Taylor On US Markets & Gold
THE FINANCIAL MARKETS
COMMODITES
We note the CRB has been performing very strongly. It closed at 243.70 and as such remains above its 20-day, 50-day and 200-day moving averages. At the end of this past week, it had risen above a resistance level dating back to March of this year.
As many subscribers know, your editor has been reluctant to buy commodities and commodity stocks because of my views of the deflationary effects of the Kondratieff winter. I still hold fast to those views, but have come to realize that we may have a considerable amount of price inflation prior to the time when the Kondratieff winter temperature decline ushers in new "deflationary ice age" caused by a chain reaction of debt defaults.
Ironically I see rising prices as actually helping to catapult the U.S. into the Kondratieff winter deep freeze since we consume so many commodities yet for a variety of reasons, no longer produce much of what we consume. More on deflation and inflation from an Austrian perspective below.
GOLD
The yellow metal is looking very strong as it broke through a key $374 level this past week. Not only is the price of gold rising above all the rising moving averages, but this past week it broke to the upside of a wedge formation on the charts.
From a longer term perspective, a secular bull market in gold appears to
have begun in June 2002 when for the first time since January 1997, gold's
20-month moving average of $280.31 stood above its 40-month moving average of $279.81. This was the first time since January of 1997 that happened.
NATURAL GAS
The Amex natural gas index remains very bullish. It closed the week at 195.17 and as such was above all its moving averages. The fundamentals are hugely bullish and our guest interview for September, Bill Powers will explain why. For this one interview alone, you don't want to miss our September 2003 issue. We think before the cascading debt defaults freeze our economy up solid, there will be a great deal of money to be made in some energy stocks.
However, the potential for a substantial rise in natural gas prices this winter, combined with the possibility of a dollar decline and interest rate
rise could very easily trigger the beginning of the Kondratieff freeze up.
And when that happens, ultimately we expect energy prices and commodity
prices in general to become weak. Whether the freeze up we envision takes
place in one year or five years from now, we cant say. But for now we feel
comfortable in owning natural gas stocks and other commodities in the
Rogers Raw Materials Index fund.
NEUTRAL MARKETS
Technically, for the moment, the dollar, U.S. Treasuries and equities are
all in neutral territory. There are reasons to believe we are seeing a major topping in the equity markets. Small investors are being sucked into stocks at the same time big investors are selling out and when insiders are selling $30 of their stock for every $1 they are purchasing. This is typical for major equity market tops.
US Treasuries look to be in a temporary holding pattern following the most
rapid rise in interest rates in some time. One of the reasons it is impossible to predict when the Kondratieff freeze up might occur is because in our highly indebted (leveraged) economy, there are so many hidden weaknesses among the derivatives markets and as John Crowley suggests, in the asset backed securities markets. There are those who believe the recent sudden rise in interest rates could lead to a cascading debt default not unlike the Long Term Capital Management debacle that threatened to take down our financial system. Another sudden rise in treasures may be all it takes for some very unpleasant events to begin to unfold among mortgage related derivatives, not to mention what rising mortgage rates are likely to do to the housing industry and consumer demand. Indeed Christian Weller, an economist at the Economic Policy Institute in Washington D.C. said this past week that he thinks the housing boom will be over in the fall as a result of higher mortgage rates.
What could cause rates to rise further at this time? We have pointed out
there is a positive reason for rates to rise, namely economic growth. However, there are also some very negative reasons for rates to rise,
especially for the U.S. economy, which has relied so heavily on foreign
capital. Not if, but when the day arrives when foreign capital stops
flowing into the U.S., rates will rise dramatically. Also, we think
projections now of an out-of-control $500 billion Federal budget will
provide stiff competition for private borrowers, thus leading to higher
rates.
All of these markets, equity, the dollar and U.S. Treasuries, we believe will turn bearish, perhaps this fall. It might also be that when these major markets turn down again, we will finally see the long awaited capitulation phase for equities and an awareness on the part of the public that gold is the place to be. So far, 90+% of the investing population are believing the propaganda from our establishment that equities will soon resume their upward trek toward the promised Dow 30,000 on its way to 100,000. Say Halleluiah! Amen!
Economic and market realities (like debt and insanely overpriced equities)
strongly suggest Americans are about to experience one of the most profound rude awakenings ever! It is going to be ugly as sin. We believe it is our responsibility to guide as many investors as will listen away from the
nonsense and propaganda sold to an unsuspecting public by CNBC and other
members of the establishment propaganda machine.
FINANCIAL SHARES
We expect to keep our eyes peeled on the financial stocks. Specifically, we are watching the IYF Index, traded on the American exchange. The "Zutz," as Richard Russell calls it, showed up late during a thinly traded Friday market session, to goose the financial stocks to their highs for the day and slightly above their declining 20-day moving average. But these financial stocks have gone nowhere over the past three months. In fact, it appears that these stocks, which contribute 40% of the earnings for the S&P 500, may be in a head and shoulder topping pattern. Could the weakness in these shares be telling us there are derivative or other problems out there related to the sudden rise in interest rates?
September 1, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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