We are receiving all manner of good news from the mainstream press these days and there is no doubt the economy is picking up, although as Stephen Roach points out, the lack of job creation is indeed troubling. But lest anyone think the plunging dollar bodes ill for America, there are also countless folks eager to tell America's lemmings that the decline in the dollar is actually good for America because it will increase the ability of Americans to export good and services.
As is most often the case in economics, there is an element of truth imbedded in every side of an argument. So yes, there is no doubt that a lower dollar will boost the earnings of some companies. However, the currencies, which now need to change the most to allow the U.S. balance of payments deficits to be reduced, have barely changed or have not changed at all. Moreover, with U.S. wages in just ten minutes about equal to what a Chinese worker makes for an entire week, and with China now also boosting efficiency of production with massive upgrading of capital equipment, one wonders just how close to zero the dollar will have to plunge to result in a balanced trade between the two countries. Putting it another way, one wonders how much America's living standards re going to have to plunge before equilibrium is achieved.
So, no matter how the talking heads spit this issue, make no mistake. The decline in the dollar is not overall good news for America. In addition to the manipulation of the gold price during the 1990s, which as Lawrence Summers knew was a pre-condition to a strong dollar policy in an environment of declining real interest rates, the U.S. dollar was strong to a great extent simply because people were willing to hold it and to use it as a medium of exchange for global trade. Something like 70% of all international trade is, or at least was in the past, denominated in dollars. As the willingness to hold dollars for world trade declines, the dollar will decline sharply.
The strong dollar meant that when my family and I went to Paris and London over the past couple of summers we could buy things real cheap. The strong dollar has also helped push the price of things we import way down year after year. But increasingly, this strong dollar has had less and less to do with the strength of the American economy and more and more to do with unsustainable underpinnings of spin, market manipulation, and of course the not-so-subtle reminder of America's awesome military power that has come at great expense to America's economy over the longer term.
The problem is this: As the dollar is driven lower, foreigners who have been willing to invest in America are getting hurt very badly because in terms of their own currencies their U.S. investments are in negative territory. How much longer this will go on is anyone's guess, but even a slowly declining dollar is a huge problem for America, given our enormous debt loads.
Again, I think we must look at the following chart because it provides a quick picture of the awful position into which we Americans have put ourselves and why we are on the verge of a various decline in our standard of living.
This is not a picture of a healthy national cash flow. In fact, this is a picture of a bankrupt country that does not save enough to even meet its own consumption requirements, never mind capital requirements. As long as foreigners continue to lend us something on the order of $1.5 billion per day, CNBC can and will stay on the air to keep on generating revenue for its guests who are granted free infomercials to continue selling shares of extremely overvalued stock to America's lemmings.
But the day will come, perhaps sooner rather than later, when the music will stop and the party will be over. Investments in America are becoming an increasingly losing proposition. Already there have been signs that the private sector is reducing its purchase of American financial assets. And this growing distaste for America's financial assets is seen from the following chart.
U.S. DOLLAR CHART
KEEP AN EYE ON THE PRIMARY TRENDS
The folks on CNBC will continue to mislead investors because they allow their self interest of selling ad time to America's corporations to overrule objective truth. So we are constantly being fed a huge amount of "noise" that tends to confuse us and keep us satisfied that "big brother" has everything under control for us. We are told that we should just keep on buying stocks for the long term and all will be hunky-dory.
The ability to think outside of the box that CNBC would put you in and to see the long term, primary trend is hugely beneficial. It is certainly what we try to do with this newsletter, which is why we keep showing you long-term charts for equities, the dollar, and gold. The following observation, which was posted at Jim Sinclair's Web site, says it all with respect to the virtues of being able to see long-term trends taking shape and to tune out the daily noises that serve to obscure the big picture.
1948
Imagine if it were 1948, just after World War II ended, as had the Great Depression. Someone was jumping up and down asking you to buy the Dow or leading stocks when the PE ratio was below ten and their dividend yield was between six and eight percent. What would you have thought then? You would have looked at the past, extrapolated into the future, and determined that person was crazy. At the time the Dow was 161 (when its previous high was 381 in 1929 and it would not hit that again until 1954). Richard Russell and George Schaefer were those persons encouraging everyone they could to get into the market.
Unfortunately, you would have made one of the greatest investment mistakes of your life by assuming Russell and Schaefer to be crazy. The Dow was about to begin its second legendary bull market of the century that would not end until 1966 at Dow 975.
1971
Imagine if someone in 1971 told you that gold, which was then at $35 an ounce, would be at $887.50 by the end of the decade. What would you have thought of them? Obviously, they were crazy, as gold had been at $35 an ounce since 1933. Again, most people extrapolated the past into the future and decided not to buy gold. Oh, yes. Richard Russell, James Dines, Harry Schultz, and Jim Sinclair were those crazy people.
Well, you would have made the second greatest investment mistake of your life. In 1980 the Dow was between 800 and 850 and gold was at $887.50.
