Taylor On The Markets & Gold
Jay Taylor
Financial Markets
The Game of Musical Chairs Must Go On!
My good friend Wistar Holt, of St. Louis-based money manager Holt Shepherd, sent the following e-mail to me yesterday.
If you don't believe that the markets and economy are facing difficulty, read these opposing views from two of he most respected economists today!
Wistar Holt
February 27, 2004
John Makin - American Enterprise Institute Economist
"A premature tightening by the Fed would cause asset markets to plunge, while U.S. growth would slow rapidly, with negative consequences for growth in China and the rest of the world."
Steven Roach - Morgan Stanley Economist
In "an open letter to Alan Greenspan," Roach urges Fed to raise the federal funds rate immediately to 3% "to restore some semblance of normalcy to financial conditions." He says "sure, politicians will be 2 up in arms if you hike interest rates, particularly in an election year. But the last time I checked, America had an independent central bank. You must do the right thing - not what is politically correct."
The Federal Reserve is supposedly independent. It is a private institution, not a government institution. It is controlled by major international banking interests, which based on the work of G. Edward Griffin and largely confirmed by Clinton's Georgetown history professor, Carroll Quigley, are more interested in gaining and consolidating political and economic power than caring for the global economy. Toward that end, the
destructive acts of printing money may make a great deal of sense. It allows the ruling elite to fund all manner of political give away programs in the process of destroying markets. Then when their intervention against the natural working of markets results in extreme market activity, in the midst of the market collapses that follow, they pass laws the further reduce personal freedom. Financial chaos caused by growing intervention, like
attacks from foreign countries, gives theses human monsters the ability to further consolidate power and take away our freedom.
The key to the Fed's continued independence is keeping us all as stupid as possible with respect to monetary issues. That suits the government well, too, because if we don't understand how money is created out of thin air and what damage this monetary system does to the economy through massive indebtedness, then the politicians and the bankers can retain their cozy symbiotic relationship. That enables the bankers to enrich themselves (by siphoning off wealth through the printing of monetary claims against wealth) and the politicians to continue funding their programs with debt, thereby deceiving the voters into thinking they can have their programswithout really paying for them.
And so deceive and trick us they do, thanks to the complicity of most of the media. But according to the U.S. Constitution, only Congress, not the Fed, has the right to make monetary policy. Congress has abdicated that responsibility with disastrous consequences but even here the record of the Fed has been obscured by the Keynesian and monetarist indoctrination provided in our government-run and -dominated universities. Congress
gave up its right to control money to the Fed because the Fed promised us they would help stabilize the economy. In fact, the result has been just the opposite. Since the Fed took over we have had the worst depression in our history (1930s), and they have set us up for a deflationary collapse that could be far worse than the Great Depression of the 1930s. If so, and unless people begin to rebel against the Fed, it looks like an outright dictatorship for America going forward.
I lament the irresponsible manner in which the Fed is leading us into the next Kondratieff winter depression by printing money, which is how they keep interest rates low and the debt bubble expanding. But that debt bubble is exactly what will cause the system to collapse. A debt implosion is coming. The only question is when. This situation has been caused by the enormous power of the Fed, a power that Greenspan recently admitted to
Congressman Paul is excessive. Only if the people take the power back that is rightfully given to them by the Constitution, and demand that money be returned to gold and/or silver, will America have any hope of retaining even some of the lasting freedom we have come to think of as our birthright. Paradoxically, the overly permissive monetary policy by Greenspan and all the central bankers these days may in fact make a return to
honest asset-based money more likely because these actions are in fact setting the table for a vicious deflationary collapse of the system. Not by fiat but by the dictates of the market place, during times of inflation and deflation, people turn to an asset money like gold or silver because they want to be sure the medium of exchange they are accepting for their goods and services they deliver will retain value.
Are Equity Markets Topping?
Indeed, as Chuck Butler said Friday in his daily missive titled "A Pfennig For Your Thoughts," the U.S. economy seems to be slowing down.
"You know... I'm watching the data come through these days, and seeing the U.S. economy losing steam... I think the jobs problem is beginning to filter through... Why just this week we've seen Consumer Confidencetake a major hit, Existing Home Sales come in weak, Durable Goods a negative 1.8%, and Initial Jobless Claims remaining in the 350k range...So, right on time, today, we'll see a revision to 4th QTR GDP come in lower than the previous posting of 4%."
