Betting After the Race: That's Good, Right?
Sid Klein
In terms of currency denomination, the bottom line regarding asset allocation, is that one may consider 50% gold, 25% Yen and 25% Swiss Franc (or Euro, if there is liquidity issue), as appropriate for one's holdings. As regards the specific investment classes, it is noteworthy that the consistency of the arguments that favour each class, supports the same conclusions as to where we are in the Kondratieff Long-Wave economic cycle. Specifically, one should be 100% long the gold allocation, 50% long one's gold equity allocation, while perhaps hedging against New York with long-dated Dow puts as that index heads toward 6500, noting Japanese Domestic Demand Oriented Value Stocks (DDOVS), as a positive theme which supports the dollar/gold view here. Let's see how each item supports the view, or global picture of a massive gold bull market that, ultimately, possesses potential to over $1,300 per ounce, over the next two years.
The Dollar correction is over, as the Yen got close enough to 115, at 114. The big and easy profits have been made in the Euro, Swiss Franc and the Yen, the three currencies on which I comment. With the massive gains in the Euro, SKC switched to the first sentence's allocation in deference for gold. The Swiss Franc is the closest thing to a real currency, due to its gold holdings. It is also not part of the European Union.
Why only 50% long gold precious metal stocks? The recent activity in the equities, versus the performance of the underlying metals, was reminiscent of the stocks' terrible performance after gold hit its low at $410. More to the point, as that occasion marked the first post-2002 unhappy experience, despite having forecast the gold low around $410, SKC's attention shifted to the 1929-1932 experience.
The gold stocks followed the Dow until 1931 when, in the middle of the send wave of crash to Dow 40, the gold stocks finally divorced and soared. Money was flowing in the same direction…gold! Still, the equities had initially resumed their collapse with the Dow. It's the "initially" part that concerns me. Still, with so much potential in the leveraged precious metal companies and stocks, 50% is a sufficient position for now. "For now" could be brief.
In the short term, gold shouldn't break the $435 area, followed by a move to $460. How it behaves thereafter will determine whether to go 100% long. If the Dow's initial major support en route to 6500 were at 8000, would it only be at that point that gold truly accelerates and gold stocks completely bottom?
The precious metals stocks won't bottom together with the Dow, but fear has to move stock to knowledgeable hands. A crashing Dow and the margin calls they engender would create fear. Don't be surprised if the market would simply attribute gold equity weakness to higher costs again.
Apart from believing in capital flows, one may note that this intermediate term contrarian (to the bullish gold) point of view considers the need to not buy the metal during a Dow collapse, since that could exacerbate the condition of fear being caused by the stock market. This logic/truism is similar to the fact that stock markets rarely crash on bad news because the bids wouldn't be there (see below). In other words, gold buyers need sellers.
Finally, it should be pointed out that the latter point is actually moot, as far as the metals are concerned. Gold will be moving through $500 by year-end, after having gotten stuck underneath that level the first go-round. The pause that included a peak $10 under $500 per ounce will now be followed by an eventual acceleration through it.
As trade agreements and trading blocks become more strained, asset allocation must reflect this. The Yen has the greatest profit potential of the three paper currencies, as an emerging new block currency. Be sure of it. It is a matter of course. At the end of the last decade, the Japanese government started to guarantee the Yen-denominated federal debt of Southeast Asian countries. When he was Montreal, I had asked the new Japanese ambassador to Canada whether this measure served toward creating or becoming the world's third block currency. Particularly as Japan naturally shifts toward being more services oriented, this struck me as all too obvious.
In any event, a special indicator (yes, another one) may be the strains on NAFTA. I would only add that Canada, I believe, is the most indebted country in the world, per capita. This may be an additional wildcard.
Gold will supplant oil as a real thing to own, once attention turns more fully to the economy's eventual woes. It will also be shocked higher by real estate (Fannie Mae, Freddie Mac, etc). Japanese real estate peaked in 1992, two years after the Nikkei. The Japanese were seeking "safe haven". And then the roof caved in, pun intended. Well, the same has occurred here. With the "safe haven" burning people's equity, with all currencies now in a bear market versus gold, realizing that oil doesn't by bread, gold will dominate as the single most recommended, favoured and popular asset class.
A major push toward gold as the true safe haven is the US' equity values, and tip-toe through the most treacherous minefield; anything can set it off. Knowing that we are in that part of the K-wave where one must be concerned with economic demise, we analyze that the Dow's PE of 18 makes no sense within the context of forecasted growth of 11%, falling earnings forecasts and rising rates. This three-point formula is a recipe for Crash, such as the one that will probably be upon us, soon.
Forget the Dow. The investor ought to simply ask him/herself what should be done with an $18 stock, whose "value" (to keep it simple) is $11, and the earnings on which are falling?!
