Michael Ballanger: Market Conditions Extremely Gold-and-Silver Friendly

Michael Ballanger “Buy the TSXV” was the advice Michael Ballanger, investment advisor for Union Securities Ltd., sent to his clients the morning after the Dow Jones Industrial Average lost 698 points, the worst loss since 2008. In this exclusive Market Conditions Update for The Gold Report, he explains why he sees the current climate as “extremely gold-and-silver friendly.”

As of this morning, I restated my “Buy the TSXV” recommendation based (largely) on the same reasons that I stated back in May. Until U.S. real estate turns, the U.S. economy is growing at structural stall speed. Until we see consecutive monthly rises in the Case-Schiller Home Price Index, policymakers—led by the Federal Reserve Board, the U.S. Congress, the European Central Bank, the People’s Bank of China and every other individual who has never met a payroll in their lives—are going to embark on policies that are extremely gold-and-silver friendly. The Fed announcement Tuesday afternoon turned markets sharply higher, thus reinforcing my comments back in May that we will see as many periods of quantitative easing as necessary until the real estate market in the U.S. (and Europe) improves.

Now—as for the gold stocks—NEVER in my 35 years in this industry have I ever seen them so incredibly disconnected from the underlying commodity that they produce. In the past 72 hours, the fundamentals for this industry group absolutely soared and yet the shares declined. The “pundits” would suggest that “the gold stocks are telling you that gold prices are about to decline!” and I might agree with that except the historical lag effect between gold and gold shares is about four to six weeks and this has been going on since January! What I see in here is that the gold price might decline in the shorter term but the shares are going to absolutely explode based on the projected earnings and price-earnings ratio multiple escalation brought about by the very simple fact that they are extracting and selling gold at $1,700 per ounce.

I am advising clients to buy senior gold stocks as a proxy for not only this undervaluation, but also because they have less than 1% of professional managers of pension and mutual funds involved in this space. If a mere 20% of the money now trading Apple, Cisco and IBM decide to move to the precious metals space, it would inhale the entire market cap of this sector.

As for the junior mining space, avoid the penny stocks with poor treasuries that are purely exploration plays. Buy the issues that have adequate working capital and definitely accumulate the “discovery stocks” like Kaminak Gold Corporation (TSX.V:KAM) in the gold space and Tinka Resources Ltd. (TSX.V:TK; Fkft:TLD; Pksheets:TKRFF) in the silver space. These companies are extremely well-funded and their results are indicative of large gold and silver reserves in the development stage.

Without getting too animated here, I am pounding the table in my bullishness for the gold/silver sector. I am reminded of 1978 when the major markets were locked in a stagflation death spiral with fund managers holding a mere 0.7% of assets in gold, silver or precious-metals-related securities. They all moved in tandem over the next 18 months to north of 22% exposure. Well, given that the market cap of Apple Computer is basically larger than the entire TSX Venture Exchange, I would suggest that this massive asset allocation shift is, indeed, coming.

We just survived the Fear cycle; now it is time to benefit from the Greed cycle. Assess your risk-tolerance levels; look deeply into the mirror and if you pass your own internal acid test, you should get down to business and recall the famous old adage from the pits of the Chicago Mercantile Exchange: “When they’re yellin’, you should be sellin’ and when they’re cryin’, we should be buyin’!” The sobs I have been hearing in the past week have been wails from the highest yardarm.

Finally, in 2009 I included a chart of the parabolic plunge of the TSXV as measured against the (then) rising price of gold. It was what turned me so bullish at the time. I urge you all to observe the same chart from yesterday:

michael ballanger
Now, go out and buy ‘em!

Michael Ballanger completed his undergraduate studies at Saint Louis University, where he earned a BSc in finance and a BA in marketing. He joined the investment industry in 1977 with McLeod Young Weir Ltd., and currently serves as an investment advisor at Union Securities Ltd. His substantial background in corporate financing is further informed by his 30 years of experience as a junior mining and exploration specialist.

Tipping point fallacies

Beaten to the metric I am.  Hard to blog at 36K feet.  I note the news out of the BEA is that personal income growth in the Pittsburgh ranks pretty well.  It all begs an interesting question where all this (relative) good economic news for the region is coming from.

To answer that, first read this:  Pittsburgh’s Big Rank Jump

Then look at the date.

Go back and reread that every time you read some newly written story about how the economic story of Pittsburgh is something new or recent.  I just am not a big believer in simple stories or ‘tipping points’ in most economic stories for the region.  As Jim R. will point out, the mesofacts are closer to the real facts, but they don’t make such easy stories to tell.

