Taylor On Markets & Gold
Financial Markets
A key market move this past week was in U.S. Treasury bonds. The 10-year bond rose from 3.63% last week to 4.00% at the close of this week. That is an amazing move for just one week. In fact, according to John Vail of Mizuho Securities, the spike upward following Greenspan's testimony on Tuesday was the biggest one day jump since at least the 1960's. The reason for the move? According to the pundits it was because the market doubted the sincerity of previous Federal Reserve promise to manipulate long term lower by buying long bonds.
The other key markets to watch is the U.S. dollar market. A declining dollar market could also trigger a rise in U.S. Treasury rates, even if and in part because of a weakening U.S. economy. We think it is only a matter of time before the U.S. economy weakens to the point where foreign capital leaves the U.S. in search for better returns. As that happens the U.S. will face the worst of both worlds, namely shrinking national income and a rising inability to service debt.
At the present, heavy intervention combined with some moderately good economic news has bolstered the dollar. The 1930's style beggar thy neighbor pressures seem to be growing. Japan for example has reportedly engaged in enormous interventions to prop up the dollar so the Japanese can keep exporting to America. Same is true of China who continues to rig its currency at an artificially low level. These kinds of interventions only prolong the U.S. centric trade patterns that will eventually implode into a global economic tragedy. But the hope of the policy makers is that a bit more time can be bought and that somehow perhaps an escape hatch can be found -somehow! But we believe mother nature cannot be fooled. The only question that continues to plague us is how much longer can the policy makers continue to defy gravity? If we knew we would be richer than Bill Gates. And so would you my subscriber.
A Key Question. Why Are Interest Rate Rising?
Interest rates rising as a result of a healthy and robust economy is one thing. Last Tuesday, interest rates skyrocketed when the market interpreted Greenspan' remarks to mean that the Fed would not buy longer term U.S. Treasuries to continue pumping money into the economy as the Fed had earlier indicated it might do. So the boys on CNBC immediately suggested that the rising interest rate was evidence the market foresaw economic growth. But there can be no denying that a significant amount of demand for long term money is resulting from companies that have an urgent need to shore up liquidity on their balance sheets. For example, last week we noted how General Motors borrowed billions of dollar not to build new plant and equipment but to simply fund the company's pension plan which is deep in the hole. And as we noted, a large percentage of the S&P 500 companies have underfunded pension plans to prepare for so GM is hardly an isolated case.
And then last week, an equally ominous reason why interest rates may be rising was provided in an article from the International Herald Tribune. The reason? According to the article published on June 16th, during the prior week, Asians began dumping their Freddie Mac securities because they are worrying about the investigation into improper Freddie Mac accounting policies. As foreign money began to roll out of this Agency debt, rates above Treasuries rose from 0.26% to 0.40%. During the first quarter of 2003, Asians bought $33 billion of Agency debt and Europeans purchased $20 billion. If/when large amounts of capital flows out of the U.S., the greatest financial orgy in history, funded by OPM (other people's money) will be over at which time even in a stumbling economy rates may rise.
The Harold Tribune article went on to say how Asians are more and more talking about diversifying their currency holdings by investing in Euro assets rather than the U.S. dollar. And with Asians no longer holding the U.S. economy in such high esteem, one would expect the time could be near for another sharp decline in the dollar. At some point, given the shortage of savings in the U.S., a major rise in interest rates is bound to be in store for Americans which could very well be a major dynamic that starts the American economic dominoes falling into the more harsh "months" of the current Kondratieff winter.
Should we Speculate in the Chinese Currency?
