Taylor On Markets & Gold
Jay TaylorFinancial Markets
Perhaps the two most important markets now as far as the U.S. economy is concerned are interest rate and real estate markets. Two charts displayed below suggest we may be in the midst of a major turning point in both markets.
Interest rates are heading higher. How much will the Japanese and Chinese
come to our aid now? That is a big question. Or perhaps the better question
is, "How long can the Japanese and Chinese come to our aid by lending us
hundreds of billions of dollars so we can go on living the high life?" I
think it is safe to say that Americans in our 200+ year history have never
lived so irresponsibly as we are now. We are in debt more than at any other
time in our history. In the aggregate, Americans are spending more than
120% of their incomes. Our savings rate is almost zero and as such among
the lowest in the world. To keep the wheels from falling off of our
economy, the Fed is printing money at accelerating speed, just as Larry
Kudlow, Brian Westbury, and other irresponsible supply-side Republicans are
demanding. But as we keep insisting, the money creation is also resulting
in debt creation, and debt is growing much faster than income. When will we
reach the point in time when the level of income (GDP/blue line) is
inadequate to pay the interest and principal on the skyrocketing debt (red
line)? Perhaps later if the Chinese and Japanese keep buying American
Treasuries. Perhaps sooner if they do not.
One good long-time subscriber of mine sent an e-mail last week suggesting
that I engage in a debate with my good friend Clyde Harrison, an
inflationist, who works for the Rogers Raw Materials Index Fund. I think
the world of Clyde, and we have our discussions twice a year at the Chicago
Natural Resource Conference held outside of Chicago. But I think debating
inflation or deflation is really a waste of time. Deflation ultimately and
without any doubt follows inflation as surely as day follows night. The
only question is "when," not "if," it will happen.
The fallacy of Ben Bernanke's money-printing helicopter can be seen from
the chart above. With mathematical certainty, a day will come when not even
interest can be paid on such an enormous mountain of debt. And when that
day comes, millions of Americans and global citizens will begin scrambling
with lightning speed down John Exter's upside-down pyramid. When that day
arrives, we will have deflation, which will be a good thing (though not
pleasant) because it will be evidence that markets are being returned to
equilibrium by the forces of nature against the interventionist efforts of
policy makers who try to fool the laws of nature. This deflationary
cleansing process must and will take place. In the meantime, we need to be
ready for both inflation and deflation, which is why we have continued to
hold inflationary hedges in our portfolio (Rogers Raw Materials Index Fund
and energy stocks and gold) as well as deflationary hedges (gold, gold
shares, and technology stocks).
Does an Interest Rate Rise Spell Real Estate Doom?
Not surprisingly, the immediate repercussion of printing money is
inflation. And so, with money losing its purchasing power and with the U.S.
living so far beyond its means by taking on more and more debt, something
has to give. The "surprising" inflation numbers last week, coupled with the
strong job numbers the week before, are clearly shaking the confidence in
the bond markets. So, the bond markets are beginning to say "enough" of
this phony money scheme. Again, I ask the question. Will the Japanese and
Chinese come to our rescue again by buying an ever-increasing amount of our
debt? Or have we reached a point at which that is no longer possible so
that Americans will now be required to start paying the piper along the
lines of what is right for a country that is living beyond its means? James
Sinclair suggests below (under GOLD) that for now the Japanese have thrown us a life raft by stepping in to buy U.S. Treasuries this past week. Even so, the bond and real estate markets appear to be at a turning point.
30-Year U.S. Treasury
The charts for the 10-year and 5-year U.S. Treasury look very much like the
30-Year Treasury bond pictured in the chart above. The turning point for
both markets was the "good news" of stronger-than-expected job numbers the week before last, and then the higher-than-expected inflation number of 0.4% for the month (or 6% annually). Of course, thanks to government
manipulation, even those numbers are understating inflation, so who in
their right minds would accept interest rates of less than 4% on long-term
bonds when the inflation rate is 6%? In fact, rates should be 2% or more
above the inflation rate, which suggests long-term U.S. Treasury rates
ought to be somewhere around 8% or higher. Such a hike in rates, given our
enormous debt burden, could be expected to start the scramble down John
Exter's liquidity pyramid and thus usher in Ian Gordon's Kondratieff winter.
