(December 9, 1997)
Dinesism #13, The Dines Theory (TDT): gold and silver
must confirm each other's Technical signals, else
moves are apt to be deceptive. (See Mass Psychology
book, page 329, for further discussion.)
Sometimes it takes a tortuously long time for a new concept to reach Mass Consciousness. For example, it took 1.5-million years after humans had discovered fire, and that sticks needed to be rubbed together to produce it, before matches were discovered. An alchemist from Hamburg in 1669 believed he was transforming an olio of base metals into gold, when Hennig Brandt instead produced the element phosphorous. Disappointed, he ignored the discovery. British physicist Robert Boyle in 1680 coated coarse paper with phosphorous, and drew a splinter of wood tipped with sulphur across it for the first demonstration of the principle of a chemical match. However, phosphorous was scarce and expensive in those days, so the discovery disappeared before most Europeans who kindled fires with sparks from flint striking steel knew it had existed. In 1826, a British chemist named John Walker in Stockton-on-Tees, while developing a new explosive, stirred a mixture of chemicals with a wooden stick at the end of which a tear-shaped droplet had dried; to remove it he scraped the stick against the laboratory stone floor, the stick ignited and the friction match was born in a blaze. The droplet was a mixture of antimony sulphide, potassium chlorate, gum, and starch. While he amused his friends with it, Walker never actually got a patent. Samuel Jones, who had observed John Walker, began a match business and named them "Lucifers," which greatly accelerated tobacco smoking of all kinds. The odor was so offensive that they advised people whose lungs were delicate not to use the matches; in those days it was the match rather than the cigarette that was believed to be hazardous to health, so the wheel turns. The French found the odor of British Lucifers so repellent that in 1830 a Parisian chemist named Charles Sauria developed a new compound based on phosphorous that was a poison destined to sicken factory workers and idiot children sucking on matches. The first non-poisonous match was created in 1911 by the Diamond Match Company, using harmless sesquisulfide phosphorous, on which they deliberately forfeited patent rights, as a humanitarian gesture. Then, German chemistry professor Anton von Schrotter in 1855 created a "safety match" in which part of the combustible ingredients were in the head of the match, and part on the striking surface of the box. An attorney from Lima Pennsylvania named Joshua Pusey in 1892 invented the matchbook; the patent was purchased by the Diamond Match Company, and it finally became a quantity business in 1896 when a brewing company ordered more than 50,000 of them to advertise its product. This order induced Diamond to create machinery to mass-manufacture matches, and also launched the custom of advertising on matchbook covers. In the 1940s the psychological-warfare branch of the US Military used matchbooks to carry morale-lifting messages, and millions of them with propaganda messages in several languages were dropped by airplanes behind enemy lines. Today, Americans alone strike more than 500-billion matches a year, about 200-billion of those from matchbooks. Perhaps proving that if you build a better mousetrap, you'll have to join the rat race in order to sell it!
We expect a similar long-term saga in gold's evolution. As this is written, gold is almost universally despised and central bankers worldwide declare their intention to sell it off, to get rid of it, because gold is worthless and to be unknown by the masses. Ostensibly Lenin was right in that gold will line the urinals in the Kremlin as an example of uselessness. Tabloids proclaiming that central bankers will demonetize gold clearly do not realize that they will soon become back numbers.
The fact is, a gold coin can be cashed for paper money anywhere in the world, which could hardly be said about paper money for gold. In fact Asian gold prices actually went up when local paper currencies crashed. Central bankers do not yet fathom the function of a fuse in the fusebox, and that gold is the "monetary fuse." Central bankers made the identical error in the 1920s, as very carefully outlined in your editor's second book The Invisible Crash. Evidently history repeats itself, except it keeps getting more expensive.
In 1960 most everybody said that "the dollar was as good as gold." The dollar's link to gold was progressively severed during subsequent decades despite our bitter opposition and now they say "gold is not even as good as the dollar," an extraordinary ruination of our very currency. The worshippers of fiat paper money are like engaged couples, that final period in which lovers keep up their pretenses. Trouble is, by the time you're old enough to understand the opposite sex, they don't notice you any more. And you have discovered that alimony is the high cost of leaving!