1974 or 1982
Let us move to 1974 or 1982. Imagine that someone was jumping up and down asking you to buy the Dow or leading stocks when their PE ratios were below 10 and their dividend yields were between six and eight. What would you have thought of them? You would have looked at the past, extrapolated into the future, and determined that the person was crazy. Oh yes, Richard Russell was the person encouraging everyone he could to get into the market both times.
The Dow would experience the greatest bull market that the world had ever seen. It went from either 577 in 1974 or 795 in 1982 to 11,722 in 2000. Unfortunately, you once again had made one of the greatest investing mistakes of your life.
To make it worse, you got into the market starting in 1998 or 1999 and you experienced horrific losses.
Now in 2003, what should you do? Sit on your losses and hope the market comes back or look now to see where the next great bull market is? Well, most people will sit and wait for another two to seven years before they do anything and then they will sell their stocks at exactly the wrong time and buy into the peak of whatever bull market is occurring to compound their error.
Today - 2003
Once again imagine today in late 2003 if someone told you that gold, which is at just over $400 an ounce, will be at $3000 - $10,000 an ounce by the end of the decade. What would you think of them?
Obviously they are crazy, as gold has been below $400 an ounce since 1996 and below $500 an ounce since 1983. Again, most people would extrapolate the past into the future and determine that they are crazy.
Oh yes, once again Richard Russell, James Dines, Harry Schultz, and Jim Sinclair are those crazy people.
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(Note: I was born on October 3, 1948 and I'd never heard of any of these guys until four years ago when I got involved in the gold market. Now I read and heed every word they write. Thank God for the Internet. Ed)
Inflation at 40-Year Low! Is This Good News?
The U.S. November CPI was down 0.2% and the core rate down 0.1%. In fact, we now have the lowest year-over-year CPI in forty years! The core rate of inflation excludes highly volatile energy and food prices. In fact, we have seen a considerable rise in the inflation rate as noted in our Rogers Raw Materials Index fund and our energy stocks, which in fact will have been our best performing sector this year in our Model Portfolio.
What I find so astounding about this still-declining rate of inflation is that it has come during a period of time when we have had the largest fiscal and monetary stimulus since World War II. But this tame inflation is very much consistent with Ian Gordon's theory of the Kondratieff winter. Ian believes-and I share that view-that debt levels are so great now that it increasingly drags down the demand side of the economy, thus reducing the need to be concerned with rising consumer prices. Indeed, we still do see rising levels of inflation as manifested in the money supply (although M-3 has now started to decline almost every week!), the stock market, the bond market, and the real estate markets. But inflation, when defined as rising consumer prices, is in my view pointing ominously toward the beginning of the Kondratieff winter.
For more details on this issue, please keep your subscriptions current so you do not miss our interview with Ian Gordon in the January 2004 issue of J Taylor's Gold & Technology Stocks.
GOLD
I have received some extremely complimentary reviews of my interview with Blanchard & Company CEO Donald W. Doyle. Dr. Larry Parks, for example, called to tell me this was the best work he has ever seen in my newsletter. James Turk sent me an e-mail to tell me I should use this interview to drive traffic to my Web site. And there were many more comments from other subscribers of mine who suggested this was the kind of journalism the main stream press should be doing.
Of course, I am always happy to receive compliments like these. But in all fairness, the real compliments belong to Don Doyle who did such a remarkable job of making this fairly difficult topic for most lay people rather easy to understand. Yesterday, in preparation for my appearance on the Korelin Hartfield show (you can listen to this archived show at www.kuik.com, which also includes my friend Dave Morgan and Bill Bonner), I re-read my interview with Don. What really impressed me was just how dramatically the J.P. Morgan/Barrick collusion apparently drove the price of gold lower. And then, as Barrick began to unwind its gold hedge from $24 million ounces in January 2002, the gold price began to rise.
I would like to excerpt a section of my interview with Mr. Doyle that I think provides some important insights into the impact that the J.P. Morgan/Barrick gold-price rigging had on the price of gold, and thus, how it hurt gold investors and the poor people of the African gold-producing nations so badly:
"Taylor: Can you provide for our readers some statistical evidence that the transactions that J.P. Morgan and Barrick were responsible for did in fact push the price of gold downward?
"Doyle: There are a lot of ways to approach it. The first way is to chart the price of gold against the short positions that were put on by Barrick. We only have accurate data on Barrick's positions back to 1996 because we don't have quarterly information before that, but we will have all of that after discovery. But if you chart the available data from 1996 through the present, you find that there is an almost perfect negative correlation between the size of Barrick's short positions and the gold price.
"Also, think of the size of Barrick's short position relative to other factors. As of the end of 2001, Barrick's net short positions were:
"Taylor: That was its cumulative short position, so it isn't the amount of gold J.P. Morgan and Barrick dumped on the market each year.