But going back to the news today.  The PG version compares Pittsburgh’s income growth to some of the smaller metro areas in Pennsylvania.  Might be worth noting just now much smaller some of the noted metro areas are in comparsion to Pittsburgh.  They note we have not grown as much as the Williamsport metro area. Is Williamsport half the size of the Pittsburgh region?  A quarter?  Looking at the income data of note today, Williamsport had $3.9 billion in annual personal income.  The Pittsburgh region has over $103 billion.  So you are talking about a region less than 1/25th the size of Pittsburgh.  Statistically, the entire gain in income in Williamsport would not even be a blip if diluted across the larger Pittsburgh region.

Williamsport is itself an economic giant compared to some of the smaller areas of Pennsylvania that really are at the heart of the Marcellus Shale development that is said to be the cause of some of the the income growth in the state.  You have to keep the scale of these numbers in mind when thinking about that.  It goes back to a basic point that the Marcellus Shale story appears so outsized because in the places where the development is happening the economies are so small that new economic activity is inevitably very large in comparison to the status quo.

Riots and Free Trade

Here’s a chilling excerpt from a paper entitled The Los Angeles Riot and the Economics of Urban Unrest:

What caused the 1992 L.A. riot? While this question has no definitive answer, the evidence presented in this paper does suggest that South Central L.A. had some characteristics that made it more likely than other cities to explode into a large scale riot. Our empirical results suggest that the ethnic diversity of South Central L.A., the high unemployment rates of young black men in that area, and the sheer size of Los Angeles all help explain the 1992 riot. [Emphasis added. HT: Chuck.]

One of the effects of free trade has been to increase unemployment in manufacturing industries.  Jobs in these industries are generally low-skill, and the proper domain of younger males, at least given the labor market value of young males (hint:  it’s really low since young males tend to lack intellectual capital, i.e. skills).  So, since there are fewer jobs available to young men as a result of free trade, and since young men without jobs are more prone to rioting, it would appear that free trade has a probable role in setting the stage for future riots.

Of course, it is entirely possible to avoid this possibility.  The government can either impose wage parity tariffs on all imports, which would have the effect of ensuring that any imported product would have the cost of minimum wage labor factored in, or the government can stop making illegal for young males to compete with foreign labor and production on price, which means eliminating minimum wage laws.  It is absolutely ludicrous for the government to have policies that hamstring domestic labor and favor foreign labor.  Something has to give eventually, and let’s hope it doesn’t take a large number of unemployed males rioting in the streets to convince the government to set a pro-domestic labor policy.*

* While I’m on the subject, I’d just like to note just how completely horrible it is that the government’s current economic policy is in the worst possible interest of the citizens it claims to represent.  Free trade only benefits domestic consumers because it enables them to buy goods at lower prices than they normally would.  Of course, the general price of goods wouldn’t otherwise be high in the first place if the stupid government hadn’t set policies that drove up the price of goods in the first place.  Between inflation, minimum wage, asinine “corporate” taxation, and incredibly cumbersome regulation, the government has managed to concoct a perfect storm of skyrocketing prices.

The only thing that obfuscates this fact is the presence of foreign trade, which the government welcomes because it helps keep consumers from knowing the true cost of government interference.  Of course, this charade can’t be kept up forever because foreign labor will eventually become more productive, leading to increased demand, leading further to increased prices (wages).  As this happens, the buying power of foreign labor will increase, relatively speaking, and drive up the price of goods on a broad, international level, meaning that Americans will eventually pay more for goods anyway.  By the time this happens, though, the American economy will have been so hamstrung as to become permanently crippled.

And that’s why I hate the American government and the politicians and bureaucrats that run it.  They are fools, every last one of them.  They, and I mean this literally, deserve to rot in the bowels of hell for all eternity for the fraud, deceit, and destruction that they have practiced against the American people.

Economic Events on August 11, 2011

At 8:30 AM EDT, the International Trade report for June will be released.  The consensus is a deficit of $48.0 billion, which would be $2.2 billion less than the previous month.

Also at 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 405,000 new jobless claims last week, which would would be 5,000 more than the previous week.

Also at 9:45 AM EDT, the weekly Bloomberg Consumer Comfort Index will be released, providing an update on Americans’ views of the U.S. economy, their personal finances and the buying climate.

At 10:30 AM EDT, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.

At 4:30 PM EDT, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.

Also at 4:30 PM EDT, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.