Taylor On Markets & Gold
Jay Taylor
Financial Markets
Greenspan said this past week that deflation is no longer a problem. I
would suggest you consider that remark as evidence that exactly the
opposite is true. Stocks are struggling and the metals prices are plunging.
However, gold relative to silver has been rising over the past couple of
weeks.
The extremely rapid rise in longer-term interest rates over the past couple
of weeks has been the big story as far as we are concerned. Why rates are
rising is important but not as important as the fact that they are rising
because of the enormous amount of debt and illiquid assets that those debts
have purchased. Remember a few weeks or perhaps a few months ago when
Greenspan suggested more home buyers should take out variable rate
mortgages to take advantage of the short-term rates. Why this advice, I
wondered. I suspect he was trying to assist reduce the pressure that the
banks were facing from too many long term loans financed with short term
debt.
Remember in John Exter's speech that I published last month he talked about how the banks borrowed short term and lent long term and how that would eventually lead to enormous problems of illiquidity and ultimately a
scramble down the upside-down pyramid toward cash and gold. I believe the
recent plunge in the commodity prices may be indicating that deflationary
process could be underway. While our focus has been on longer-term Treasury rates, the action today (Wednesday, April 21), which shows a sharp rise in T-Bill rates, may be far more significant. As the chart below shows,
suddenly short-term rates are rising dramatically. Why is this important?
Because it means either that (a) the Fed has changed its policy, or (b) it
is no longer able to keep short-term rates low. In other words, it could be
that we are actually being asked by the markets to begin paying more, given
our huge and rapidly growing debt and that the Fed is no longer able to
push rates lower. Or, there could be other factors, such as the need to
defend the dollar, which is underpinning a change in policy.
3 month T-Bill
30-Year T Bond
Whatever the reason, the dramatic rise in the short-term rate (which rose
sharply on April 21 above all the moving averages) may start to put huge
pressures on our financial institutions, as what they pay for their
short-term borrowings begins to rise relative to the longer-term fixed-rate
loans they have on their books. In fact, we are seeing some evidence of
weakness in the financial stocks, as evidenced by the following chart of
the Financial Shares Index (IYF) traded on the American Exchange.
We have argued that by flooding the markets with fiat trillions of dollars
of money created out of thin air, interest rates have been held at levels
considerably below their natural levels. That has served to cause bubbles
in the real estate markets as well as the financial markets, which benefit
from lower interest rates because they borrow short term and lend long
term. So as intervention in these markets push short-term rates down, banks reap a windfall between the spread they charge on long term loans. However, when rates rise, the opposite is most often true. If we are in a prolonged period of rising interest rates, profits of financial institutions, which not comprise something like 22% of the S&P 500, could suffer a decline. Perhaps that is what the following chart of financial companies is saying. Remember, the market discounts the future.
Financial Index Shares
Real Estate Index
If financial institutional profits are important for the overall stock
market, that is also very true for the real estate markets. Indeed
artificially low rates imposed on the economy by our interventionist Fed
kept the markets from adjusting to the excesses of the last equity market
bubble. Artificial rates allowed many people to use their homes as ATM
machines for the sake of living for today. Indeed, a high number of new
housing was constructed over the past few years, which also gave a major
boost to the economy. Low interest rates also caused Americans to go out
and buy automobiles and large vehicles of all kinds, way beyond what they
need as well. Artificial rates, which boosted an artificial demand for
housing and autos helped keep the economy temporarily form going into a
depression. But these are large-scale items you don't need to buy every
day. So, when interest rates rise and defaults begin to rise with them
(personal bankruptcy rates are already at all times highs even in this
"recovery") what engine will pull the economy up then?
I believe Richard Russell summarizes the emerging deflationary pressures
better than I can so I'm going to reproduce some verbiage on this topic
from his very excellent "Richard's Remarks," dated April 20, 2004. I must
honestly say this is my favorite newsletter. You should try it. Go to
www.dowtheoryletters.com to learn more about it. The cost is $250 per year, which may sound expensive, but if you can afford it, it provides the best value among newsletters that you will find anywhere!
"April 20, 2004 -- What's happening? For one thing, Wall Street is waiting
to hear whether Greenspan in his speech tomorrow will give any hints as to
whether the Fed will boost rates prior to the November election. The market has already factored in a rate rise, but that's just the market's guess.
