Taylor On The Markets & Gold
Jay Taylor
Financial Markets
"The Zutz" is Still Active on Wall Street
America is resembling the old Soviet Union more and more as times goes on.
Isn't it amazing how unanimous conventional wisdom is, not only on views about world events and the economy, but also on exactly what is deemed to
be newsworthy and hence given coverage? We may not have an official
"Provda," but the results are the same. Our government puts out information
that is instantly puppeted on every radio and TV station in the world. We
are being told what to think about and how to think about it, and most
Americans could seemingly care less as long as their standard of living
doesn't decline.
Actually, the origin of America's controlled press was explained as early
as 1917 by Congressman Oscar Callaway. He told how American corporate
interests headed by J.P. Morgan arranged to buy the top 25 newspapers in
America in order to control the news content. The account of how the ruling
elite-the same family interests who still rig the gold and silver prices today, and with near certainty also intervene in the U.S. equity markets-have managed to win the mind control game in America is provided in James Purloff's well-documented book titled, "The Shadows of Power." If you
really want to know who the power behind the American throne is, you need
to read this book, as well as "The Creature from Jekyll Island," by G.
Edward Griffin. Given the history of how the ruling elite have managed to
gain and retain control of the American "spin machine," the evidence
provided by GATA that the gold and silver markets are rigged should come as no surprise to those who have taken the time to read well-documented
accounts of what the richest families in America and Europe have been up to
behind the American political scene.
Friday's jobs number was being built up as the last economic statistic we
would need to prove that the Federal Reserve had managed to conquer all
economic problems by printing endless amounts of money. Numbers like
125,000 to 200,000 new jobs were being touted on the nation's airwaves.
Then suddenly, on Friday morning when the nonfarm payroll state of only
21,000 new jobs was released, the equity market suddenly tanked. Bonds
rallied sharply and gold and silver rose dramatically. Those were all normal reactions to this bit of devastating economic news. However, the equity market began to defy the laws of gravity once again by actually posting a modest gain on the day. This dramatic turnaround of equities, even as the other markets responded normally to this news, led my friend and St. Louis money manager, Wistar Holt, to send me the following e-mail message:
"Let there be NO DOUBT about the manipulation in this equity
market!!!!!!!!!!!!!!!!!!!!!!!!!" GATA has talked about how the Fed involves itself in pumping money into a couple of key, well-connected Wall Street banks whenever a major decline begins to unfold in stocks. The Wall Street banks then go out and take long positions in the futures markets to break the fall and thus retain CONfidence of the people. I have little doubt this has been going on now for quite some time, most likely since the 1987 crash. During those bleak days the Fed came in and guaranteed banks who lent money to the specialist firms for stocks when there were absolutely no buyers for America's strongest companies.
Unfortunately, this kind of action on the part of government distorts markets and hinders them from performing their work of efficiently
allocating scarce resources. A lesson we were told as kids in the 1950s was
if you tell one little white lie, it leads to another slightly bigger lie until the lie becomes a monster lie. And so the lies are getting bigger and bigger and bigger, and the market distortions and imbalances are getting bigger and bigger and bigger. But lies continue to abound in order to save politicians for the sake of re-election efforts and for the sake of Wall Street executives' bonus payments. Richard Russell used to refer to the sudden and mysterious intervention in the equity markets to keep stocks from falling off a cliff as "the Great Zutz." Once again, it looks as though the Zutz has paid a visit to Wall and Broad Streets.
On March 1, 2003, Austrian economist Kurt Richebacher noted in a piece he
wrote titled, "Vindication for the Fed?" that the lack of jobs in America
is really telling us that there is no recovery at all. Moreover, he notes
that the U.S. government is fudging the inflation statistics so badly that
productivity numbers appear to be much better than they actually are. This
productivity fib, along with enormous amounts of newly-created credit money being pumped into the U.S. economy, is leading to a more and more
overvalued equity market. Were the inflation numbers more in line with the
true numbers, which Richebacher believes are actually considerably higher,
Mr. Greenspan would not be able to crow about those numbers as a basis for
justifying such high equity prices.
In the end, the truth will be known. If the economy is growing as well as
we are being told it is, then one would expect federal tax revenues to grow
dramatically as well, and that the number of jobs would actually begin to
rise more in line with other "recoveries." In fact, the job picture is the
worst of any so-called recovery since the 1930s. That, I believe,
legitimately leaves room to wonder if President Bush will not go the way of
Herbert Hoover, even as the U.S. economy faces the first Kondratieff winter since the 1930s.
Meanwhile, the Japanese are doing their part to keep the markets from
adjusting to their natural equilibrium points as well. On February 27, Japan's Ministry of Finance announced that it and the Bank of Japan sold
about 3.3 trillion yen ($31 billion) that month to purchase dollars in the
foreign exchange market, boosting the year-to-date total to more than 10
trillion yen ($95 billion). This is already about half of the 20.4 trillion yen ($193 billion) sold into the FOREX market in all of 2003, which itself was three times the annual intervention figure for all of 2002. If this rate were to be insanely continued for all of 2004, it would mean buying dollars on the
scale of almost $600 billion. Only God knows how much longer this game of defying the natural laws of markets can go on, but it will end. And when it does, America, which has been leveraging its future for the sake of living an orgy lifestyle today, will pay dearly.
