Today a legendary short seller covered gold, silver, and what will usher in the next collapse.
By Bill Fleckenstein President Of Fleckenstein Capital
(King World News) – The futures were higher overnight, although I couldn’t tell you why, but it didn’t take long for those gains to be erased and the market was slightly weaker in the early going. This morning I took the opportunity afforded by the bounce over the last couple of days to reload some of the puts that I sold Friday morning. I only bring that up to emphasize the point that, for the first time in ages, I have begun trading around on the short side, however minutely. Not that my doing that makes it correct, but it is a change, so we will see if it leads anywhere…
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After the early morning softness, the market just bounced around unchanged, which is about where it was when I left with an hour to go.
Running Its Course
Away from stocks, green paper enjoyed a nice rally and I, for one, am rooting it higher in the short run because I would like to get this move over with. It’s been a bit of a one-way street in the dollar for a while now, so once it rallies a bit in all likelihood it will then head lower and that decline might make for some fireworks.
Turning to oil, it was flat, fixed income was heavier, and the metals were the scene of a couple of overnight bombing runs, particularly in silver, which lost almost 3% to gold’s 1%. It is worth noting that even when gold and silver were on their lows, the miners dug in pretty impressively (though I didn’t see how they closed).
A Bit of Ore-Shadowing?
I believe what might be occurring is that the sentiment in America among investors and speculators is changing ever so slightly at the margin, and folks were of a mind to buy this pullback in gold. A couple of days could easily be noise, but the better performance of the miners recently could also be a tipoff of what is to come.
You Heard It Here Second
Now I’d like to turn to an excellent article I saw this morning on ZeroHedge headlined, “The Billionaire Bears Club,” written by Kevin Muir, author of the Macro Tourist blog. I’m not terribly familiar with his writings, but I noticed something that captured my attention, which longtime readers will recognize. In the article, which is well worth reading, he ended it by saying:
“I will leave you with my prediction. The next crisis won’t start in the equity market, or even the high-yield bond market. The next crisis will occur when central banks lose control of sovereign bond markets” [emphasis added].
This is the first time I have read that anywhere besides my own writings. Of course, I have been making that point since QE started back in 2009, i.e., that the only thing that would stop central banks would be when the bond market took away the printing press (with many questions along the way about how could the bond market do that given how much the central banks were buying). My answer has always been, when a market changes its mind, it can do anything.
What we don’t know is (a) will this happen or (b) when. What we do know is that it most likely can’t happen until the central banks are forced to come back and try QE again, which can only occur once the stock market gets blasted.
Movers and Shakers
Muir also made another comment that captured my feelings exactly:
“I have done an abysmal job identifying what will explode higher in price, but my message has been consistent: Central Bank balance sheet expansion has the potential to create some unprecedented asset price moves.”
Lastly, Muir’s article also featured a hilarious poster for a movie spoof called, “Darkness Falls,” with the tagline, “When your stock portfolio declines 2.5% from an all time high…” For whatever reason, I found that particularly humorous, thus it seems that Mr. Muir is capable of wit as well as potentially brilliant (since he agrees with me!) insight.
Also on ZH today was another must-read article, “Why Cryptocurrencies Will Never Be safe Havens,” by Mark Spitznagel. I couldn’t agree more with his points.
Included below is one question and answer from the Q&A’s with Bill Fleckenstein.
Question: Bill: There is a lot of talk here about the virtues of investing in miners vs. gold. The only long-term ratio chart I’ve seen for gold miners vs. gold is from the Adens, and in their writing, they clarify that they are drawing from the Barron’s gold miners’ index, which is the only miners index that has been around that long (1970-present). This is a 2015 version:
I know you’re skeptical of trend line reading (which can always be invalidated by future events), but the ratio does strike me as a relevant data point. I’ve also run my own charts from 1990 on Stockcharts (XAU:GOLD is a clear declining wedge, that bottomed in early 2016). I find it interesting that miners are presently super-cheap relative to gold, in historic terms. Question: Do you view this kind of ratio charting as totally meaningless, or would you weigh these kinds of patterns into your decision-making in any way?
Answer from Fleck: “That only tells you about the price of the stocks, it says nothing about the price of the stocks versus the businesses, which is what is most important. I never use those types of charts.“
King World News note: Bill Fleckenstein spent years as a board of director at Pan American Silver and he is extremely knowledgable about the business of mining, which is very difficult. I have known Bill for many years. He has been with KWN since its launch, and I have all the time in the world for his thoughts on the mining sector. Having said that, I feel strongly that the ratio will reverse and head in the other direction violently as the secular bull market in gold and silver begins to reassert itself to the upside in earnest. Meaning, I expect the high-quality mining shares to significantly outperform the advance in the metals.
***KWN has just released Dr. Stephen Leeb’s remarkable KWN audio interview and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
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