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Large Speculators and the House of Pain
Contributed Opinion

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Michael Ballanger Every bottom in gold is characterized by massive long liquidation by the Large Specs, precious metals analyst Michael Ballanger states.

This week's COT report once again confirms that the Large Speculators are arguably the stupidest group of gold traders in existence. To be certain, as criminality is to the Commercials, brainlessness is to the Large Specs. They are constantly long massive positions at major turning points in gold and silver and are consistently on the wrong side of the trade. Pundits love to refer to the Small Speculators as "dumb retail" or the typically green, blindly optimistic newcomer piling into gold futures after receiving an e-blast from one of the blogs praising the regenerative powers of gold and silver. However, I have been watching the Small Specs for a while now and they have actually been on the right side far more often, but without question, residing forever and a day in the House of Pain, are the Large Specs. The last two COT reports illustrate this point perfectly but first take a peek at the last 30 days of gold trading.

You can see how the gold market traded down in the two COT weeks ended February 6 and 13 amidst massive liquidation by the large speculators.

Now observe the massive liquidation of all of those positions bought in late January as high as $1,370 as the blogger world chortled and chimed "$1,360 breakout!!!" Recalling "MJB Rule 1 of Gold Trading," what is it that we do when an obvious technical support or resistance level is taken out? Why, we go the other way of course! You SELL "breakouts" and you BUY "breakdowns" because of one resounding theme: THE GOLD MARKET IS RIGGED. 31,656 contracts were purged from the Large Spec portfolios representing 3,165,600 ounces of gold with a notional value (assuming average liquidation price of $1,315) of $4,162,764,000. Forget about the cretins on the other side of those comedic capitulations; we KNOW all about the machinations of the Commercials. What slays me, though, is just how much money is lost and how it happens literally four or five times a year but what is unmistakeable is that every bottom in gold is characterized by massive long liquidation by the Large Specs.

Last week I was feeling pretty much vindicated as the UVXY (ProShares Trust Ultra VIX Short-Term Futures EFT) got hammered back down into the mid-teens from my exit points at $23-25 after a brief stint above $30, as the panic of early February was replaced by the solace and certainty of plunge protection. Massaged back under $10 by the serial interventionalists and master manipulators manning the trading desks of the government-sponsored agencies around the planet, you want to avoid this vehicle for another few weeks as you can pretty much assume that the big boys will resume their volatility-suppressing antics if for no other reason than to teach the latecomers a painful lesson or how "past performance is no guarantee of future profit." Delving into Barron's "Market Lab" this weekend, I noticed that the American Association of Individual Investors sentiment index went from 44.8% bulls the week before the meltdown to 37% bulls during the meltdown and right back to 48.5% bulls this past week, rendering sentiment to where nothing about the 10% one-week plunge mattered. Rising yields, hot CPI, heightened volatility—mattered not as we head into the final stretch of winter, which is exactly what I wrote last week about the market heading right back up to test or exceed the highs by the end of May.

Market Sentiment

You can see how quickly market sentiment exited the "Euphoria" levels from late January, but it is still way above the levels seen last summer when the reading was a hair above "Panic."

I was also feeling pretty cocky that the JNUG (Direxion Daily Junior Gold Miners Bull 3X ETF), which I grabbed at $13.35 two Fridays ago, was powering above $16 after a two-day dip to $11.34 but once again, late-Friday goofiness took gold down below $1,350 again and the Gold Miners threw a tantrum with the HUI (NYSE Arca Gold BUGS Index) off 2.33% on the day alone. Nevertheless, I continue to be a buyer of any and all dips in the physical metals and always have to remind myself just how much of a move would be required to get to "all-time highs," a phrase we have had to listen to for most of the past 15 months for every asset class EXCEPT gold.

People tend to forget just how far down the Gold Miners have fallen since the highs of 2011 but when you look at how pathetic they have been managed over the years, you have to wonder why anyone would buy them. Look at Barrick's Pascua Lama project where they have written down U.S.$429 million because they broke every rule in the book muscling their way into water rights, environmental breaches, and incompetent execution. There are times when I wish they would exclude ABX from the Gold Miner Indices altogether and let the well-run smaller companies like Eldorado and AngloGold carry the water.

It might also be nicely refreshing to see one of the major mining companies actually join into the lawsuits of bullion banks such as Scotiabank, HSBC, Deutsche Bank, UBS and Barclay's but since they just never know when they might need one of them to either lend them some money or head up a financing, they just stick their heads in the sand while the product they search for, produce and sell gets suppressed, injuring all of their shareholders on a daily basis.

We head into what is ostensibly the final week of February with the arrival of Spring a mere thirty-one days away. With this weekend's "Up and Down Wall Street" entitled "The Ghost of Inflation Reappears," Barron's Randall Forsyth does a pretty good job in accidentally removing inflation fears as a potential stock market land mine because, as you all know, when something becomes a headline in Barron's, it is, by the time of arrival, obsolete. Mind you, it wasn't the cover story so perhaps it will resurface later in the Spring when the CPI detonator really gets flipped.

I am not going to make any dire predictions as to the vibrancy of the current stock market rebound but based upon the behavior of the market last Monday and Tuesday, I am convinced that the-powers-that-be were hell-bent to avoid a full-on technical breakdown. The orchestrated rebound after the S&P knifed down through the 200-dma at 2,540 was classic PPT so anyone wondering whether or not the central planners had cut the umbilical cord found out on the last trading day of the week that the serial interventionalists had not yet left the equity market building. However, they are sticking a microscopic pin into the bubble so as to allow a slow leak as opposed to a "POP" and that, I contend, will be the continuing mantra for the balance of 2018.

I had a call from a buddy who is getting killed on his "Short Euro, Short Yen" strategy, which he executed on the assumption that like all other financial crises, the USD would rally in response to either higher rates (which we have) and/or safe haven buying. The problem with that is when you are the largest debtor nation on the globe, rising interest rates challenge the viability of your currency because of DEBT. The U.S. dollar is no longer the safe haven; it is now the Achilles Heel of the global economic reflation—and I didn't write "recovery" or "expansion" or "boom"—further cementing my belief that what worked from 2009 until 2017 will not work in 2018 and beyond. The game has changed, the tide has turned, and formerly successful investment tactics will need to be replaced.

The sooner, the better.

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 and images courtesy of Michael Ballanger.

Michael Ballanger Disclaimer:
This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.

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