The Complexion of the Equity Markets
Richard Russell makes a very strong case that we are in a major topping
pattern for stocks. The behavior of my "Sector Scorecard" or "Index of
Indexes," which I began measuring only about five weeks ago, is consistent
with what I would expect at a major inflection point in the markets. At a
top, you might expect many stocks to be above their short-term moving
averages one week and below those same moving averages the next week. And so what I have found is that of the 37 different sector market indexes we have begun tracing, we have seen a huge amount of volatility over the past five weeks. Bullish is defined by the current price being above the 20-day moving average, and bearish is defined as stocks trading below their 20-day moving average. The following chart displays the percentage of markets that are bullish out of the 37 sectors from week to week.
3/19 ............. 13%
3/26 ............. 13%
4/2 ............... 97%
4/9 ............... 94%
4/16 ............. 52%
How bullish or how bearish is this Index of Indexes? We try to answer that
question by assigning a value of "1" for each index that is above its
20-day moving average. We assign a value of "2" for each index that is
above its 50-day moving average, and its 20-day moving average, and a "3"
for each stock that is above all three moving averages. We assign numbers
of "-1", "-2" and "-3" for indexes that are below these respective moving
averages. Then we sum these positive and negative values up for a
Bullish/Bearish Magnitude score at the end of each week.
After five weeks, here is how the Bullish/Bearish picture has emerged.
3/19 ............. -39
3/26 ............. -46
4/2 ............... +85
4/9 ............... +57
4/16 ............. +4
To be sure, this really measures short-term equity market complexion. Once
this secular bear market overcomes what has been a cyclical bull market, I
would expect to see less volatility and a predominance of very low bullish
ratings and strongly negative magnitude numbers.
As of 4/16/04, following is a tabulation of the sectors we follow and where
they stood on our Bullish/Bearish scorecard.
Gold took a hit and silver an even bigger slam last week as supposedly good
economic news was used as an excuse to dump the yellow metal. Some good
news right? The Consumer Price Index hit 0.5% of the month which, if my
arithmetic is correct, translates into more than 7.5% annual rise in
consumer prices. Wall Street's spin machine is always quite effective. It
has the polished CNBC talking heads to do its dirty work day in and day
out. But in an election year, the entire establishment is working
especially hard to sell people on the virtues of Keynesian and monetarist
For a host of fundamental reasons, some of which are addressed above in our discussion of the markets and in what James Sinclair has to say below, and given the disinformation provided in two interesting articles on gold
published this last week in the "Financial Times," I remain as bullish as
ever on gold. I think this current weakness in the metal, and especially in
the shares, provides another "golden" opportunity to increase one's
exposure to the yellow metal, in the event you are currently underweight.
Consider John Exter's upside down pyramid diagram as published in our April
issue. When all that money in the most illiquid investments at the top of
the pyramid begins to work its way down to the bottom of the pyramid where very little wealth is now parked in gold and cash, there will be an
enormous explosion in the value of those liquid assets, with gold of course
being the most liquid of all.
So as always, we need to step back from the trees so we can see the forest.
My monthly average chart remains extremely bullish for gold. While it is
always possible we could have some significant short-term declines in gold,
in the longer term-both from a technical and fundamental viewpoint-gold is
looking very strong. The only question in my mind is how much longer the
establishment will be able to dishord gold. I would submit to you that
articles below suggesting "Rothschild is 'getting out of gold,'" may be an
indication that the days of central bank dishording may be nearing their end.
Average Monthly Gold Price
Two articles from the "Financial Times" relating to gold are excellent
examples of how the mainstream media is spinning lies to keep the public
out of the gold markets. The first article, titled, "Rothschild to pull out
of gold market" by Charles Pretzlik, was published on April 14. I have
noted how incredibly biased (or incredibly ignorant) the "Financial Times"
is about gold. But the two articles this week beat everything I have seen
yet from this otherwise very good newspaper.
