Monday was a 90% down day. So, the market was ripe for the kid of manipulatory disinformation from the CIA or who ever was responsible for spreading good, but unfortunately false news. The short-term traders had to bail out of their short positions in equities and out of their long positions in gold. Gold has of course been the target of intervention to push its price lower and defy market economics. The recent decline in gold was more related to a hefty increase in futures margins requirements than any fundamental changes. All that has done is to give the Chinese a shot at buying more physical gold, more cheaply than they could have if the market were left free. More on gold below.
U.S. Treasuries
Bullish - Before the 90% down day snap back and disinformation campaign was put into effect, Treasuries rallied to the point where the 30-Year issue very briefly broke above the values of last October. With the short covering and rumor mongering equity rally on Thursday, bond prices plunged but remain far above their 200-day moving average, so the U.S. Treasury markets remain bullish.
We expect U.S. Treasuries will remain bullish until at some point, the gradual weakening of the dollar turns to an avalanche. That point in time may regrettably be near given the continued worsening of our current account deficit which is now over 5.2% of GDP. Generally, 5% is considered by economists to be problematic.
The bond prices does not seem to be very worried about the rising producer price numbers which were greater than expected last week. The 1% rise followed the 1.6% gain last month which was also higher than expected. Why are the debt markets not crashing if inflation were a concern? Seeing the enormous amount of increasingly problematic debt, we think the markets are far more concerned now about deflation than inflation. Were the U.S. a net creditor nation rather than the largest debtor nation in the history of the world, I might want to buy U.S. Treasuries. But at some point, the world will get their fill of dollars. The day when foreigners say the want no more dollars we are likely to see interest rates rise even as the economy becomes weaker. That will not be a happy time for the American economy.
The U.S. Dollar- Bearish
With the manic U.S. equity markets rallying, the dollar chart looks almost identical to U.S. equity index charts last week. The dollar rallied sharply above its 20-day and 50-day moving average but remains significantly below its 200-day moving average. Normally, the Fed would increase interest rates to defend a currency but with the U.S. economy weak and seemingly getting weaker (notice more talk again about a double dip), and with the U.S. indebted to the world and to itself like no super power ever, raising interest rates would not only bring immediate economic pain but would also be political suicide.
A major rise in interest rates is likely to make visible the harsh Kondratieff winter conditions spoken of by Ian Gordon because that is when the enormous amount of debt used to manufacture the U.S. Financial orgy of the Clinton years will begin to bite the economy big time. What will rising interest rates to the housing industry, especially as unemployment is rising? What will it to do the auto industry, which is already extremely sick? What will it do to what is left of the mining, manufacturing and agriculture in the U.S.?
The big problem we face now is the truth about the big lie told by our establishment during the booming 1990's. The Clinton Strong Dollar policy was built on series of falsehoods including the "New Paradigm" and a rigged gold market which fooled markets around the world into believing that the dollar could rise to higher and higher levels even as the supply of dollars was rising at a torrid rate. Had that basic law of supply and demand been repealed by Mr. Greenspan, Rubin, Summers and others, that indeed would have indeed represented a "New Paradigm." But alas, we are faced with the realization that the laws of nature remain the same since the day of God's creation. Now we must pay for defying those laws.
Commodities Bullish
But… - With a plunge in oil prices related in part to war rumors and warmer weather, the CRB fell below the 20-day and 50-day moving averages and also below a rising channel extending back to the June-July time frame of last year. At 240, the CRB remains substantially above the 200-day moving average so we consider commodities to remain in a bull market. But as regular subscribers know, your editor is cautious about commodities longer term because I think when the Kondratieff winter reaches its coldest point, all prices except for gold are likely to drop dramatically as mounts of debt default will cause the economy to grind to a screeching halt. We hope and pray we are wrong about this, but that is our fear.
The Producer Price Index cannot be ignored. The Rogers Raw Materials Fund, which we think reflects the cost of staying alive much better than the CRB, is up 12% already this year. Yet I am taking a seemingly paradoxical view that rising commodity prices are deflationary rather than inflationary, because as the Kondratieff winter bits harder, the ability to pass along production costs is drastically reduced. And eventually, as more and more personal and corporate bankruptcies result from an inability to meet debt servicing requirements, demand for all goods and services will decline very, very sharply.
