The following large pools of capital will each be diverted into the precious metals asset groups. The promise of greater returns will be strengthened by economic conditions, monetary stress, desperate reactive government policy, and international chaos. A volcano will build, with the USDollar providing the power, and world central banks providing the muscle. Each major road will feed large amounts of money into the gold market. Some up-to-date background precedes discussion of each supplying road. Motives will be covered for each source to seek out gold. Many are the roads. Many are the motives. Together they will build a volcano under gold, merging the roads and lifting its price with awesome power.
SOURCES OF MONEY FLOWING INTO GOLD & SILVER:
Since December of 2002, gold has broken out, making major headlines around the world. The gold market has seen a significant breakout above the #330 price, even as silver appears poised to break above the #490 resistance level any week now. Numerous powerful factors are all at work, all pushing the gold price up from far ranging disparate and global sources, collectively impossible to control. These factors are detailed at length in my November article (see ref#1). Since that time the sources have become more clearly defined, while the actual forces have become more intense. As time lapses, the market dynamics are fast emerging with deep clarity whereby very large money flow sources are being directed toward gold. The roads are being paved with more official sanction, if not respectability, even as they widen. Although many experts and pundits proclaim with strained resignation that the new gold rush owes its roots to the declining US Dollar, they often fail to explain the reasons behind the dollar decline itself, or offer few explanations. The overvalued dollar has begun correcting in value. Foreign appetite is flagging even as its supply is accelerating. A dollar crisis is building, since no protection feedback mechanisms exist or operate at this moment. The monetary mechanism is being impeded by Fed intervention (prevent rising longterm rates) and the industrial mechanism has long been absent (offshore mfg in Asia and Mexico.) No defense stands to protect the dollar, whose declines will set off a vicious circle. In the past few weeks, pathetically shallow and self-serving reasoning by the press & media attributes gold's rise to the Iraqi tension. How expedient ! In my kept book, Saddam Hussein and Iraq rank somewhere around 6th or 7th on a long list of market forces behind gold. If the Iraqi conflict is resolved, sure, we might see a sudden $15-25 drop in the price of gold. But that drop will be overcome in the following weeks, then long forgotten. The pundits will be left scratching their heads. Over the next 18 months, I expect them to scratch their heads numerous times. Eventually they will watch gold in awe, and conclude "something is very wrong."
A burgeoning trade gap, a dangerously escalating federal deficit, and pre-empted negative real interest rates are of greater importance, easily eclipsing the more public spectacle of Middle East tensions. This much goes without question to any serious student of gold and the dollar. As Stephen Roach points out, the US current account deficit was $40B in the month of November. We are on pace with a trade gap approaching 6% of the US GDP. Now the service sector is experiencing rising imports, a new development. Bulging deficits of this magnitude typically dictate big concessions in USTBond, US equity, and USDollar valuations. Certainly an immediate lack of confidence in American leadership within international circles has chipped away at the dollar. Worse still, isolation of the United States could jeopardize the required capital flows that keep our economy operating (in the red) at almost $3B per day. Our leaders seem ignorant to this risk. Shallow attribution of dollar woes to Iraqi tensions is akin to observing a man suffering from acromegaly, and calling him ugly since he has recently begun to show evidence of acne. (The condition is based upon excessive secretion of human growth hormone, see Frankenstein Effect or The Hulk.) The US economy has been the object of decades of excessive secretion and absorption of financial growth hormones, and now suffers from severe imbalances and distortions, a grotesque form of "financial acromegaly."
The gold rush has more dominant roots in the progressive failure of the post-bubble US financial asset markets, the debt-suffocated economy, and the faulty monetary system founded upon a debt-backed reserve currency. The gold rush finds its origin in a dangerously overvalued USDollar, coupled with discouraging fundamentals and extreme imbalances in the USA Inc "stock share." Consider basic theory of the firm. We have a national stock share with a hemorrhage of rising losses (trade gap), guidance of growing future debt levels (budgeted federal deficits), dividend below zero (negative real interest rates), uncontrolled new share issuance dilution (expanding money supply), a labor force suffering from fatigue (household debt), slumping product demand (excess capacity), large foreign ownership (hostile share holders), fraudulent financial books (raided Social Security Trust Fund, no Gold Reserve disclosure), and deceptive reporting (economic aggregates). Conditions are perfect for severe devaluation, as a wartime economy undermines productive investment and a consumption emphasis takes firmer root. If this were a company's stock, it would plummet. This article addresses from a higher level, without a flood of data, what the major roads are that now deliver surviving capital toward gold during a frightening time when monetary system fractures are emerging and capital is tragically being set ablaze. Roadways are now delivering money into the gold sector, like magma flows through breaks in the earth's mantle. More roads will be built soon, even as existing roads are widened so as to cope with larger capital flows.