"Doyle: That is correct, but if you just take the additions to its short positions for 2000 and 2001, they totaled 14.3 million ounces, which is significantly more than the annual gold sales by all of the central banks in the 1990s. Global investment demand for 2000 and 2001 combined was 6.7 million ounces, and the addition from Barrick to physical supply was 14.3 million ounces. Anyone who thinks these figures are not big enough to affect the price has not spent much time with markets and doesn't understand the concept of prices being made at the margins.
"Maybe the most persuasive evidence is the fact that Barrick's position was 80 times the speculative position limits on the COMEX. (The speculative position limit for gold is set by the COMEX at 300,000 ounces, and is applicable only during the month when the futures contract matures and becomes deliverable. Barrick has the discretion to make delivery under its short sales contracts in any month it chooses. The COMEX limit applies to futures contracts rather than the physical short sales made by Barrick. However, that 300,000-ounce figure represents the best estimate by the CFTC and the COMEX of the size of a speculative position that could cause "unreasonable or unwarranted price fluctuations.") Although the speculative position limits may not apply to Barrick since its spot-deferred contracts were privately negotiated, the purpose of the limits is to delineate the levels at which there is undue pressure on the market. If 300,000 ounces is considered to be that level, what does that tell you about the impact that 24 million ounces will have?"
I believe this is very important information because it provides investors with some insight into what the price of gold should be just to reach its normal price level, without any major global or wartime influence that would cause the world to opt out of paper into gold. Of course, the rigging of the gold markets, which indeed came with the cooperation of the Fed and most likely the Exchange Stabilization Fund as part of the Clinton Strong Dollar Policy, encouraged investors to flee from gold (real money) into all manner of false fiat money which we believe was a major contributor to the enormous excesses and imbalances that have built up in the global economy and which still will have to be dealt with. As the current overloaded system breaks down, we may see panic buying of gold take place that could drive it well over $1,000 or perhaps many thousands of dollars per ounce. But for now, in this first phase of the gold bull market, we only need to know that gold will not be fairly priced until it gets into the $600 to $700 range.
The key to the effectiveness of the J.P. Morgan/Barrick gold price manipulation was of course the highly unusual arrangement that allowed Barrick to borrow gold with no margin and in theory never had to pay it back! With normal business risks removed, Barrick was free to serve as a conduit for the dumping of an enormous amount of gold onto the markets. In fact, as Don pointed out, far more gold hit the markets via J.P. Morgan and Barrick than ever came from central bank dishording. That was possible because unlike all other mining companies, Barrick never had to worry about ever covering margin requirements, nor did it have to worry about ever paying the gold back because the term of the loan was an "evergreen" 15 years. (Each year, the maturity of gold repayments was pushed back one additional year).
The Stalker - Is he Chinese?
But now that Barrick is covering its shorts, and with growing problems looming over the horizon of the global economy, and with the dollar now obviously one of the weakest currencies in the world, we are seeing growing concerns on the part of foreign countries with respect to their reserve bank holdings.
The following comments which I have titled "The Stalker" is intended for your entertainment and insight and is from Bill Murphy of GATA. He is passing on information he is receiving that suggests China is nibbling away at the gold markets in what is still a relatively small but significant manner. (You can subscribe to this daily Web site that proves a constant flow of information on the gold markets at www.lemetropolecafe.com.)
"The Stalker"
"This is the fourth time I have received a specific call from my STALKER source. What I learned:
"*Turns out THE STALKER has not bought as much as I thought he had so far, but he still has accumulated over $5 billion worth of bullion.
"*This buying group plans to buy $1.4 billion to $3.4 billion more gold if they can get it before the price goes bonkers. At the moment, this group is in the US market, picking up gold where they can.
"*The orders are coming out of Australia.
"*It is believed they are for the Chinese.
"*THE STALKER has acquired its own refinery.
"*This group has real concern about production continuing to decrease in South Africa, due to further mine closures as a result of their cost problems in that country. The concern is buying gold in size will be more difficult next year. (Jay-the previous sentence is unclear)
"Each time I have brought this secretive "gold buying group" to your attention the past many months, gold has popped. We shall see if it happens again. One thing for sure-if my information is correct and so far it certainly appears that it is-gold corrections will continue to be shallow and short-lived. There are too many buyers out there for a supply which is gradually dwindling.
"THE STALKER input has been very helpful to understand why gold is trading the way it is. The Café Sentiment Indicator also has been very useful. It remains about a 5, a neutral. With all the gains gold has made, the public remains oblivious to what is happening. What is most surprising to me is even those interested in gold the past few years are ho-hum about what is going on. It is as if many former Café members don't believe what they have read from the MIDAS column. As mentioned in prior commentary, never seen anything like this in all my years of trading and covering the markets.
"Funny, JUST as I wrote this, the following was sent my way by Chuck (Cohen)
"This was in Mogambo Guru's letter today: "Le Metropole, another newsletter that deserves high respect, even though the title of their newsletter is decidedly French-sounding and no self-respecting American can give any frog any respect these days, says that those Chinese dudes are accumulating gold through various secret and various sources."
December 30, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com