Trade Barriers Abound
In this election year we are hearing rising cries about imposing barriers
against imported goods and against corporations that outsource work and in
the process lay off high-priced American workers. But a less-recognized
form of protectionism comes in the form of currency devaluations. Not since
the 1930s have we seen this kind of cheating by country after country in an
effort to gain an unfair advantage over other countries in the international trade arena. Underlying this are the same dynamics as were caused during the 1930s, albeit on a much smaller scale. The world is faced with excessive supplies of a host of goods and services, which are pushing profit margins down. These oversupplies were caused by the excessive creation of money out of thin air by fiat currency regimes of every nation, especially the U.S., and the dollarization of the global economy.
And, in my view, the end result of all this will be a similar or perhaps a greater deflationary depression than we suffered through in the 1930s. I
believe this to be true because the raw material of fiat money is debt, and
debt is deflationary. The Fed's Bernanke can talk big about dropping money
from helicopters, but when he does that, he cannot get away from the fact
that ours is a double-entry fiat money bookkeeping system and that the
paper he drops from helicopters, unlike gold mined from the ground, has
ZERO INTRINSIC VALUE! And so as the debt, which is growing much, much
faster than GDP, finally becomes unserviceable, there will be a mad
scramble for dollars.
As Richard Russell points out, the world is very, very short on the dollar.
If you are in debt and own no cash, you have a major dollar-short position.
As the true reality of our economy painted by Mr. Richebacher comes into
focus, there will be at some point a scramble for dollars as declining
incomes will necessitate the sale of nonessential items in order to get
dollars from which to meet life's daily requirements. Thus, as Dave Morgan
pointed out in my March interview with him, people will be faced with tough
decisions about whether to pay their health insurance or buy groceries. The
unwinding of this extremely high leveraged economy is what the debt
repudiation process that Ian Gordon describes is all about. The liquidation
of nonessential assets to purchase essential assets will result in an
enormous drop in the prices of all kinds of goods and services. When that
happens, cash and/or gold will be king. Unlike the 1930s, cash which is no
longer backed by gold may not be king, because as a liability money, it may
not be accepted in the markets as a medium of exchange. Gold and very
possibly silver, however, which are asset money, are likely to evolve as
acceptable mediums of exchange when confidence is lost in paper money.
What are the most important ways for you to prepare for the upcoming
economic trials and tribulations? (1) Stay out of debt, (2) hold some cash
in the form of currency notes (paper dollars), and (3) own gold and silver
in the form of coins as well as gold and silver equities. Holding cash in
the form of dollars when they pay virtually no interest does seem painful,
but not nearly as painful as holding stocks when the next phase of the bear
market continues and holding non-corporate bonds when they default.
In what form should we hold cash? Should we hold dollars or foreign currency? Those are questions I hope to address more in the near future. At
present, I am continuing to anticipate more dollar weakness as the weakness
of the U.S. economy continues to emerge. Thus, I suggest continued holdings
of the Prudent Global Income Fund, which is comprised of a mix of foreign
currencies and gold.
In our Model Portfolio we are also suggesting that you continue holding
gold and silver, and gold and silver shares. We also continue to think our
"essential" technology stocks make sense because their proprietary
technologies should enable them to produce life's essentials at lower costs
than their competitors, and therefore be in a position to survive while
higher-cost producers become insolvent.
For now we will continue to hold our inflation hedges in the form of energy
stocks and The Rogers Raw Materials Index Fund. A dramatically weakening
U.S. and global economy would give us reason to examine the continued
holding of these inflation hedges. But for now, as the following chart
reveals, these two sectors are the best performers in our Model Portfolio
so far into 2004.
GOLD
For those who suggest that gold has risen as far as it can because of
extreme bullishness in the market, the following information from
www.decisionpoint.com suggests otherwise.
RYDEX CUMULATIVE NET CASH FLOWS DIVERGE
One of the indicators tracked by DecisionPoint is the Cumulative
Net Cash Flow into each Rydex mutual fund. The total dollar value of assets
in each fund is known each day. As such, the amount the assets should
change based upon the percentage change of the Net Asset Value (NAV) can be
calculated. The difference between this and the actual amount of change is
the net cash flow. Decision Point keeps a cumulative total of this daily
net change. On its Web site, available to paid subscribers only,
DecisionPoint.com reports the following observation about the behavior of
the precious metals mutual funds at the end of 2003. By the way, I find
this service to be most valuable in keeping me up to date on the trends in
a host of major markets and indexes, and the fees charged for this service
are very reasonable. Go to www.decisionpoint.com for more information.
"On the chart above is the price chart of the Rydex Precious Metals Fund,
and at the bottom of the chart is the Cumulative Net Cash Flow index. We
can see that it normally rises and falls along with the price index, but an
unusual thing happened at the end of the year. As prices rose into a second
top (circled), CNFL actually continued down into a low. This fund doesn't
necessarily reflect activity in the entire market, but this action infers
that money was being taken out of gold stocks, even as prices moved higher.
