Sector expert Michael Ballanger discusses breakdowns in base metals markets and his current views on the status of cryptocurrencies.
Since I covered gold and silver on Wednesday, I am switching to the base metals because they represent a dollar flow infinitely larger than the precious metals, and are therefore far more difficult to “manage” in terms of price. Also, 90% of the pricing structure for a metal such as copper is dictated by the cash or spot market, where physical delivery governs pricing.
The paper markets have grown to fear the dangers in trying to orchestrate price by way of the CME (Chicago Mercantile Exchange), as many of the blow-ups with rogue traders are in areas such as oil and copper, where the enormity of the flow is overwhelming. Base metal markets are far purer in terms of economic sensitivity because traders bob and weave around them rather than for or against them, as in the case with precious metals. As such, the prices of industrial metals often act as excellent leading indicators of global trade and commerce, with real supply and demand determining price as opposed to the fictitious supply created out of fiat whims by the paper merchants and bullion banks, which have gold and silver on a spring-loaded leash.
So, with copper crashing to $2.82/pound, what does that say about global growth and the likelihood of cost-push inflation forcing central banks to up-ratchet the interest rate structure?
As I ranted about previously, the impact of machines cannot be underestimated once a definitive trend has been established, and while base metals are especially difficult to manipulate, their trends are quite easy to exacerbate and accelerate by way of the “pile-on effect” that seems to be a specialty of the “bots.” And when they scan the news flow and come across an anti-China Trump-tweet that talks about industrial supply tariffs, the machines descend upon the markets like locusts in ancient Egypt.
Let’s examine the relationship between copper and the S&P 500 dating back to 1990. You can see that copper appeared to detect the top in 2001 but failed miserably in 2006-2007. It disagreed with the stock market from 2011 to 2016 but came to its senses in 2016. However, in the shorter-term window, shown in the 28-year chart, notice how in the past four weeks copper has diverged to the downside. It might be that copper is reacting directly to fears of trade war weakness in demand, thus inviting accelerated hedging from producers. Despite all the blogospheric commentary on the predictive powers of Dr. Copper, the last 28 years has shown little evidence of such.
However, when you take lead and zinc and add their technical breakdowns to the equation, something has the base metals spooked and that cannot be good.
Base metal prices are under a tremendous siege since the trade wars were instigated by DJT, and while the Wall Street crowd would sluff it off, saying that “he really doesn’t mean it” (wink wink, nudge nudge), the markets are most certainly taking him seriously, with base metals as the barometric harbinger of a stock market maelstrom.
Now, if you add in the MSCI All Country World Index and see that it, too, has rolled over, you have the beginning of a convergence of technical breakdowns, and an event-driven rationale that runs the risk of forcing a few trillion dollars of stock market leverage to be pruned from the system. Given the illiquidity common in summer markets, I am taking the stance that preservation of capital is critical, and since the gold and silver stocks have been woeful performers thus far in 2018, the downside risk in this space is minimal. (And the upside might be substantial.)
Now, there was nobody that called the top in Bitcoin better than this humble penman, and while I have done my best to minimize the brilliance of the call, I am going to shamelessly reprint three paragraphs from my Dec. 11 missive entitled “Cryptojunkies: Beware the Ides of December,” written one week before the top at 19,891, the very day the futures were introduced on the CME.
“This need for fiat sanctuary, insulated (or so they assume) from the devious tentacles of bankers and governments, will be tempered by the introduction of Bitcoin futures by the CME Group on Dec. 18. Just as precious metals futures are the tail by which governments and bankers wag the dog through unimpeded interventions, it is, in my opinion, the very tail by which the moneychangers are going to “reel in” cryptocurrencies. So, between now and the end of the month, the Commercials (bullion bank traders) will reduce their aggregate short position as gold’s major competition comes under the smothering blanket of intervention and manipulation.
“As I wrote about in the commentary entitled “The True Meaning of Bitcoin’s Success,” this is all about the arrival of the hyperinflationary melt-up characterized by various asset classes going into systemic price spikes. Stated another way, it is about the purchasing power of fiat currencies experiencing sudden and dramatic crashes. This recent narrative of a digital currency replacing gold as a store of value is as nonsensical as the idea that “dollars,” whether from the U.S., Canada, or Zimbabwe, will maintain their purchasing power over time. The bankers reeled in gold in 2013; they will reel in the Bitcoin as well. What both have in common is the medium of control.
Beware the Ides of December.”
Now, there has been very few occasions in the past forty years in which I have wanted to actually hop on a plane and fly across the Atlantic to punch someone in the nose, but tonight is one of those nights after reading the remarks of Bank for International Settlements chief Agustin Carstens directed to the topic of cryptocurrencies.
He starts by recounting how Sir Isaac Newton nearly bankrupted himself trying to use alchemy to create money (gold) and finishes with: “So my message to young people would be: Stop trying to create money!”
MJB response: “Why? Central bankers and government treasury departments have had that monopoly for over one hundred years!”
Then he says: “Cryptocurrencies do not fulfill any of the three purposes of money. They are neither a good means of payment, nor a good unit of account, nor are they suitable as a store of value. They fail dramatically on each of these counts.”
MJB response: “Since when have dollars, yen, deutsche marks, pounds, lira, etc., ever been suitable as a store of value?”
The greatest debasement in monetary history has occurred since 2008, and complete inflationary breakdowns in counties like Venezuela and Turkey, and Carstens talks down to the “young people,” urging them to use paper money as a “store of value”?
This type of commentary is proof that the only good thing about people like Senor Carstens is the fact that they will never be elected to office where they could do any serious damage. Perhaps he had a bad day, or had just received a large margin call on his “short Bitcoin” trade, but his nonsense actually pulled me—the ultimate Bitcoin bear—over to the cryptocurrencies’ defense. Bankers around the world have a monopoly on the most important asset in all of commerce—currency—and the fact that cryptocurrencies were invested to wrestle that control away from the elitists is not a proposition to which I might object. My only beef with crypto was that it diverted investment dollars away from the traditional safe havens, protecting wealth that were (and are) gold and silver.
And one look at the Bitcoin chart proves that money avoided the heavily managed gold and silver markets in favor of their own version of anti-fiat alternatives. The cryptos did their job until they didn’t, which magically coincided with the arrival of the CME futures. And then they were summarily vaporized with military-style dispatch.
Welcome to the world of free markets, price discovery and transparency.
Originally trained during the inflationary 1970s, Michael Ballanger is a graduate of Saint Louis University where he earned a Bachelor of Science in finance and a Bachelor of Art in marketing before completing post-graduate work at the Wharton School of Finance. With more than 30 years of experience as a junior mining and exploration specialist, as well as a solid background in corporate finance, Ballanger’s adherence to the concept of “Hard Assets” allows him to focus the practice on selecting opportunities in the global resource sector with emphasis on the precious metals exploration and development sector. Ballanger takes great pleasure in visiting mineral properties around the globe in the never-ending hunt for early-stage opportunities.
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Charts courtesy of Michael Ballanger.
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