The article said that the Rothschild family is planning to withdraw from
the gold market after more than two centuries of being the premier gold
bank in the world.
"The same company that smuggled gold coins across the English Channel to
finance the Duke- Wellington's military advance through France 200 years
ago will also withdraw from the twice-daily London gold fixing, which it
has chaired since the first fix of the gold price took place in 1919.
"Baron David said the income generated by commodity trading was
increasingly insignificant to the bank. "Five or 10 years down the road,
can we be a meaningful house in commodities? The answer must be 'No'," he
"Gold producers were buying far fewer hedges, which Rothschild specialized
in and the firm had neither the infrastructure nor the risk appetite to be
a big trader, he added.
"It is clear that the revenues we have generated from commodities - in
comparison with those from investment banking, [corporate] banking and
those we think we can generate from private banking - have definitely
declined," he said."
The article went on to suggest that Rothschild would bail out of
commodities and gold in order to enter the red hot property markets, as
well as engage in acquisition finance and structured finance.
When I first read this article, my suspicions immediately were raised to a
very high level. First of all, the Rothschilds are very private. This is
one of the most private families and many believe absolutely the richest
family on the face of the earth. They don't make various "most wealthy
lists" because they don't want to be on them. They work hard at keeping
private and multi-national, so they can get away without paying taxes. And
they engage in all other manner of mischief, so the fact that this family
leaks out its intention of "leaving the gold industry" in itself is
noteworthy. Why would they want the world to know that?
Secondly, when the Rothschilds talk about getting out of gold, what do they
mean? This is a firm that has been a known pioneer in making gold loans. In
other words, they have been big short sellers of gold. Baron David as
quoted above noted that one reason for "getting out of the gold market" was
because "gold firms are buying fewer hedges." In other words, lending gold
was not profitable. When I first read this article, I suspected what the
"Financial Times" article was being used by the Rothschilds to mislead the
public into thinking they were "getting out of gold" as in selling all the
gold they owned, when in fact, I suspected they were actually getting out
of the business of lending gold. That is quite different than "getting out
of gold"-though loosely defined (since lending has been their main business
in gold), it could be construed as an accurate statement.
Certainly the legal actions of Blanchard & Company played a role in closing
the dishording pipeline available to the Rothschilds and other gold
lenders. As subscribers will recall, in my December 2003 interview with Don
Doyle, he explained in very clear terms how the unholy alliance between J.
P. Morgan (a financial institution that is well connected to the
Rothschilds) and Barrick was used. Not only was the alliance a conduit for
huge amounts of central bank dishording (through investment bankers like
Rothschild), it was also used to manipulate prices first up and then down,
to the advantage of J. P. Morgan and Barrick. The advantage that both J. P.
Morgan and Barrick had as a result of this inside information allowed them
to never have one single losing quarter for many years, when in fact such
hedges are normally a 50/50 proposition over time. Indeed, a case can be
made that the dishording policies by Barrick were forced on them by the
Blanchard lawsuit, which in turn has made gold lending a far less
profitable endeavor for the likes of Rothschilds and other bullion banks.
But as James Turk, Bill Murphy, Jim Sinclair, and other GATA supporters
believe, the days of dishording gold may be quickly coming to an end
because the gold that is actually in the vaults is at least half of what
the central banks claim. No matter how the Keynesians and monetarists try
to spin the public perception on gold, the fact is that it is real money.
And when this financial debacle that is still being created by Greenspan
and his partners in this crime eventually blows up, economic participants
of all sizes and shapes will demand gold as a medium of exchange and store
of value. Otherwise they won't lift a finger to do any work or buy
anything, because paper money will be exposed for the worthless scam it is.
The Rothschilds are not stupid. They know this is true better than anyone.