I have been talking for quite some time now about the undervalued Chinese currency known as the Renminbi or Yuan. Dr. John Whitney, CEO of Itronics has pointed out to me how capital intensive produces from China have been defying huge transportation costs and pushing American produced commodities out of our own markets. Finally, a year or so later, our elected officials seem to be catching on to this issue which begs the question. When or will the Chinese Renminbi be revalued upward and if so, can we profit from such a speculation? An alert subscriber of ours, Dr. Alan Gaynor, MD & MBA wrote the following email message to me this past week, asking my thoughts on taking a speculative long position in the Renminbi. Following Dr. Gaynor's email are: 1) some of my thoughts on this issue. 2) Information from Everbank.com which provides investors with an ability to own Renminbi and 3) comments on the prudence of speculating in the Renminbi from my good friend Marshall Auerbach, an independent analyst who advises The Prudent Bear Funds on its currency positions and who also works with the very brilliant Frank Veneroso.
GOLD
$420 Gold by October 10th?
Eric Hommelberg wrote a short piece that appeared in www.GOLD-EAGLE.com the other day that discussed a couple of very interesting patterns in the price of gold over the past two years. The first pattern is an 8 week trading cycle that extends back two years. Eric wrote that he "…counted 12 periods of two months that exactly matches the 8 week trading cycle. Not a single exception encountered! Two months up, two months down, for two years now! So according to this 8 week trading cycle, we can expect a bottom in the price of gold somewhere around the first week of August and a top somewhere around the first week of October."
Then Eric noted another popular trading theory among gold traders known as the ABCD pattern. Again going back two years, Eric provided a chart that clearly pictures a pattern with a steep rise (A), followed by a steep decline (B), followed by a modest rise (C) which doesn't challenge the high of the (A) move, followed by a modest decline (D) that doesn't challenge the low of the (B) move. Then the cycle repeats itself. The A moves mark new highs in an operating Bull Market.
Eric then notes that by combining the 8 week trading cycle and the ABCD pattern, you can project a move upward to $425 during the first week of October 2003. Of course, in economics it is never safe to assume things will unfold exactly as they have in the past. There are no guarantees that future patterns in this gold bull market will unfold so neatly and predictable. But if traders begin to think this way, these waves can become almost self perpetuating at least for a while. Of course the underlying, fundamental dynamics for gold, which is driven by the unhealthy creation of huge amounts of fiat money is what will really drive the gold markets over the longer term, rather than traders who begin to surf discernable waves.
But if this pattern does result in a $420 gold price by October, I will tell you one thing. Gold Shares are going to rise dramatically. We may even begin to see our gold share portfolio surpass our average triple digit gains of 2002.
Are Newmont's Shares Leading the Way for Gold?
Newmont mining is the largest gold producer in the world. Throughout its corporate history, Newmont stridently opposed hedging strategies. A hedging mentality was simply not to be found in its corporate culture. Your editor recalls an experience when I was working as a junior lender for Westpac Banking Corp in the early 1980's, that educated me about the anti-hedging philosophy of Newmont. I, along with my boss and his boss went to visit Newmont's Treasure who at the time was named Fontain. (His first name escapes my memory) After making us wait about 30 minutes before inviting us into his office, he looked over his glasses and sneeringly asked us why we were there and if we would please not waste his time. He pointed out that Newmont had a very strong balance sheet and that it had no intention of hedging its gold price. When the price of gold rose, management wanted to reap the full benefit. And given its strong balance sheet it felt it could weather any decline in the gold price. Warren Maggi, who at the time was an officer of Mace Westpac, one of the five firms that set the London gold fix each day, was treated most harshly because he was the person in our group who pushed Fontain hardest toward his gold hedging products. Twenty years later, that experience remains fresh in my mind.
