Question: I've just subscribed to your newsletter and am enjoying the November issue and your 11/15 update. I do have a question for you though, albeit one you may have answered many times before.
In my subject line I refer to Warren Buffett because in reading his recent article in Fortune magazine (the one about Squanderville, etc.) I noticed a particularly obvious example of what I'm talking about. This was a sidebar explaining that what Mr. Buffett was expecting can't possibly happen. The explanation is that foreign investors couldn't pull their reserves out of U.S. dollars because all they can do is sell those dollars to one another, therefore the dollars are still held by foreigners. Of course I know that's a load of crap, and shame on Fortune for including it next to Warren Buffett. What I don't know is the answer to it. I can think of a number of possibilities, all nasty, but I'm not enough of an economic expert to know the concise response to that sort of thing.
I see your discussion in 11/15 p. 7 about foreign governments "selling dollars for Euros, yen, and gold." How does it work, though, and what happens to the dollars that get sold? Maybe you could discuss that in one of your weekly bulletins.
Thanks.
Answer: I believe what Fortune is saying is that these countries can't sell their dollars all at once or if they did, the dollar would fall toward zero, and if that happened their national wealth would largely dissipate. And knowing this, as rational economic players, they would simply not behave this way. It's a little like the argument that says when a borrower is big enough to make the banks go down, the borrower, not the bank, is in control.
All the players on the international scene are well aware of this lender/borrower dynamic and certainly if the thought has occurred to Jay Taylor, Warren Buffett knows about it as well. The problem with the Fortune argument is that the entire system is increasingly vulnerable because of enormous and growing amounts of leverage, which is why we continue to believe that Ian Gordon's forecast of a deflationary depression is right on target. The U.S. is already for all practical purposes a bankrupt country. I say that because we are already-even before the baby boomers retire-relying on borrowings of $1.5 to $2 billion per day from foreigners, not to build our infrastructure or plant and equipment that will enhance wealth over the longer term, but rather to continue consumption well over the limits of any other country on the face of the earth. As a nation, we are hopelessly addicted to consumption and it is every bit as pathological as the alcoholic husband that drinks all his paycheck up before he buys groceries and pays the rent for his family. We are living on borrowed time. We are so far gone that we can no longer compete effectively with other nations. Why would foreign countries continue to invest in America? Already we are seeing a huge drop-off from foreign private sector investment in the United States. Central banks are buying U.S. paper, but that is part of the beggar-thy-neighbor currency devaluation pathology that is seeping back into the world for the first time since the 1930s.
Bear in mind that foreign countries don't have to withdraw the money they have already put in the U.S. to cause the U.S. to collapse. All they have to do is stop sending us $1.5 to $2 billion per day and the dollar will tank, big time. As Richard Duncan said in his book, The Dollar Crisis, "The dollar is destined to collapse because the U.S. economy will soon no longer be able to generate a supply of secure U.S. dollar-denominated investment vehicles sufficiently large to enable the rest of the world to recycle its annual half a trillion dollar current account surplus." And if that is the case, then why would the Chinese and Japanese continue to send us real tangible consumer goods if all they get back in return are pieces of paper that are without value and in fact continue to lose value against say the yen, the euro, and gold? And why would these surplus countries accept any fiat money when the value of all fiat currencies is based not on any intrinsic value as gold is, but rather on the willingness and ability of people to pay their debts, especially when debt around the globe is growing exponentially, vis-à-vis income, which is growing in a linear fashion?
It is only a matter of time before the dollar collapses against other currencies and ultimately the most against gold which John Maynard Keynes called a barbaric relic. The laws of the universe, which presumably includes the laws of economics rather than those of John Maynard Keynes and his fellow atheists/humanists who write editorials for Fortune and other major media, will ultimately win out. All fiat currencies are in fact a lie. In fact the "dollar standard," which is no standard at all, is the biggest lie of all so it will fall the farthest, vis-à-vis the other currency "lies."
Might the dollar's demise now be close at hand? "Transactions with Foreigners in Long-term Securities" suggests that may be true, although one month a trend does not make. Monthly Net Purchases, having averaged almost $76 billion over the preceding six months, collapsed to a measly $4 billion. This release highlights the risk of broad-based waning demand for U.S. securities. Averaging $16 billion monthly through August, net purchases of Agency debt reversed to a negative (liquidation) $3.2 billion. Foreigners also liquidated $6.3 billion of U.S. stocks, while purchasing net $5.6 billion of Treasuries and almost $20 billion of corporate bonds (including ABS). Year-to-date, Treasury and Agency purchases have accounted for 63% of total purchases, this compared to 51% during 2002, and 36% for 2001. U.S. "risk assets" are out of favor.
GOLD
The chart below pictures the monthly average gold price from January 1995 through November 30, 2003. What we see here is a powerful bull market, evidenced by the shorter term monthly average ($389.89) rising above the longer term 20-month average ($340.85) and 20-month average rising dramatically above the 40-month moving average ($307.26).