As concluded in The Invisible Crash, when central bankers can print as much paper money as they choose, paper currencies become inherently corrupt because they are not limited by a link to gold or silver, and a financial calamity becomes inevitable. Yet, with all the commentary now in the press and media by supposed "experts," not one grasps that the currency collapses worldwide are a function of the absence of a gold standard; these are what we call "Vesuvian tremors" leading up to a "Big Bang," via what we call "The Father of All Bear Markets." All that is yet ahead of us.
Anyone who truly believes that gold is obsolete, and that its primary function will be to coat the visors of cosmonauts in outer space, albeit useless elsewhere, should not hedge with gold. But if you understand that gold represents "the ultimate monetary safety," then the current decline in gold and gold shares presents an opportunity. Gold shares are mostly in Downtrends now, but are so far below their true long-term value that they should be buys just the moment their Downtrendlines get penetrated.
The chart shows that silver is moving up while gold bullion is moving down which, if the Disparity continues, would be a "Non- Confirmation" as per Dinesism #13 (TDT) at the start of this feature. With bullish implications for gold.
Silver bullion made its low at $3.52 way back on 22 Feb 93, shortly after our "Major Buy signal" on 9 Nov 92, so we are now into the fourth year of a Major silver bull market while the masses doze. Silver is so dirt cheap that, adjusted for inflation this century, its price is below zero, and might well be the single most-underpriced commodity in the world today. Silver inventories have descended to levels from which a serious shortage becomes increasingly likely in the coming period, such that we are now looking for an assault on the 1987 high above $9, around which time we luckily flashed our last Major "Sell" signal on silver.
The Dines Wolfpack Theory* indicates that gold, silver, platinum and palladium tend to move together; platinum made its low way back in Mar 85, palladium in Jun 92, and silver in Feb 93, so gold bullion is the odd-man out and pessimism toward it increasingly looks like a back number that could yield to buyers without warning. Proving that precious metals are beginning to assume their regal place in monetary systems, the US Mint confirmed sales since September of over 83,030 ounces of their new Platinum Eagle bullion coins. Those seeking a long-term investment in platinum are still advised by TDL to acquire some Stillwater Mining (SWC), a blue-chip in the making.
Nobody knows for sure the day that gold will resume what we believe is its Major bull market but, having hit an extraordinary low at $300 last week, we are confident that the gold-mining industry worldwide will begin to close down. Superficially, that might sound like bad news, but in fact it could not be better news because the ensuing shortage will be like flame to a matchbook.
Wise investors should keep a "core position" in the precious metals; an equal amount in each of the stocks in Supervised List #3 should be viewed like acquiring fire insurance while hoping never to have a fire. In order to "spice up" that precious-metals core position, a small sum in Supervised List #5 enables an investor to "swing for the fences" because these low-priced golds and silvers can rise spectacularly during their sporadic bull runs. Instead of buying call options that expire in a short time, a few low-priced golds and silvers is like acquiring "permanent call options" that do not expire. Many gold-mining stocks are down to extremely low levels that, in the past, have spawned new bull markets -- Agnico-Eagle, for example. Gold bullion is at the lower end of a sixteen-year trading range, while the Barron's Gold Mining Index is at the lower end of an eighteen year-old cycle. We are somewhere near the time to "go for the gold," if you would please excuse the synecdoche.
According to CPM Group, a New York-based precious-metals research group, total silver supply for 1997 will reach 589.2 million ounces, compared with a projected demand of 792.8 million ounces. "Structurally, the overhang in the market over the past 17 years has gone. India has absorbed all of the above-ground silver, and what we're seeing is a long-term play upward," J Aron's Mr Riley predicted. Pallavi Gogoi & Aaron Lucchetti, WALL STREET JOURNAL, 14 Nov 97 -