"In the mean time, something very important is going on, and nobody seems
to be noticing. But here's what I'm noticing. Almost everything is looking
toppy or at least weak against the dollar.
"The commodity indices look toppy. The D-J Financial Index looks toppy. The
various non-dollar currencies look toppy. Copper looks toppy. Yes, even oil
looks toppy. The stock averages look toppy. Gold and particularly silver
look toppy. The building stocks look toppy. The REITS look toppy. Fannie
and Freddie look toppy. Bonds and notes look toppy. Merrill and Morgan
Stanley and Goldman and the brokers look toppy. "Is it just my imagination? I don't think so. If I had to describe today's price action in broad paint strokes, I'd say that almost everything looks toppy or at least weak against the US dollar.
"Wait a second -- if what I've said above is true, why not be largely in
dollars? Hell, nobody else is. The great American public is deep in stocks,
mutual funds, housing, condos, cars, dinners out, vacation trips, home
theaters, ten-dollar movies -- and you name it, but they're certainly not
liquid, they're certainly not in dollars. Half the families in the US
couldn't raise three thousand in cash if their life depended on it.
"Sure, the dollar could fall apart somewhere ahead -- in a month or six
months or a year. But right now I feel comfortable in T-bills and money
market funds all denominated in dollars (for comments on gold read later on
this site)."
Russell has been one of the precious few commentators on Wall Street who
have recognized the potential for deflation all along. He quite correctly
has outlined the enormous struggles between inflationary and deflationary
forces. He does in fact frequently make the connection between excessive
debt as a precursor to deflation. In that same issue he continued with the
following excellent commentary:
"The US is now the world's greatest debtor nation. The US is running huge
trade and budget deficits, and nothing I see ahead suggests that the US is
going to cut back on its spending nor do I envision the US systematically
shrinking its deficits.
"This makes for a very unstable US. It also makes for very shaky
underpinning for the dollar. I'm not trying to time gold. Sure, I watch
what gold is doing, but I don't speculate in gold, and I don't trade it. I
buy it when I want to -- and I never sell it.
"My thinking is that as this primary bear market develops, we're going to
see massive pressure on debt. If you can't service your debt -- then
brother, you go bankrupt. Many people will not be able to service their
debts or their mortgages. Already personal bankruptcies are running at
record rates, and this while the bear is taking a breather.
"Once the bear tightens his grip on the US economy, there will be a panic
to raise cash in the US. Cash will be scarce, interest rates will rise, and
banks will demand higher rates because they will be taking greater risks.
This will all be basically deflationary.
"But let's remember the Fed, which will panic on any signs of deflation.
The Fed will fight deflation with all the power at its command. The Fed
knows only one way to handle any problem -- create more liquidity. Thus,
although cash will be in great demand, the international value of the
dollar may head down (this is where the US as the world's biggest debtor
nation plays a part).
"In this final scenario, gold will "head for the moon," since the very
viability of the dollar itself will come into question.
"At any rate, these are some of the phenomena that I believe we could see
in the months and even the years ahead. And this is why I hold for gold.
And for the time being -- dollars."
I am in complete agreement with Russell on his scenario, except that I
might add that ultimately deflation will win, which I'm not sure he agrees
with. Why do I think deflation will be the final outcome in this major
cycle (the current Kondratieff cycle, which began in 1949)? Because, while
I agree with Russell that the Fed will fight deflation with more liquidity,
that is exactly the remedy that ensures ultimate deflation, because to
create more liquidity, you have to create more debt. And debt is the
underlying dynamic that ultimately forces the policy makers to face the
reality of a financially broken world. At some point, as debt continues to
grow so much faster than income, it will no longer be possible to create
anywhere near enough liquidity to even postpone John Exter's decline down
the pyramid for even one minute! Certainly the intervals between the
requisite painkiller medications are getting shorter and shorter.
So I believe it is entirely possible that given the huge synthetic short
position in the dollar that Russell has also been talking about, we may
very well be nearing the start of that gigantic scramble for liquidity that
Exter understood so well but was so premature in predicting. Ian Gordon's
Kondratieff model suggests that the liquidity scramble could come at any
time. What I am suggesting is that the short rise in the short-term rates,
which could signal severe stress for short-term financiers, could be
telling us the freezing temperatures of the Kondratieff winter may be
drawing near, perhaps especially so as Mr. Greenspan tries to assure us
otherwise.