And they wouldn't get out of gold exactly at one of its lowest points in
history to enter a real estate market that is at its peak in history. Smart
money simply doesn't behave that way. So when I read this "Financial Times"
article, I was sure I smelled a rat.
My rat-smelling suspicions were confirmed on April 16. As I was going for
my bike ride workout, I noticed an article two days later in the "Financial
Times" titled, "Going, Going, Gold." "The barbarous relic, as Keynes called it, is crumbling to dust. When even the venerable NM Rothschild has quit the gold market and the Bank of France, among the most stubborn of the official goldbugs, is thinking again about its bullion holdings, the end of gold as an investment has come a little closer.
"It will not be before time. The fetishisation of shiny yellow metal,
decades after it ceased to be used as the anchor of the international
monetary system, is a lingering anomaly in modern financial markets.
Perhaps Rothschild's last service to the bullion market could be to keep a
live gold trader on display behind glass as a reminder of a bygone age,
like the former coal miners who now make a living giving tours of defunct
"The one advantage of gold as a reserve asset is that, unlike assets based
on fiat money, governments cannot make it worthless by inflating it away.
But in an era of low inflation, and given that independent inflation-targeting central banks are the norm across the industrialized world, that risk has very sharply diminished.
"Indeed, for both private and official investors, gold is now a rather
risky asset with a nil or low return. The intrinsic value of gold,
determined by its use in various industrial processes, is well below its
market price. Gold does not grow. So its value to any one investor as an
asset is dependent on other investors also holding it as an investment
asset. The gold price hangs precariously by its own bootstraps.
"For private investors to hold gold on this basis is their own foolish
affair. For central banks and governments to hold it as a reserve asset is
a betrayal of the public on whose behalf they are acting. Despite recent
sell-offs, governments and central banks still hold about a fifth of the
world's bullion. Their large holdings relative to the size of the market by
themselves make gold particularly ineffective as a reserve asset: the very
act of official selling of bullion on any large scale to raise cash will
itself drive down the price.
"This danger was amply demonstrated by the UK's unhappy experience of
trying to sell some of its gold holdings. Announced in 1999 in a sensibly
open and transparent fashion, the sales sparked such a fall in the global
bullion price that a group of central banks signed a concord limiting such
sales. That has recently been superseded by a new agreement providing for
limited official sales.
"Given the pointlessness of holding gold, the speed of its official
sell-off scarcely matters, unless leaching the gold into the market bit by
bit somehow maximises the return to the public purse by limiting the impact
on the price. That would imply some irrationality on the part of the
market. But then holding gold is irrational in the first place. Perhaps the
central banks are right to go slowly.
"Whatever the speed, the direction is clear. Gold is on its way out as an
investment and a reserve asset. Three cheers for that."
Excuse my French, but what a load of crap! The desire to shape public
opinion against gold ownership because "even the Rothschilds and the
French" are getting out of gold, was very transparent from this follow-up
gold bashing article by the "Financial Times." First the announcement that
the Rothschilds are "Getting Out of Gold." Then a follow-up article,
spinning a pack of lies about how "gold isn't necessary these days" because
the central banks are now able to manage their fiat money system without it.
My guess is that the Rothschilds are actually doing exactly the opposite of
"getting out of gold." In fact as short sellers of gold they were always
"out of gold." So in fact, what "getting out of gold" actually means is
that they are "getting into gold"-not only as they unwind their short
positions, but I suspect as they begin to buy more and more of the yellow
metal so as to accumulate more and more power when, as James Sinclair
opines below, gold rises not just to $480 but to $1,500!
What we citizens really need to do is to pay attention to what our ruling
elite are doing to us. Based on some very good research by Ed Griffin and
many others (read "The Creature from Jekyll Island"), the Rothschilds are
not only the power behind the English throne but also the power behind the
U.S. "throne." GATA and Blanchard & Co. have been on to a conspiracy in the
gold markets. I think the evidence points to a handful of wealthy families
behind the gold manipulation but none of them is larger or more at the
center than the Rothschilds, who are the real "landlords of the world."
April 19, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
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