With respect to this last prediction from Mr. Butler, it seems as though the government statisticians in fact pulled some more rabbits out of hats on Friday. All the economists I listened to on Friday were wondering how the federal government could report an increase in 4th Quarter GDP. Expectations were across the board for arevision downward, not upward. But hey, this is an election year. Anything is possible!
What we do know is that equity markets tend to predict future economic activity. Given the artificial nature of this economic expansion and an apparent end to the enormous stimulus of the past couple of years, it would not surprise me if Richard Russell is right in his prediction that the equity markets are in the process of topping out and that a return to the next phase of the secular bear market is ready to take place. The next phase of this
secular bear market will change the psychology. Then we will receive the "capitulation" that the folks on CNBC wanted to quickly get out of the way in 2000 so they could continue to party on. Mr. Russell uses various indexes and technical tools to successfully sense the major turning points for markets. But one that is at the center of his strategy is confirmation or non-confirmation of the Transport Index with the Dow stocks. The theory here is that if the Dow is rising, then the transports should be rising too because a rise in the fortunes of the transportation stocks would confirm economic activity really is on the rise.
The trouble is, we have increasing market intervention by politicians in their attempts to get re-elected and by a complicit Wall Street which is more concerned about their next quarter results and their annual bonus paymentsthan the long term good of the American economy. All of this intervention brings about short term relief but causes longer term economic dislocations to continue to grow. The ability of the Fed to print money is indeed the biggest reason the nonsensical policies of market intervention by the Fed, politicians and Wall Street can continue to disrupt the otherwise efficient signals of the market in allocating scarce resources in the most efficient manner possible.
Yet as Richard Russell points out frequently, these interventions have their limits. While the ability of the imbalances to correct is being interfered with by bankers and politicians playing a short-term game of musical chairs, it is not a question of if the music will stop, but when it will stop. Unfortunately, given increasing intervention in global markets decade after decade, especially since 1971 when all remaining reverence for
honest money was abandoned, the ultimate correction is going to be horrendously great. The U.S., which is the most overvalued country, will have the most to lose, and when that process of loss begins, it is going to be an awful process. Those who have managed to keep their financial house in order may be better off. But then again, depending on how the politics of this disaster shake out, those of us who have managed to prepare for
this disaster by owning gold and cash and staying out debt could simply have our wealth confiscated by government. That, of course, is not what our Constitution says should happen to our private property. But who, aside from Congressman Paul and a relative few people of like mind, is paying any attention to private property issues these days? The prospects for America turning into an outright dictatorship is very real in my view,
unless Americans begin to understand how the existing monetary system is inevitably leading us in that direction. Will America wake up in time to "get it?" I don't know, but it is with questions like this that lead this 56 year old man to begin thinking about life after this one.
Turning to the immediate here and now, if you are in the equity markets, I believe it is time to get out, aside from our gold stocks and a handful of energy and tech stocks. We think it would be foolish to wait until after the election to bail out of stocks. Not only is the market a leading indicator of future economic activity, but you can also bet your bottom dollar that those who think that way won't wait until November 3, 2004, to sell stocks.
The corrections in the gold bull market as well as the dollar and equity bear markets have resulted in a poor to lackluster performances in the gold and silver shares as well as the Bear Fund and the Prudent Global Income Fund. The Prudent Bear Fund shorts equities and the Prudent Global Income Fund represents a short for Americans against the dollar. However, given our views about the global economy as discussed above, we continue to believe shorting equities and the dollar and going long on gold is the right policy.
Longer term, we are betting on deflation, although we are profiting very well now from commodity inflation hedges. Overall, commodities are such a small part of our economy that I do not believe rising commodity prices will lead to price inflation in the U.S. In fact, rising commodity prices for America act like a gigantic tax 5 on our economy since we produce a relatively small percentage of what we consume. That "tax" is if anything
exerting a deflationary force on the American economy. So for now at least, we remain bullish on commodities until there are signs of economic weakness. At some point as the economy begins to weaken, we expect we will need to exit our commodity plays, which essentially are our energy stocks and the Rogers Raw Materials Index fund.