The gold market is an imminent volcano, and as such requires two principal ingredients: avenues and forces. Fractures in the earth's mantle create avenues for hot molten magma to seek out and flow up to the surface. The forces originate from the intense heat and pressure beneath the mantle, lodged and released. Likewise, several fractures have been witnessed in financial markets, beginning with the March 2000 stock bust. The unfortunate, hopeful, yet gullible and illiterate masses regard the stock bust as the end of the calamity, but it was only the initial signal. The Enron debacle was the second signal, spreading into a credit calamity that crippled the utility industry. Has anyone properly interpreted the dire warnings issued now by the DJ Utility index ? None except Richard Russell ! The unheeded admonition comes as clearly written graffiti on the walls of subways and buildings alike - "a debt collapse is in progress." Dow Theory requires the utility index to respond to monetary stimulus. Instead, debt collapse is leading to internal monetary deflation forces, while China echoes with external price deflation forces. Enron also revealed criminal accounting on the backs of offshore entities. Exactly no reform has take place on this front, where gold and other derivative chicanery occurs. The most recent signal is the December breakout of gold, largely overlooked in the press & media. It signals not so much international tensions, but for a monetary crisis with the USDollar at the epicenter. First stocks, then credit, now currency in the prescribed order for the Perfect Storm. This will build into a volcano, with the dollar decline building the massive pressure and force necessary for the volcano to erupt. A giant cantilever pump is under construction, with the dollar downward pressure lifting gold up. For every 1% drop in the USDollar, we have seen a 2% rise in the gold price. The dollar's decline will lead to the death of the USDollar as we know it, and will provide liftoff for gold, which will take on a life of its own before 2005. After China revalues their yuan (renminbi) currency upward, we in the United States will see inflation, perhaps a taste of hyper-inflation !!! I defy you to identify a single cycle where our Federal Reserve failed to overshoot. Can anyone remember their delusional plan for a Soft Landing with a Fed tightening in 2000 ???
Next is the likely slow-motion attrition in the Treasury markets, as Bonds and Notes wear down after bottoming in yield, which will cause fallout in the housing sector. Following the credit market, and very much related to it, is the upcoming gradual separation of real estate from the hard asset class. Real estate is but a "hard asset impostor" destined for a debt downgrade. Its property values are derived much more from the mortgage finance industry, than from hard asset commodity considerations. This final fracture will be clearly the most painful, as the economic consequences are vast. It should seriously test the entire Structured Finance system that funds the mortgage industry. The volcano is building in pressure. What say to forces? The forces will be capital seeking preservation, survival, even growth opportunities. They will join with the USDollar decline cantilever. Mammoth hydraulic power coming from the Federal Reserve itself will finally pump new money into a desperate system with utter futility. While fighting deflation, the unintended consequence of limitless creation of new fiat dollars will be a sustained power amplitude. Think of it as the USGovt kicking in the "turbocharger" to the dollar plunge, from adding to an oversupply already. The new money will find the path of least resistance and highest prospect for gain - COMMODITIES. The chief financial commodities are gold & silver. The chief commercial commodities are oil & gas. Where debts do not obstruct investment, money will seek out and be directed like a magnet.
The Kondratieff Winter scoffs at central bankers with little or no reverence. This winter has succeeded in scraping off much superficial paper machier (gold cartel short positions) which fails to effectively cover the rushing magma flows. The exposed and liquidated debts only heighten the sense of urgency for capital to seek true safety. Up to now, that safe haven has been found in the risky and temporary shelters of Treasuries and Real Estate. K-Winter shows no mercy (see ref#2). It will next deal with these final debt classes, releasing capital in large streams. K-Winter will spare no form of debt from a severe challenge in test. The most dangerous upcoming shakeout will be to Structured Finance, which underpins the unregulated and out of control housing mortgage industry. We will know that the mission is completed when the transportation sector has been delivered financial death blows. Note the supercycle pattern every 60-70 years, one human lifetime. Unlike railroads in 1870, automobiles and radio in 1930, this transportation culling exercise had warm-up sessions with the internet, wireless, fiberoptic, and telephone in 2001 and 2002. The main event will next deal with automobiles and airlines. Fully one quarter of all airlines are now in bankruptcy. I expect all US car makers to either go through bankruptcy or become nationalized. Foreign acquisition is out of the question, given their debt and pension obligations (not to mention product performance and reliability shortcomings.) The economic fallout has huge implications to the stability of capital, and thus directs more money toward gold as recession grips and more debt is threatened.