GOLD
The price of gold has been trashed and smashed by an establishment that is,
as James Turk notes below, showing more and more signs of desperation to
keep the price of gold suppressed so they can continue to foster the
illusion that everything is fine and dandy with our fiat monetary system
and the global economy. "We have nothing to fear but fear itself,"
Roosevelt said. And so the establishment sets out to raise confidence in
people regarding the U.S. currency and its economy by capping the gold
price. It's a little like taking your temperature with a thermometer that
has no mercury in it. If the mercury fails to rise after several minutes,
does that mean you don't have a fever?
But with the global dollar scam becoming more and more apparent to those
capable of thinking independently of CNBC, risk of a major economic
calamity is rising dramatically by the day with every new manipulative ploy
aimed at delaying the inevitable workings of the markets. Not only do
policy makers play games by intervening in markets to keep them from
working efficiently for their own political and economic gains, but as
James Perloff noted in "The Shadows of Power," the establishment uses the
newspapers as a medium for propagandizing purposes so as to obscure
objective reality. As James Turk points out in his excellent piece written
in his monthly "Freemarket Gold & Money Report," the gold manipulation game is nearing an end. In light of that, the establishment is becoming more and more desperate.
Clearly, from a longer-term perspective as the following chart above
illustrates, gold remains in a huge bull market, notwithstanding its recent
correction down to around $390.
James Turk Explains How "The Financial Times" Assists Gold Manipulators
The establishment has used all manner of propaganda to paint proponents of
a gold-backed monetary system to be missing a few screws. Perhaps some of
us, your editor included, have helped make it easier for the establishment
to discredit us because we have often acted emotionally about the injustice
of paper money, which is in fact a form of legalized theft used by the
ruling elite to reallocate wealth according to their own desires.
The same cannot be said of James Turk, former banker and now CEO of
GoldMoney.com. Jim is as intellectually solid as they come, so he is one of
the hard money camp's most potent weapon against the abuse of our paper
money system. Jim doesn't call the other side names. He simply takes them
and their propaganda head-on with facts. In the process, he demolishes them.
An example of James' excellent work was presented in his April 19 article,
published in "Freemarket Gold & Money Report," which I recommend you
consider purchasing a subscription to. The subscription price is $220 per
year. Contact James at P.O. Box 5002-240, North Conway, NH 03860-5002. The article I speak of was titled, "FT Makes it Easy for Us." The article,
which I am publishing for your benefit with permission from Mr. Turk,
exposes all and tears down the propaganda and lies published in that
article. And with respect to each meaningful clause in the article, he sets
the record straight. James' critique of this article is important because
it goes a long way in explaining why the gold price is still so artificially below its market equilibrium, and it also provides a powerful reason to buy gold with both hands rather than sell it as the "Financial Times" (and the elite it serves) would like you to do.
"Judging from the volume of emails I have received, it seems that most
everyone has heard about the hysterical anti-gold rant in the April 16th
issue of the Financial Times. Entitled, "Going, going, gold," this
unsigned editorial is by far the FT's most strident anti-gold harangue,
which is probably purposeful-the more intense their bombast, the more
attention that is drawn to it.
"There is no doubt that the FT must have worked hard to get their article
so widely disseminated, but that's what propagandists do. I will further
their objective by drawing even more attention to it, but at the same time,
I will put their article in its proper perspective, lest anyone be foolish
enough to consider acting on the FT's advice. "Following as it does hard on the heels of an April 15th article in which the FT tries to make a mountain out of molehill about the French government's intentions regarding their gold, I can only assume that the FT and its central bank handlers whose interests the FT serves must be totally panic-stricken about gold's recent 15-year high, and the prospect that gold is going higher still. So out comes their rehashed anti-gold propaganda, written I guess in the hope that the FT can still catch one or two people unaware of its anti-gold prejudice and its horrific track record for sell recommendations (its articles have very consistently appeared at important gold market bottoms). So that this does not happen, I have reprinted their article below in italics, interjected with my comments in brackets.