GOLD
GOLD SHOCKER - BARRICK ADMITS ITS ROLE IN MANIPULATION
It was brought to my attention that Barrick Gold told investors at their annual investor meeting that the price of gold continues to rise because of producer dehedging. Well, well, well! So does that mean when a producer that hedges 24 million ounces on to the market and has no financial incentive to remove those hedges is doublyinfluencing those markets on two directions? This would seem to be a blatant admission to a key issue that
Blanchard has made its case against J.P. Morgan and Barrick, namely that the very strange and unique spot deferred contract awarded Barrick was indeed influential in driving the price of gold well below its normal equilibrium price.
As the chart below shows, gold remains in a huge bullish formation, although we are clearly in a correctivephase, as long as gold can hang in a little above or below $400, I think we are in real good shape. Moreover, thefundamentals are conspiring against the gold manipulators. Not only are the conspirators running out of gold, but, as we discuss below, there is also growing evidence that huge buyers are coming into gold. Why? Because there is a growing awareness that all is not well in "Dollarland."
Editorial Speculation
Which Countries Trash Gold? How Much Gold is Left with Which to Manipulate?
Who are the countries playing the gold rigging game so they can con people into believing the paper money they print is legitimate so they can continue to fund their own property-confiscation and vote-buying schemes? Which countries are married so irrevocably to the U.S. and the dollar-based monetary system that they are willing to play the game at least for the time being? Which countries may now be looking over to the other side so that rather than selling gold they may be buyers and thus employing a strategy of hedging their bets on the dollar?
Most countries would never do what the British did, namely, announce beforehand their intentions to sell gold and then proceed to tell the markets how much they were going to sell, unless they wished to influence the price against their own apparent best interest. The Bank of England did exactly that a few years ago, but as GATA has pointed out, the Bank of England didn't care much about whether its citizens were gypped in terms of what the country received for its gold. England's power brokers were more interested in seeing the currency of their best friends, America, gain strength. The conspiracy of major banking families in England with those of the U.S. are very well documented and these relationships go a long way in explaining why we are usually together on issues of war. So, England was very much on our side in trashing gold in order to perpetuate the Clinton
"strong dollar" lie of the 1990's.
What about Germany? Given various signals from Germany, there seems to be a division among various factions. Deutsche Bank, for example, appear to be playing the dollar game with America's ruling elite. Indeed, Deutsche Bank was one of the defendants in the gold-manipulation lawsuit filed by Reginald Howe. An recently the German central bank has been doing all it can to trash the gold price by repeatedly talking about
selling gold. There are factions within Germany who are on the side of the honest money issue. But on balance, for now it would seem Keynesian and monetarist ideologies have balanced Germany on the side of the gold manipulators. Generally, these folks have bought into the big lie that human beings at a central bank can manage money better than the markets can. Under that pretense, the Federal Reserve was created and with so
many countries using dollars as their reserve currency they have a vested interest in believing that fallacy. But the track record of the Fed managing fiat money is not good nor has the record been good of past fiat money trials. In the short history of the Fed since 1913, rather than smoothing out economic cycles, we have had the greatest depression in U.S. history during the 1930s. More to the point, this same institution, which is now far more powerful on a global scale than it was then, are setting us up for another humdinger now. In fact, there is every reason to suspect what is in store for us now may well be worse than that of the 1930s.
What about France? Whose side are they on? That's easy. France is on Frances's side so they could go either way on the gold issue. But they have no love for the U.S., which will make it easier politically to "stick it to us" by trashing the dollar in favor of gold, as De Gaulle did in the 1970s, which forced Nixon's political hand to slam the gold window shut. I think we can count on the French. I would expect France to turn more quickly
against the U.S. dollar than Germany does but make no mistake. When either country is forced into a depression by the impending global deflationary collapse, both will do what they feel they need to do for survival.
What about Russia? I believe Russia could turn against the dollar at any time, and their willingness to build up their gold reserves in recent years by selling dollars may provide a tip-off. The key here is that the dollar reserves held by Russia as well as a multitude of countries is growing rapidly and as that happens, the downward pressure on the dollar and the upward pressure on gold and its price - if even a small percentage of dollars are turned into gold will be enormous.
The Muslim countries I think are the likeliest of all to buy gold and sell dollars. In fact, Frank Veneroso has said he thinks the policy makers who were pushing the gold price down may have begun to lose control of the price of gold following 9-11. Realizing that their assets may be seized, they may have begun tipping the bearish balance managed by the substantial dishording by the gold sales and gold leasing programs of numerous central banks around the world. I recall many years ago when the Shah of Iran argued on Meet the Press that unless the U.S. stopped their "promiscuous and immoral act" of printing so much money, the oil producing Muslim countries would have to force higher oil prices. That was a time, too, when Muslim countries were in the process of buying considerable amounts of gold-which was one of the forces that took the yellow metal to
$850 in January 1980.