Those close to the precious metals and equity markets are aware that recent years have presented cases where one could bet on the news, after it was already known. This may be partly due to manipulation of one form or other, but the important consideration is that the effect is a psychology of, "well, the market doesn't seem to care, so maybe that's really not so important."
Today's oil situation is a good example. It is a technical truism that stock markets aren't smashed, amid very bad news, when bids could run and hide. Rather, it is when the bad news corrects (abates) that the stock market is hit, as institutions need bids to sell to. The public has been convinced that falling oil would be bullish, since stocks have fallen with rising prices.
The spread between, and the crossing over of, oil versus Dow charts, has hit extreme divergences. An oil correction will allow for bids to come into the market, which allows institutions to trash the market. On the other hand, if oil rallies further, attention will simply be drawn to what is causing those negative earnings revisions in the first place. Again, it is the valuation and technical stories that prove the technical case, and the long term technicals within which paradigm all this is occurring, are then triggered by those irrational valuations. The valuation and technical stories tell of such fragility, of a system that will be blind as to whether the shocks come from Fannie Mae, declining Chinese bond purchases, oil, or anything else.
When I joined the investment industry in 1982, my mentor had taught me that to understand what to invest in, one must first have the greater economic context in view. Then, one would need technical tools that served for timing, preferring those technical tools that themselves offer greater perspective. To achieve these, it was most important to understand Kondratieff and the Elliott Wave, the teachings went.
There is also a simple reason for significant confidence that gold will soar to levels well beyond what most of us can imagine. Such activity will be consistent with where we are in the K-wave cycle (actually a sequence), which related to every market forecast and identification published in SKC, whether it pertained to gold, the Dollar, Japan or the Dow.
Therefore, even if one does not experience the "intuitive obviousness" of all this, an honest intellect can understand that the mathematical probability of being correct in each of those cases, while being wrong about the paradigm upon which the forecasts were made, would be absurdly low.
These different markets, and the correct understanding of them, are like arrows that point to the bullish interpretation of gold. Working on Japan, New York and the Dollar provided the evidence, only because the economic Long Wave interpretation made it easy to plug-in the fourth variable. Gold needn't be the fourth variable; my point is only that one may be extremely confident in the lifetime opportunity to buy precious metals (gold and silver) and precious metals stocks, by having a handle on the other variables, and all within that all-critical context or paradigm.
Where are we in the K-Wave now?
At this point of disaster, we must recall some basic axioms. When at this point in the Long Wave economic cycle, the focus shifts from financial decimation (1929, 2000), to economic pain. The third chapter, of course, is political/military, which would only be somewhat later on.
Nick Barisheff has quoted Alex Wallenwein as pointing out that the Chinese government's "recommendation" to the Chinese people to buy gold may be a first in the modern history of governments.
DDOVS strength is part of the story of the shift in dominance from West to East, and nothing could be a greater indicator of a massive shift on every level than this fact. Before his death, the climatologist Dr. Raymond Wheeler wrote that a 508-year cycle of East-West dominance transition was underway (report available via Robert Prechter's Elliott Wave Theorist). He has made numerous outstanding market calls, from the grave, so to speak. His findings happened to fit perfectly with the K-wave interpretation.
Such a Grand Super Cycle shift means that the West must re-build its manufacturing sectors, because the East won't be its slave anymore. This is what happens when the creditors suffer the debtors' defaults.
As this brings long term confluence and greater egalitarianism of currency levels, gold must necessarily skyrocket to deal with the dislocations. Japan has about 40% or $12 trillion of the world's savings. Then, there's China. What part does the Westerner not get?
It is difficult to understand the investor who looks out at the minefield of the Dow's negatives, and feels that a 2.3% dividend compensates his risk. I also cannot grasp how retail investors hold bank stocks, real estate and the Dow, with such an utter disdain for the precious metals complex, despite a now multi-year confirmation. The intro to the CNBC US interview said it all. It asked whether the Dow was going to 6500 or 11000. 500 points of upside and the dungeons below. What is the debate? Is the Dow better than gold?
Strength in Asia means strength in precious metals, too. Asians are culturally predisposed to placing savings in gold. While, the poorest Indian woman has had the sense to hold her gold, Westerner governments have basically run down their reserves.
And so, as the title of this article suggests, the investor seeking to profit from lifetime opportunities in the gold and silver complex, can complete his or her "Sting", without having had to perpetrate a hoax as the lovable characters of that film had to, to restore justice. Here, after all, the hoax will have been the result of institutionalized psychology, which has presented the already-run race, the silver platter of desired prices, along with the illusions that keep investors from taking what has been placed right in front of them.
28 August 2005
JAPAN ASIA INVESTMENTS
www.sidklein.com
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