Taylor On The Markets, Gold & Silver
Jay TaylorFinancial Markets
Some relatively bad news on the labor front caused stocks to cool a bit on
Friday. The consensus among economists was for the growth of 100,000 with
some suggesting as many as 200,000 new jobs might be added to the economy. So, when only 1,000 new jobs were reported, it took a bit of wind out of the sails of the Dow and S&P 500, although the NASDAQ was in solidly positive territory. But never fear. The FED is here! No reason to worry because the Federal Reserve bubble-creating machine will just keep printing more and more money to ensure that the equity bubble, the debt bubble, the housing bubble and all manner of other bubbles keep expanding.
"Prophets of doom," your editor included, have been around for a long time,
warning that the American economy is in trouble. Yet government policy
makers have managed to keep the economy afloat by increasingly inserting
government intervention into the equation. In 1987 the Fed persuaded banks
that they should lend to the specialist firms (no matter if they were going
broke) and assured the banks that they would not lose money by doing so. It
seemed there was never an international crisis during the Clinton years,
that the Clinton Treasury secretaries working in concert with the Fed did
not want to involve themselves in. Pumping money and jawboning and
intervening in various markets (the gold market included via the ESF
dishording policies) helped keep the U.S. economic patient breathing awhile
One of the major repercussions of increasing intervention in the markets
has been to deny the natural ebb and flow of markets that help to restore
equilibrium. We frequently talk in our newsletter about how
intervention/manipulation in the gold markets has driven the price of gold
to extraordinarily low levels and how that manipulation was a key element
of the Clinton Strong Dollar Policy. Related to that intervention is what
Stephen Roach describes in his January 9, 2004, essay as "serious and
ever-mounting structural imbalances-namely, a rock-bottom national savings
rate, record levels of personal indebtedness, a massive budget deficit, a
record current-account and trade gaps." Roach is concerned, as we all
should be, about the day when foreign capital ceases to flow into the U.S.
"A funding shortfall and concomitant implications for a weaker dollar and
higher real interest rates are very real possibilities, in my view."
Instead of being concerned about the kinds of imbalances that have been the death knell for the economies of other nations throughout history,
Greenspan, Bernanke, and company carry on like drunken sailors, and serious
policy makers like Lawrence Lindsay are discharged from serving the Bush
administration. They should be asking the question that Stephen Roach
asked, again in his January 9 piece, namely, whether these imbalances can
be sustained indefinitely. He suggested the answer is now on the basis of
the following considerations:
"First, America is putting more and more pressure on foreign central banks
to up the ante on purchases of dollar-denominated assets. Not only is the
current account likely to keep rising, but as private foreign demand for
U.S. assets now wanes-$59 billion of inflows in 3Q03 versus $212 billion in
the first half-foreign official purchases must pick up an ever larger
portion of the slack. "Second, foreign central banks are also attempting to reflate their own economies; when they eventually achieve traction and domestic demand starts to recover, surplus saving will be absorbed in their home markets, leaving less available for the offshore purchase of Treasuries. "Third, trade frictions and mounting protectionist risks lessen foreign appetite for dollars. In short, I think it's a fool's game to believe that the days of relatively costless external financing by the U.S. will persist in perpetuity. A funding shortfall and concomitant implications for a
weaker dollar and higher real interest rates are very real possibilities,
in my view. Roach went on to say, "Macro tells us little about the timing of such an endgame. That's more a by-product of the proverbial exogenous shock. But here's what macro does tell us: The greater the imbalances, the more combustible the flashpoint-suggesting to me that the day of reckoning could be sooner rather than later. Such an endgame would be all the more
treacherous for an increasingly asset-based, wealth-dependent U.S. economy.
To the extent that a resolution of America's imbalances results in higher
real interest rates, then the popping of more recently formed asset bubbles
becomes a distinct possibility. That's when the Fed's bluff is finally called. At today's exceedingly low levels of nominal interest rates, the options narrow: It would be exceedingly difficult for the central bank to implement another post-bubble damage containment program. This key risk seems all but forgotten in the hubris of the Fed's victory lap."
Clyde Harrison Suggests a Possible "Tipping Point" for the U.S. Economy
Before I read Stephen Roach's latest article, my good friend and long time
commodity trader Clyde Harrison called to voice his concern about the
arrogance and lack of concern about the dollar on the part of recent
Federal Reserve policy makers. Clyde summarized at least one apparent
attitude of the Fed that suggests they don't care what the underlying
fundamentals of the dollar are, the rest of the world has to keep buying
our Treasuries or else their own economies will collapse.
While that may be true at this point in time, Clyde made the point as did
Stephen Roach (above) that suggests that the U.S. trade imbalances as well
as other major structural problems will not continue on forever. Clyde
suggests that day will arrive when the economies of China, India, and Japan
will generate sufficient domestic demand that they will no longer have such
a need to export to the U.S; hence the need to accept our paper, which is
becoming increasingly worthless because the U.S. economy produces less and
less of value as our manufacturing base is being decimated.
I have noted some headlines recently that the Japanese people are finally
starting to consume more domestically. But China would appear to be a huge
wild card. Clyde pointed out to me that last year, China produced one
million cars for sale to their own people. Yet, China has only 1 car for
every 287 people, compared to the U.S. where we have 1 car for every 2
people. Clyde pointed out that the marginal utility of even the most
rudimentary gasoline powered equipment provides enormous marginal benefits to the Chinese people in boosting their productivity, whereas in America we have several vehicles of various sizes and shapes simply for prestige or fun of it. Clyde pointed out that a Chinese person who may need to walk one and a half hours to work every day, will, when he is able, jump at the opportunity to buy a motorbike that gets 80 miles to a gallon of gasoline
if it gets him to work in a matter of minutes rather than an hour and a half.