"The barbarous relic, as Keynes called it, [Wrong. Keynes called the "gold
standard" the barbarous relic, which is a very different thing than gold
itself. The motivation for Keynes' statement was that central banks had so
abused the classical gold standard introduced by Sir Isaac Newton 200 years before, it had indeed become an artifact leftover from a time when
governments served their citizens, rather than the all-powerful commercial
banks that so oppose the discipline of gold.] "is crumbling to dust. [Wrong again. Gold is up $75 over the past 12 months, a 23% gain. Only the FT's credibility is crumbling.]
"when even the venerable NM Rothschild has quit the gold market [Compared to UBS, HSBC, Morgan Chase, Barclays etc., Rothschild is tiny. It doesn't have the capital base needed to compete with the majors. So its withdrawal therefore relates to its own unique insinuation, and has no reflection on gold.]
"and the Bank of France, among the most stubborn of the official goldbugs,
is thinking again about its bullion holdings [Central bankers are always
'thinking' about all of their assets, as they should be. So what's wrong
with that?] "the end of gold as an investment has come a little closer. [Weak premises to an illogical conclusion like this one has one purpose only - it is pure propaganda. The FT's specious reasoning is in effect saying: That Chevy is blue, and this Chevy is blue, so all Chevys are blue.] "It will not be before time. [If the FT's anti-gold bias wasn't already apparent this far into the article, it is clear now.]
"The fetishisation of shiny yellow metal, decades after it ceased to be used as the anchor of the international monetary system [Only the FT and some central bankers believe that gold is no longer the anchor of the international monetary system. The market surely doesn't believe it because it still costs about 2.2 goldgrams to buy a barrel of crude oil, the same as it cost in the 1950s]
"is lingering anomaly in modern financial markets. [This observation proves
the FT's previous statement incorrect. That gold still comprises a large
part of central bank reserves shows that it is neither 'lingering' nor an
'anomaly,' but rather, an important international asset.]
"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
pits. [And soon to be joined by unemployed ex-newspaper propagandists who
write apologia for central banks.]
"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.
[Ah hah. You see! The FT really does understand the usefulness of gold -
they just feign ignorance about this noble metal's true usefulness. But
because the FT is statist by nature and a lap-dog for central bankers, it
will still claim that gold is not useful.]
"But in an era of low inflation, [The FT must buy its food and gasoline
from the same suppliers who sell food and gasoline to the statisticians,
who calculate the U.S.-CPI, or to the Federal Reserve governors who claim
there is no inflation. We, however, have to deal with suppliers who sell
food, gasoline and countless other goods and services with prices that are
rising by 10% a year or more.] "and given that independent inflation-targeting central banks are the norm across the industrialized world [Is there really anyone left who really believes that central banks are independent from the governments whom they serve?] "that risk has very sharply diminished. [That risk has always remained, and if anything, it is rising because government intervention in the free-market process is rising.]
"Indeed, for both private and official investors, gold is now a rather
risky asset with a nil or lower return [Goebbels couldn't have said it
better. The truth of course is the opposite; there is no risk when you hold
something tangible, in contrast to the huge risk one takes when holding
instead a promise of some politician.]
"The intrinsic value of gold, determined by its use in various industrial
processes [Although Goebbels was a schizophrenic, at least sometimes he
accepted reality - the FT apparently doesn't. Gold's value arises because
of its monetary usage, which is why the price of crude oil is unchanged
over 50 years.] "is well below its market price [Yes, which proves that gold is not an industrial metal, but rather one whose value is based upon its monetary worth.]
"Gold does not grow [Of course not-it's money, not an investment. Gold
therefore does not have any return. Gold's 23% 'gain' over the past year is
really a 23% loss in dollar purchasing power.]
"So its value to any one investor as an asset is dependent on other
investors also holding it as an investment asset. [Sounds profound at first
blush, but it's just an obvious statement of the underlying principle that
applies to any asset. For example, people hold the stock of Microsoft
because they believe it has value.]
"The gold price hangs precariously by its own bootstraps. [Yes, and thank
goodness! Better to hold gold, which is dependent upon nothing but its own
merits, than to rely upon any national currency, which hangs from the
bootstraps of politicians and their capricious whims.]
"For private investors to hold gold on this basis is their own foolish
affair. [Wow. This is by far the FT's most vitriolic anti gold article,
which is probably an important observation. Central bankers must really be
getting worried about the dollar's collapse and gold's rise.]