Whether this volcano endures for a lengthy life spewing steady lava flows, or ultimately explodes with gusts of noxious financial gases followed by lava flow bursts, remains to be seen. Given the complete reluctance for the markets to be permitted capitulation, my vote is for steady enduring lava flows for month after unresolved month. Its climax could well occur immediately before or after the unanticipated resurrection of the gold-backed USDollar, the motivation for which is expertly outlined by Jim Sinclair (see ref#3). Precipitated by crisis, this historic action would herald a global rush into precious metals since the governments would announce their competition for the scarce resource known to enforce financial stability and responsibility - GOLD.
Economists have been fast asleep in forecasting the languishing recovery, the failure of the stock market, the default and liquidation of widespread debt, and the emergence of precious metals from over a decade of slumber. They helped build the system, and now might be blind to its faults. Beholden to the only system they have ever known, they advanced their incompetence with creatively shabby analysis, further compromising their integrity, going so far as to distort the reporting process itself. I have little respect for this entire profession, and offer considerable detail and reasoning for my position (see ref#4). Brokerage analysts are even more biased, departing from objectivity in grandiose ostentatious style, offering no apology for their harlotry trade. Together, economists and brokerage analysts have sold their souls, having behaved like blatant whores to the equity and credit industry for decades. Their corners of honesty are few. The public has begun to wizen to their ways. Unfortunately, scientists have rats to test their theories. Economists have none. We the public, the consumers and investors, we are their rats. If the system they devised is faulty in its foundations, we may not see changes until that system faces the gradual slide toward collapse that is difficult to rectify. I believe we are close to that point. Debt levels now suffocate every single component of our economy. The majority of business activity now only services debt. Very little newly fashioned money produces new business activity. With its thinking deeply rooted in aggregates, the community of economists seems incapable of distinguishing price deflation in certain sectors from price inflation in others. Rising prices will be witnessed mainly in costs of production, leading to widespread erosion of corporate earnings. Compounding the problem, politics now infect and subvert almost every aspect of our society, from newspapers to TV channels to school systems to security systems to corporations to nonprofit organizations to sports franchises, and of course to government. Policy changes are dictated by politics and politics alone.
Only a predictably stable stream of initial and secondary public stock offerings from mining firms will magically transform Wall Street thinking toward the bright future potential in precious metals. We think they wear gray pinstripe suits. When these men sporting hot red miniskirts are offered million dollar deals in Board Rooms as opposed to $100 bills on street corners, their thought patterns will predictably turn positive. But that day is several months away. Newmont's upcoming secondary issuance will offer some indication toward Wall Street's receptivity to religious conversion. The investment banking business has recently become as inactive as the bankruptcy business has been brisk. In a land where truth is purchased or hired, both economists and brokerage opinions will be swayed by the prospect of nascent revenue streams against the present backdrop of a severe drought. Their evolving opinions will converge toward the truth, but only with the passage of time and the sway of a payday.
Precious metal miner stocks have enjoyed excellent gains relative to other sectors. Their performance has been noted clearly in annual reviews quietly promulgated in the usual end-of-year fashion. However, these stocks should very soon experience monumental gains, as evidenced by their extremely bullish chart patterns and large short interest. The Gold Cartel has moved their villainous game from the futures pits to the stock market in recent months, inviting a short squeeze in both arenas. They have only two hands to lose, and will lose them both. Chart patterns show a realized Cup & Handle in the gold metal, and similar patterns soon to be realized in leading gold stocks and their indexes. John J Murphy provides thorough, professional technical chart analysis that the gold metal has broken out of its C&H pattern (see ref#5). Clive Maund reinforces the evidence with coverage of the unhedged HUI index and leading miner stock charts (see ref#6). Next to break out is the gold miner stock group, summarized by its index, in atypical reverse fashion whereby the metal leads.