This is hardly a recipe for maintaining an up trend, and a breakdown in
gold stocks was soon upon us.
"Similar activity was evident in a number of Rydex bull and sector funds
preceding the recent market correction, so I have to say this is proving to
be a valuable sentiment tool." --Carl Swenlin "CAVEAT: Charts featured in Chart Spotlite are intended as examples of how to use technical analysis, not as trading recommendations."
Given the large extraction of money from the mutual funds at the end of
2003, the continued strength of the gold stocks is all the more impressive.
That suggests that any notion that the gold share markets were/are
afflicted by extreme optimism and thus due for a major decline is nonsense.
It is true that in the Canadian cities, where investors are knowledgeable
about the mining industry, a level of enthusiasm that I have not seen in
years does exist. The last Cambridge House show in Vancouver in January
where I spoke was a fascinating experience. Talking before a workshop
standing-room-only crowd, not for just one hour as scheduled but for nearly
two hours, was an invigorating experience. I'm not sure that the Canadians
understand just how big this gold bull market will get. But at least they
are excited about gold and gold share investments. That is for sure.
A stark contrast however exists in New York and on Wall Street. The reality
of where Americans are with respect to gold and gold mine investment is
virtually unchanged from the bottom of the gold bear market. Some Wall
Street momentum players no doubt piled into the gold shares toward the end
of 2003 and used them to enhance returns. But they view gold's rise so far
as a nonevent. It is almost as true now as it was when gold was selling at
a mere $255 per ounce that less than 1% of Americans have any desire to own gold, and they remain completely ignorant about gold. As Dr. Larry Parks
points out, not even most gold mining executives understand the product
they produce, which explains why the World Gold Council could and still
does follow the foolhardy policy of promoting gold as jewelry. Gold is not
a commodity. It is money, no matter what Keynes and Friedman say. Sales of
gold jewelry do not result in higher gold prices. To the contrary, the more
gold sold in jewelry, the lower the price of gold falls.
The lack of desire to own gold and gold shares in America provides evidence
that "Bubblemania," which is built upon the false premise that untold
wealth can be achieved through the creation of fiat money out of thin air
by central banks, remains alive and well in America. Only when that premise
is finally exposed by the market for the lie it is by the general populace,
will gold and gold shares have their true day in the sun. The chief of
Spinmeisters, Alan Greenspan, can be counted on to keep us in the dark as
long as possible. But there are growing signs his day of deceit may be
nearing an end as global market imbalances spoken of by Stephen Roach and
others continue to expand to limits which, as friend and engineer Dave
Morgan (whom we interviewed in our March 2004 monthly issue) suggests, are reaching their physical limits.
Next Stop for Gold? $320 or $540?
Although the equity markets rallied last year, overall the markets have
pretty much gone our way, evidenced by our strong Model Portfolio gains of
46% and 43% during 2002 and 2003, respectively. A major portion of those
gains has resulted from our position in gold shares. We think we continue
to have the bases pretty well covered, given our view that we remain in the
early stages of equity and dollar bear markets and in the early stages of a
bull market in gold. But market experiences suggest we should never take
anything for granted.
In the March 1, 2004, issue of his "Chart Works" publication, Bob Hoye
suggested to his clients that from a technical point of view, it is important that gold rise above $410 within 10 trading days, which would be by March 15. If gold does rise above that level and if it can take out the $431 level, we could be looking at $540 gold by August.
On the other hand, he also paints a worst-case scenario that would more
likely challenge our investment strategy. He suggests that if gold fails to
close above $410 by March 15, we could be looking at a much deeper
correction. In that event, he thinks gold could fall as far as $320 and
that this decline could last for the better part of a year and that it
would coincide with a dollar rally within its longer term bear market.
On the other hand, Mr. Hoye noted in a speech given at the World Outlook
Conference on February 7, "Selling the stock market now is technically
equivalent to buying gold the week after the low of 103 in 1976." For those
of you who may not have been around during those tumultuous days, gold rose to $850 by January 1980. So, even if the worst-case scenario comes to pass and we have an unnerving decline in the price of gold, our Model Portfolio would figure to be sheltered at least to a great extent by our Prudent Bear holdings. Moreover, if a dollar strength/gold weakness results from continued growth in the global economy, our commodity exposure in the
Rogers Raw Materials Index Fund and the energy stocks should continue to
perform very well.
Promoters of newsletter writers want us to present an image of invincibility with respect to market forecasts. But in fact, none of us knows for sure how far markets will go and exactly when they will go. I continue to hold the firm conviction that we remain in equity and dollar bear markets and a bull market in gold. But that is not to say that we might not see corrections in these markets that could last for much of the remainder of 2004 and perhaps a little beyond. But that is exactly why I am spending the time to establish a diverse Model Portfolio. Through diversification we can reduce risk and enhance returns over the longer term. Although we are sometimes fortunate to pick stocks that make big returns very quickly, we recognize that a mentality that seeks to get rich quick usually is a failing strategy because high risk frequently results in big-time losses. We believe the slow, steady, tortoise-like move is preferable to that of the hare.
March 8, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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