In a word, yes. You're spot on with your assessment.
Look at the discussion here:
http://lotrtcgwiki.com/forums/index.php/topic,3099.msg38664.htmlFor further proof, look at the clarification for a nearly identical card:
Loathsome.
7R182
Clarification:
If a skirmish that involved a Nazgûl is about to
end, discard a possession borne by a companion
in that skirmish.
This card is played as a response to the end of a skirmish that involved a Nazgûl, even if that skirmish ends before resolution. If the skirmish is ending because it is resolving normally, the discard of the possession does not effect the resolution of that skirmish.
Emphasis mine, obviously. As for Gemp, I'm afraid it currently does not handle this one correctly. I believe the Shadow player is unable to properly react when the skirmish ends (via cancel) and while it should be able to proc even if The Balrog dies because the card is written in past tense ("a skirmish that involved ..."), at the moment it cannot.