Gold does the heavy lifting, and the cartel's back is being broken. Gold wages the international battles, fights the skirmishes inside the currency and bond pits, and serves as the object of editorial debate in the press & media. But stocks work in terms of asset value anticipation and future expectation, offering rich leverage to metal price gains. The equity markets still harbor a modicum of distrust, if not the hint of impending trouble from the harsh hammer of the gold cartel. Little do they realize that the cartel is disintegrating in its partnerships, finding itself of the wrong side of the young new bull market in gold. The cartel will see members turning on each other, typical among criminal conspirators fighting for survival. It is now resigned to helplessly ratchet up their risk control programs with ever higher and more hopeless "lines in the sand." The image of a tightening neck noose comes to mind. With investment demand picking up, a short squeeze is written in stone.
Gold has now begun to be viewed in a monetary role; silver may soon follow. Regular tests of COMEX gold supply deliveries by such mavericks as GoldCorp's CEO will be followed by similar tests of silver supplies. An accident for both gold and silver is just waiting to happen. Short positions for gold and silver are at least two year's worth of production. Whereas 95% of all the gold ever mined still sits in vaults serving as financial ballast, silver is consumed by industry. Gold can be shuffled around in a grand shell game, concealing the imbalance. But silver's imbalances cannot be masked by such deceitful paper shenanigans, continuing the deception played upon the public. Silver is consumed in photography, electronics, batteries, superconductivity, engines, burn treatments, water filtration, and slaying werewolves. I expect silver default events first, despite its lackluster price action.
Exploration firms can reap huge investment profits, even with unchanging precious metal prices. Mineral deposits on their mine properties can be confirmed and verified by geologists, only to see their projected market capitalization jump an order of magnitude higher. A lift in the gold or silver prices only amplifies the value of deposits and thus the shares of the mining firm. These explorers magnify value through their expertise in locating mine properties, analyzing geologic formations, learning from regional historical trends, seizing opportunities, as they hammer out complex contracts for larger firms to provide funds, share risk, and develop the properties. Many promising ventures were neglected and abandoned in the last decade. Large production mining firms depend heavily on these dynamos, who bring raw supply to the table, replacing their depleted reserves. These large caps pay dearly for the acquisitions. Canada is a ripe breeding ground for such companies who might be best described as modern alchemists, turning hillsides into gold & silver. Gains in their stock prices have been extraordinary since the latter months of 2001. This trend should continue.
The Canadian Dollar will rise gradually, shored up by expanding mineral and resource industries, despite expert claims to the contrary. Hence, junior miner stocks will receive an added equity dividend. Many pundits such as Ned Schmidt proclaim a severe fall in the "looney" owing to their economy's tether to its southern neighbor, sending it to 50 cents per US$. I believe he is loud wrong. Their natural resources are staggering in breadth and depth, covering oil & natural gas from the western provinces to the eastern Maritimes, with gold, copper, industrial metal and structural metal deposits, even diamonds, scattered throughout the entire northwestern territories toward Alaska. In 2001 alone, US firms invested fully $23 billion in lands showing promise of mineral and resource ventures. Now those lands have begun to be exploited to bear results from active development. Quite the contrary, I expect the Canadian Dollar to rise toward 80 cents from its current 64-66 cents. In a real crisis, with rising energy and precious metals prices, the looney could challenge parity at 100. Sure, they will share some economic pain from their own debt-ridden and over-taxed economy, but flourishing commodity industries will offset to swell trade surpluses. Investment capital will be seeking the energy and metals equity market, adding to demand for our neighborly "other" dollar. Heck, at least one dollar must survive. For similar reasons, the Aussie Dollar will also thrive.
A phenomenal leveraged silver/copper opportunity called Cardero Resource Corp (CDU- TSE Venture) is in the making now among Canadian juniors. This emerging explorer is fast receiving attention and recognition. Ongoing surface work, including mapping, sampling, and ore processing are underway on a massive scale. Geochemical tests are proceeding from shallow drill sites near the La Providencia and Chingolo mineralized zones in Argentina. A deep hole drill program will follow within a few months. Calculations on the ultimate size of deposits will take some time, but are expected to be extremely high. Several of the leading junior mining editorial writers have begun to notice this company, including Robert Bishop, who has cited Cardero in his monthly miner investment letter. Many other editors are starting to show interest. Its production costs are expected to be minimal, inferable from high percentage of copper concentrates. Small-scale mine extractions have been measured from 200 tons over a ten-year period. In all likelihood this stock must be revalued an order of magnitude higher, or else disrupt entire valuation comparisons among other pure silver plays such as SIL, PAAS, SSRI, CDE. All this is possible even with a flat silver price. This tiny giant and a few other Canadian juniors will be featured in the corollary to this article, which I expect to issue soon.