But, when Newmont acquired Nomandy Mining it inherited a nightmare of a hedge, which the gold Cartel managed to force upon that Australian company over the years. It was because of that acquired hedge that I chose for a time to rid Newmont from our list. However, based on the very significant progress made by Newmont in ridding itself of is hedge positions, we added Newmont back on to our list on June 6th at $31.76. Newmont is the largest gold producer in the world and it is going to be the "go to" stock that all mutual funds are going to have to own once the gold bull market gets underway in earnest. Accordingly, it is going to be the star performer among the major mining firms
Richard Russell pointed out in his Friday missive a pattern of higher highs and higher lows for Newmont dating back to year 2000 for this company's shares. Then in June he pointed out how Newmont broke out above a massive accumulation pattern, which he found to be a very significant action. In Richard's words, "Here is the leader, the largest gold producer in the world, showing a pattern of long-term accumulation-and then breaking out topside of this pattern. Is Newmont telling us something about the future of the yellow metal? Is NEM taking the lead in the whole gold situation? At any rate, here is the market action of what I consider the bellwether stock of the industry. In its cold and unemotional way, I have to think that this chart may be making a statement about the future."
Doomsday With No Solution?
Hello Jay,
I share your views about the US economy, dollar, gold and the coming winter. However, there is one extremely important item that you, Richard Russell, and everyone in that camp never talk about, and it bothers me. Here's the issue: I think you will agree that the US is more of a socialist government than a true democracy. There are also too many people dependent on the system and hardly as many self-sufficient people as during the 1930s. We also know that government will do anything to keep their power and placate the masses. So, I'm wondering what good will having gold, or gold shares do, if the US economy and dollar fail in a major, major way? Most people are going to scream and demand assistance from the government. The government will probably react by confiscating gold, taking away more freedom and putting everyone in the same boat, except for themselves of course. Even if one has gold shares, and they in fact do go up hundreds of percent in value, what will even that do for you? Physical gold probably will be illegal to own, and if the dollar and most other currencies fail, one won't even be able to sell the gold shares and get into a strong currency. I would like to know how one could prepare and survive in an environment when even the local currency fails and if gold is confiscated too. Have there been any precedents for that? Maybe not, but it would be nice if some research was put into that instead of just market history. If gold is confiscated, I'm not sure that Uncle Sam would even give the owners the current market value at the time, which many contrarians believe might be $1000 an ounce. Even if they did, the dollars themselves might be of questionable value. Unlike the 1930s, when the dollar did not fail, it may this time around. So, I'd like your opinion about the above. I mean, if everything goes into the tank, except for gold, is it possible that the US government, and the 99% of people who don't have any gold, are going to let the people who have gold be the new kids on the block? I think that is very doubtful. Perhaps as a hedge, one should sell some gold and gold shares, before things go over the edge socially (I'm not saying that they will, but there's a good chance for major social problems), and put the money into some land and survival type items. In other words, have some gold investments, but watch very carefully the social conditions and be ready to sell some of it if things start to look dicey.
Thanks & Regards, Lance
Taylor: Except for the view that "US is more of a socialist country than a Democratic country," I think I mostly agree with Lance about his concerns. The U.S. is certainly a socialist country or perhaps more accurately a combination between socialist/fascist because the cozy relationship between our major corporate leaders and our government is very much that of a fascist regime. In fact, I believe we are moving more and more toward a collectivist society and when it comes down to basics, there really is not much difference between socialism and fascism. They all limit individual liberty in favor of collective decision making. Actually, there is nothing worse than a democracy especially when its citizens are educated or shall I say programmed to think alike. And that, dear subscriber is what has been happening in America since the ruling elite have more and more taken control of our schools. If you doubt that, I would encourage you to read "The Shadows of Power" by James Perloff.
But aside from that small disagreement, Lance is right. We can look forward to more and more civil unrest to be followed by more and more government control of our lives until our government may take away our gold either by outright confiscation as in the 1930's or by simply by taxing it away. Roosevelt made gold ownership punishable by penalty of 10 years in prison and $10,000 fine so there is definitely a precedent for similar action in America when gold's rise exposes the dollar and the politicians and bankers for the liars they are. Storage of gold offshore might be one solution, although the U.S. could make that illegal as well. Buy it in Canada and have it stored there or any number of other countries. As long as it is legal for Americans to do that, I have no qualms about recommending that kind of geographical diversification in gold holdings.
July 21, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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