Leading up the growing debt defaults though is the inability to pass along higher costs by companies thanks to the excesses created during the orgy of the long Kondratieff cycle and in particular to he financial orgy of the late 1990's. Steven Wood, principal economist at Insight Economics LLC in Walnut Creek California. He was quoted byBloomberg.com as saying, It's so competitive out there right now, with so much excess capacity, that if your main competitors aren't going to follow suit (in raising prices), it just really makes it difficult."
Shrinking profit margins lead to scaled back plans to invest in capital plant and equipment and it also results in rising unemployment which in turn results in reduced demand from consumers and corporations. And all that is taking place when the U.S. is the world's largest debtor nation and when its citizens have spent many, many years living beyond its means. Unfortunately its time to pay the piper.
Gold - Bullish
Gold was smacked real hard last week we think in no small measure because of the need for the U.S. to look strong as it gets ready for war. Again we think it is no accident that gold has been declining since our new Treasury secretary took office because now there is someone who can once again use the ESF for manipulative purposes. We take it as a given that as long as possible, the U.S. will trash its long term financial security for immediate political gains of a stronger dollar by trashing gold, as long as it sees a political benefit from doing so. Gold closed the week at $336 vs. its 200-day moving average of $330.61. At its close it is resting exactly against a support line extending back to the October-November 2002 time frame. Could our policy makers succeed in fooling mother nature once again by managing a gold market decline?
President Bush and his Treasury secretary may desire a strong dollar as we go to war, but the strong dollar presents us with a big problem and therein lies one bullish case for gold, at least from a geo-political perspective. I happen to also believe Frank Veneroso's supply and demand numbers are correct in suggesting a free market price for gold of over $600 true if central banks had not been falsifying the worth of paper money over the years by dumping gold either by outright sales or gold leases or swaps. But the problem the U.S. has is that the overvalued dollar is leading to deflationary pressures in the U.S. To reverse this dynamic, the dollar needs to be devalued vis-à-vis gold even though that presents a new set of problems for the Administration. Our policy makers are again between a rock and a hard place. They need a strong dollar to try to convince the world that the U.S. can and take on Saddam and finance the war. But if they perpetuate the strong dollar lie, they further weak the U.S. economy and worsen the current account deficit which makes the dollar in fact all the more overvalued and ultimately vulnerable to a state of worthlessness. This is not a happy condition we are in.
The U.S. may be the strongest military power on earth, but as President Eisenhower often said, history shows that great powers decline from internal decay. Immorality of all stripes is evidenced in spades now in America. Our policy makers have been covering up the truth about the dollar and gold for a long time. But we are now a debtor nation and debtors, be they nations or individuals do not put themselves in a strong bargaining position nor does massive indebtedness lend itself to financial strength. I believe some of the trouble President Bush is having with countries like Germany and France (which understands the validity of gold on its central bank balance sheet) can be explained by our weak position as the greatest debtor nation the world has ever known! They see how the U.S. has created a phony strong dollar by trashing the gold price and they want no part of being an accomplice to that "crime."
Will the U.S. policy makers be successful in pushing gold down further? Might Robert Prechter's absurd forecast for a sub $200 gold price still prove to be correct? We don't think so but as Richard Russell is fond of pointing out, markets can do anything they want and they can stay unvervalued or overvalued longer than you can afford to retain your position. No one said investing is easy. Markets can and do eventually humble everyone which is why we have tried to keep a balanced model portfolio.
In the end, gold which is truthful money will triumph over paper money which is by its nature fraudulent. The games that are being played to fool markets are pathological and the greater the extent these games are the more certain and devastating will be the ultimate decline. With gold close to key technical levels, I think it is prudent to stay with our positions and with respect to the gold shares take advantage of this current period of weakness to add to but not beyond the allocations we have suggested in our Model Portfolio.
March 18, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
http://www.miningstocks.com