So, here we are again. The U.S. and indeed all the countries playing the dollar game are forcing the Muslim countries to demand more for their oil because they understand that the dollar, which is being inflated en masse, is losing its intrinsic value at a very rapid pace. Hence, they must have higher prices to keep the same level of purchasing power form the sale of oil. Increased supply = declining price. Those are simple economics that we have forgotten, but it is a law of nature that cannot be revoked by Keynes or Friedman or anyone.
One country we know is on the other side is Vietnam because they have openly said they are swapping their dollar holdings for gold.
India has passed laws during the past year that are favorable to gold ownership and gold trading.
China seems like it is most likely waging a pro-gold/anti-dollar bet in the longer run, while playing the dollar game for now, or at least as long as we Americans continue to sell ourselves into slavery by indebting ourselves to the point where China is dictating more and more of America's policies. The following was published this past week in "The People's Daily," an English-speaking version of a Chinese-based Web site:
"The Bank of China (BOC), one of the four big state banks of China, opened gold trade services to individuals on Tuesday in Shanghai.
"Individual investors can now trade the precious metal at 95 business outlets of the BOC Shanghai Branch, or dial 95566 to make transactions or on-line trading at www.sh.bank-of-china.com.
"To encourage more individuals to participate in the gold trade, the BOC set 10 grams of gold as the lower limit for trade.
"Shanghai was a trading center for gold in the 1930s and 1940s. China set up a gold exchange in the city one year ago, ending more than 50 years of government monopoly over the gold market in China.
"Gu Wenshuo, an official with the Shanghai Gold Exchange, the only gold transaction market in China, said opening of the gold market would boost consumption of gold and private investment in China.
"Against the backdrop of gloomy stock and securities markets, trading in gold was expected to become an important investment arena for Chinese individuals, Gu said.
"The other three state banks, the Industrial and Commercial Bank of China, the Construction Bank of China and the Agricultural Bank of China have stepped up their preparations for launching gold trading.
"Last year, the three banks launched eight new gold services, including retail sales of gold."
Why is China encouraging its citizens to buy gold? I think they are doing that because they want to build up the national wealth of China into something that will last when the dollar begins to fall toward its intrinsic value- which, unfortunately, given the direction of the American economy and an increasingly immoral American culture, is destined to head to somewhere within whispering distance of zero.
For the time being, China is playing the dollar game. The Chinese keep accepting our increasingly worthless dollars. They will play that game so long as these dollars can be turned into something of tangible value and as long as they can be used to build up their manufacturing infrastructure. My friend Clyde Harrison says China will continue to play the dollar game (buy Treasuries with trade surplus dollars) until they are able to build up
sufficient internal demand within in their gigantic economy, so that they no longer need our markets. In time our markets are destined to become miniscule compared to the Chinese markets. And, assuming recent growth rates continue in China (they may not, which would also cause a problem for the U.S.) we may be close to that fateful day when China no longer will accept our dollars.
When that day arrives, what has been an orderly decline for the dollar could turn into a sudden collapse. At that moment interest rates will surge and the U.S. economy will be toast. That is when I believe the really brutal cold of the Kondratieff winter will overwhelm our economy. It will be our debt that ultimately does us in and it is this very debt that is being created in enormous amounts now to keep the economy breathing a little longer for the near term sake of our politicians and Wall Street bonuses. How well will gold serve those of us with the foresight to own it when the U.S. insolvency becomes globally recognized? I don't know, but I would rather own the yellow metal than not own it. The most they can do is confiscate it from us. And it may actually help save us, financially speaking.
How Much Gold is Left to Rig the Market?
The following was quoted on www.lemetropolecafe on February 26, 2004.
"Nick Guarino of the Wall Street Underground has just co-authored a new gold Bulletin, the 'Gold Insider'sHotline.' The basis for his thinking:
"1) Chinese demand could eat up +3,000 tonnes of gold metal, between the populace and the central bank switching.
"2) The Muslim gold dinar and the middle easterners moving their dollars into gold, away from U.S. "seizures" and devaluation
"3) $10-20B of new gold purchases taking delivery, by Arabs et.al., would take gold "out of circulation" and push the price to $2000."
March 1, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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