The press & media declare Gold to be the true "counter-currency," as it has resurrected from a 20-year exile of neglect. Rick Santelli aptly describes it as such on his morning CNBC segments covering bonds, equities, and currencies. Gold, the financial commodity, is embraced by those who defiantly forego dollar-based financial securities, last decade's successful asset classes. The Wall Street Journal remains hidebound on the gold topic, as do Barrons, Investor Business Daily, and the New York Times. Not surprisingly, their advertisement sponsors have no loyalty to precious metals. The charming Santelli might be one of only two or three people on the CNBC staff (excluding guests) who have anything intelligent to say. Their Economics editor Steve Liesman shows signs of comprehension, citing gold not only as a currency alternative, but also as a beneficiary to worldwide currency supply expansion. Gold has begun to benefit from recognition as a currency, breaking ranks from mere commodities, and now is emerging from the shamed role of a demonetized metal. The golden bull has arrived, and will continue to trample paper-based asset groups until a mania fully blossoms, steering a full stampede. While on the subject of that fading cable channel beacon that ignores much relevant phenomena, leads cheers for bulls in the face of storm warnings, and drones hypnotically with its recycled ads, let me say this:
THE BEAR MARKET WILL BE OVER WHEN "CNBC" IS OFF THE AIR.
A new gold bull market will benefit from formidable, unrestricted, and nearly limitless supply of capital from which to feed demand. We are talking about a world-class asset traded on every continent, bought and sold around the clock. Govt intervention will resemble firemen showering lava streams with water hoses in futility. Their firetrucks will retreat in the face of approaching lava, much as risk control programs repeatedly push back their futile lines in the sand. Years of rising prices are in the works. Several sources have been supplying gold with capital in the past 18 months. Other sources will merge to send gold even higher. I intend to provide here a survey of the sources that will supply capital flows to the gold market. Also, the motives will be covered for these investors to abandon some or all of their positions, assuming a fresh stance and outlook toward bullion and the miners who produce it in gold & silver. I focus on money SOURCES and changing FORCES, much as a volcano requires avenues for molten magma lava to find routes to the surface, and powerful forces to push the matter to the surface. Fractures have occurred, and more fractures are coming. Investor motivation will be to sell traditional paper-based securities, and buy gold. Personal desire to preserve and build capital will combine with desperate government action to avert the Liquidity Trap from ensnaring us. The merging of forces will sustain this bull for years to come.
The world precious metal sector has only an $80 billion market capitalization. Compare that paltry sum to a sample of individual leader stocks and their mktcaps: Microsoft $250B, General Electric $225B, Exxon/Mobil $225B, WalMart $210B, Pfizer $180B, Citigroup $170B, Intel $100B, and Dell $60B. The impact of large-scale capital (lava) flows into gold & silver stocks will not only overwhelm the current short interest, but will lead to price explosions with ease. A mere diversion from leading stocks now languishing would attract world attention.
REFERENCES:
- Jim Willie CB: "25 Reasons Why Gold Will Rise" (Nov 12, 2002)
- Jim Puplava interview of Ian Gordon: "The Kondratieff Winter" (July 2002)
- Jim Sinclair: "Gold to be Remonitized!" (Jan 24, 2003)
and "Gold's Role Redefined" (Feb 1, 2003)
- Jim Willie CB: "A Statistician's Indictment of Economists" (Dec 2, 2002)
- John Murphy: "Gold Bull Market is Based on More than Iraq" (Jan 27, 2003)
- Clive Maund: "Gold, the HUI and XAU" (Jan 13, 2003)
- Jim Willie CB: "Predictions for the 2003 Year - Bear Claws" (Jan 27, 2003)
- Jim Puplava interview of Doug Noland: "Structured Finance & The Bifurcated Financial System"
(Jan 25, 2003)
Jim Willie CB is a pseudonym used since 1998 on Silicon Investor. Jim works as a statistical analyst for a private consulting firm engaged in consumer packaged goods marketing research. He holds a Ph.D. in Statistics. His career has stretched over 22 years, involving work at Digital Equipment Corp in manufacturing consulting and marketing research, and work at Staples in retail forecasting analysis. Visit his free fledgling website to read other articles and material, as well as to enjoy light-hearted satire, under the name: " www.GoldenJackass.com ." Many links appear for significant articles written by other authors. Future works are planned, including a mock interview of Sir Alan Greenspasm, director of the reactive inflationary pendulum.
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