In this example, Clyde has simply added some color and an example related
to the second reason Stephen Roach gives for why the great American
economic bubble orgy is likely to end. The establishment is hoping to keep
the music playing in this game of musical chairs until another Wall Street
bonus season or at least through the 2004 elections. But for reasons noted
above, the day of reckoning will be forthcoming. It's impossible to know
when the system will break down, but it would be utterly foolish to think
it won't. When the day of reckoning does arrive, it is impossible to see how that will not be accompanied with: (a) a plunging dollar heading toward zero value, and (b) skyrocketing interest rates that will most certainly pop all manner of American bubbles. As Ian Gordon suggested in our interview, the deep freeze of the Kondratieff winter (that is the debt repudiation phase of this cycle) is likely to commence once interest rates begin to rise dramatically, and that is likely to happen when foreigners start "throwing their dollars away." When that day arrives, the false sense of security Americans now enjoy by way of their high standards of living (made possible thanks to borrowing from foreign savers) will end. And as the baby boomer generation heads toward retirement, the question and answer discussion from the following article in the January 7 issue of "The Houston Chronicle," is likely to become all too familiar on the American scene.
The Don Doyle interview continues to receive very strong reviews from those who have read it. The most common remark I get is that Mr. Doyle explained a complex topic in a manner that was very easy to understand.
Indeed, Mr. Doyle made a very good case that the true equilibrium price
absent dishording of central bank gold through the J.P. Morgan/Barrick
conduit to the markets would have been around $700/oz. now. That coincides very well with the very thorough supply-and-demand analysis of Frank Veneroso which placed gold north of $600 as early as 1998, before the full extent of central bank dishording became known to those who cared to examine the evidence. And when I say those who were willing to examine the evidence, I do not include in that group of folks people like establishment favorite Andy Smith.
The issue of whether the gold markets were manipulated is not only
important in helping us understand the rot and corruption of our policy
makers and how the enormous bubble markets were constructed, but it may
also help us understand why those among us are constantly surprised by the
failure of the gold markets to suffer any substantial corrective pullbacks
here. If Frank Veneroso and Don Doyle are right in their assertions that
the correct equilibrium price for gold is in the $600 to $700 range, and
that gold sold at less than half of that range for a long time thanks to
the enormous dishording of central bank gold, then there may be no natural
need for the gold markets to back and fill over the longer term. Indeed,
what we are seeing is an exceptionally bullish pattern of a persistent and
orderly rise as still 99% of the American public remains oblivious to this
stealth bull market.
We are starting to see CNBC's "Curley and Moe" talk a bit more about gold
and silver. On Friday evening, they gave silver some attention but didn't
really give Bill Fleckenstein quite a lot of attention, and rightly so, as
"poor man's gold" is finally starting to outperform gold. But these two
goofballs really didn't want to hear the bullish story for silver. Fleckenstein managed to say something about the size of the silver market being small relative to gold. What I would have expected him to also say then was that the gold market is miniscule relative to all the major financial markets; however, these very important market considerations were relatively unimportant to these two pie-throwing comedians. But that's okay because it means that we who are early in recognizing this bull market should have a long way to ride still in this first phase of what may well be the greatest bull market for gold and silver in history.
Gold Shares Show More Volatility
While gold has been on a really persistent and steady rise, the gold shares
have displayed more volatility lately. That is no doubt because most gold
investors who are in these shares are mostly a different group of investors
who are buying gold bullion. The bullion buyers are either central banks or
exceptionally wealthy folks. These are the folks who act behind the scenes
with very astute knowledge if not inside information. On the other hand,
except for long-term gold believers (which no doubt constitute less than
1/10 of 1% of the North American population), most of the gold share buyers
are simply momentum players. CNBC's "Curley" for example, talks about
trading gold shares just like any other stock. He doesn't understand that
gold is real honest money and the fiat stuff is little more than glorified
My point is that many if not most of the gold share buyers to date have
been fickle types who are looking to trade in and out of these tiny stocks
with little care or understanding this gold bull market is in the bottom
half of the first inning of a nine-inning baseball game. Not understanding
that these markets have been manipulated beyond recognition, they are
unaware of just how rewarding staying long, rather than trading in and out
of these penny gold and silver stocks, will be-not only in 2004 but perhaps
for the next 5 to 10 years. And so, when the tech stocks come back, away
they go out of gold and back into the techs. This too will pass, but for
now this is all good news for those who recognize how special and powerful
this gold bull market is, because it is providing them with great buying
opportunities right now.
Silver Is on Fire!
Silver bugs have been predicting a blowout for silver that will be more
powerful than gold's rise. Indeed, in spite of gold's depressed price,
silver, it could be argued, has been even more depressed. Some folks like
Ted Butler have opined that the silver markets have also been manipulated.
And in speaking to my good friend Dave Morgan, I think it is most likely
true that this metal, which-like gold-is "honest money," has in fact been
manipulated. In fact, the silver market is so much smaller than gold that
it might conceivably be even easier to manipulate than the gold markets.
Whether or not silver is manipulated, there is no denying that it is in the
process of breaking out above old resistance points. As the chart above
shows, it looks like smooth sailing for silver. No more resistance levels
now that it has broken out above the $5.35 area. There are several ways you can play this powerful move in silver, which in percentage terms could be even more powerful than gold.
January 12, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
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