This is a powerful bull market. Note how far the current monthly average price has risen above the Washington Accord surge to $314.06 in October 1999. Note also that it takes quite awhile for the longer term moving averages to change directions. We could easily see the same pattern as noted above (monthly average > 20-Month average > 40-Month moving average) for 5 or 6 years or longer before an inflection point in this bull market is reached. In between that time will come sudden declines on a daily, weekly, and monthly basis. But as long as the bull market trend remains in place, you have to allow the trend to be your friend. Trying to trade a powerful bull market like this is tricky and, I would say, very risky business.
Time to Take Some Profits in Gold?
As the chart above demonstrates, the gold market has had quite a run, and quite a few well-known newsletter writers, especially those who approach the market using technical analysis, are suggesting it may be time to take some gold share profits. True, markets never go straight up, even in a bull market. However, when the primary trend is a bull market, it can be very dangerous to try to pick tops to exit and bottoms to reenter. More often than not, folks who try to trade end up missing the next big move upward during a primary bull market. Either the price of the item never declines significantly to get you back in or if it does, getting back in at the right time is never easy because you may be tempted to want a still-cheaper price.
I don't care how good a technical analyst you are, it's very difficult to win consistently at the trading game. Remember only about 10% of traders make money consistently. My view and my strategy for this newsletter is to ride the primary trends with little worry about trading in and out of the various moves within the primary trend. To be sure, we will make judgment calls from time to time on whether to buy or sell individual stocks. But as long as we are convinced we are in a bull market, we will continue to own and add to our positions on the long side of the market in question. Likewise, when we are convinced the primary trend is a bear market, we will either be out of the market in question entirely or when a means of shorting the market is available (e.g., The Prudent Bear Fund to short the equity markets), we will continue to trade from the short side.
We think the bull market in gold has only just begun. First of all gold has been so severely depressed that even if we had a healthy global economy, it could easily rise another $200 before it became fully priced. However, the world has no end of economic problems, which we talk about extensively from week to week in the Hotline. Therefore we think something more like a $3,000 gold price is a kind of number that is even more realistic than Frank Veneroso's estimate of a $600 "commodity price" for gold, during the best of times, during the second half of the 1990s.
As we have explained repeatedly, the price of gold is as low as it is because massive amounts of gold have been dishorded by policy makers in their efforts to convince the public that the dollar standard was better than the gold standard. That attempt to fool market participants will, in the end, backfire big time against these policy makers. The institution used to trigger the phony decline in the price of gold over the past number of years was no doubt the Exchange Stabilization Fund (ESF).
The Exchange Stabilization Fund and Gold Manipulation
There exists a mountain of evidence as provided by folks like James Turk, Reginald Howe, and others who contribute to www.gata.org that the U.S. President and the Secretary of the U.S. Treasury have been manipulating the gold price downward as part of the Clinton strong dollar policy. One of the logical objections used by those who reject the notion that our government would or could manipulate the gold price lower is based on the belief that the process of manipulation would require a large number of people to carry out the process and that it would therefore be impossible to keep it quiet. To get an idea of how this manipulation has taken place, I would suggest to those people that they watch closely the Blanchard gold manipulation trial that is now in the discovery phase. The case is known as Blanchard & Company, Inc., Herbert Davies, and James F. Holmes vs. Barrick Gold Corporation, J.P. Morgan Chase & Company, and ABC Companies.
I am most hopeful that this case will progress to trial and not be settled out of court because having the mechanics of gold manipulation come to light will help bring to the attention of the public three major issues: (1) The corruption of our government itself as it has clandestinely sought to send false signals to markets; (2) The role those false signals played in underpinning the Clinton Strong Dollar policy; and (3) The role the Clinton Strong Dollar has played in leading to the enormous financial bubbles and global economic distortions that have only begun to be rectified in these very early years of the current Kondratieff winter.
In our December 2003 issue, we will talk more about the Blanchard case (either through an interview or an essay). And in our January 2004 issue, we will be interviewing Ian Gordon to examine just where we are in the deflationary debt repudiation phase of the current Kondratieff winter. Both of these are, in your editor's view, key to understanding where the financial markets are heading in the months and years to come.
Getting back to the gold manipulation issue. What few people understand is that gold can be quietly dishorded from the U.S. Treasury without anyone other than the President and the Treasury Secretary knowing anything about it. Your congressman is not an important enough player to need to know and so by extension, neither are you important enough to know. The enabling of dictatorial control over our national gold supply was given to the President during the Roosevelt years and is implemented via the Exchange Stabilization Fund (ESF), which allows the Treasury Secretary to intervene in the foreign exchange and gold markets whenever he so desires. What I believe the Blanchard case may show, assuming it goes to trial, is how the seemingly impossible gold manipulation scheme can be and has been pulled off.
While the focus of the case will most likely not be on the gold manipulation policy of the U.S. Government, I believe it will show that the government's policy of making gold available to the bullion banks was a necessary pre-condition for the manipulation to take place. From that point on, hopefully questions will be asked as to why policy allowed the U.S. gold supply and/or the gold supplies from other central banks to be sold or dishorded in one way or another at such paltry price, never again to be returned to the U.S. citizens to provide backing for our currency. The alleged collusion of Barrick and J.P. Morgan Chase and the mechanics that drove the price of gold downward in a self-serving way for Barrick and the bullion banks will be the primary focus. But hopefully from those answer will come questions as to motive and policy form the Executive branch of our government.
November 11, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com