"For central banks and governments to hold it as a reserve asset is a
betrayal of the public on whose behalf they are acting. [Here is Goebbels
speaking again. The betrayal came when the Bank of England cheated the
British public by selling its gold reserve under $300 per ounce a couple of
years ago. Similarly, the betrayal came when the US Treasury dishorded
10,000 tonnes in the 1960s at $35 per ounce, rather than face the reality
that the dollar had been debased. So the reality is that in contrast to
what the FT says, the betrayal occurs by central banks dishording gold.]
"Despite recent sell-offs, governments and central banks still hold about a
fifth of the world's bullion. [Wrong. Of the 135,000 tonnes or so in the
world's aboveground gold stocks, the central banks probably have 16,000
tonnes at most in their vaults, less than 12% of the total. But we really
don't know this number for sure because central banks are unwilling to
disclose how much gold they have loaned from their vaults. Why? What are
they hiding?]
"Their large holdings relative to the size of the market by themselves [are
actually much smaller than central banks want you to believe because they
want you to think that they control the price of gold, when in fact, it is
the market that sets the value and therefore price of everything, including
gold.] "make gold particularly ineffective as a reserve asset: [The FT completely misstates the purpose of any 'reserve,' which is a tangible but liquid asset held to protect the value of a currency that is nothing but a paper promise.]
"the very act of official selling of bullion on any large scale to raise
cash will itself drive down the price. [Wrong. Recent central bank selling
was undertaken to try to keep the gold price from rising. Any central bank
dishording will result in a higher gold price. For example, central banks
are selling gold, and its price is rising. Also, the U.S. Treasury
dishorded 10,000 tonnes in the 1960s, and gold rose.]
"This danger was amply demonstrated by the UK's unhappy ['foolhardy' would be a better word.]
"experience of trying to sell some of its gold holdings. [Some? They sold
more than one-half of their gold.] "Announced in 1999 in a sensibly open and transparent fashion [It was announced in advance in a feeble and obvious attempt to talk down the gold price.]
"The sales sparked such a fall in the global bullion price [which for a
couple of months enabled us strong-hands to scoop up cheap gold, thank you
very much.]
"that a group of central banks signed a concord limiting such sales. [The
Agreement was intended purely for propaganda, aimed to make people believe that central banks control the gold price.]
"That has recently been superseded by a new agreement providing for limited official sales. [To further maintain the illusion that the gold price
arises from central bank actions, rather than the market process.]
"Given the pointlessness of holding gold, [The FT has never been so bold as
this statement. It and its central bank mentors must be panic-stricken
about gold's recent rise.]
"The speed of its official sell-off scarcely matters, [Let the central
banks sell what they have left and watch how little it matters to the gold
price.]
"unless leaching the gold into the market bit by bit somehow maximizes the
return to the public purse by limiting the impact on the price [The Bank of
England experience shows that central bankers pay no heed to what is good
for the public, but the FT has to give it some lip service so that it can
try claiming the moral high ground.]
"That would imply some irrationality on the part of the market [Mises said
that governments will destroy the free-markets long before they ever
understand how it works. He could have added the FT to his maxim.]
"But then holding gold is irrational in the first place. [Only FT
editorials are irrational. Holding gold is good common sense, but the FT
refuses to accept logic - or reality for that matter.]
"Perhaps the central banks are right to go slowly. [If the central banks
went faster, the purchasing power of their currencies would disappear
faster. So they go slowly for their own purpose, to continue hoping people
will believe that central banks determine the price of gold.]
"Whatever the speed, the direction is clear. [Yes, that the anti-gold
prejudice of the FT precludes it from factual and unbiased reporting.]
"Gold is on its way out as an investment and a reserve asset. [This
statement is ridiculous. Central bankers and their apologists have been
claiming for decades that gold has been demonetized-that gold is on its way
out. The truth is that central banks are on their way out-it is central
banks that are the barbarous relic.]
"Three cheers for that. [And three Bronx cheers for the FT for its pathetic
anti-gold propaganda.]
"Fortunately, the relentless anti-gold propaganda by the FT over the years
have so marginalized its reporting that only London School of Economics
professors still believe what the FT writes. So why should we care what the
FT writes?
"There is one and only one reason - the FT has a fabulous record of calling
the bottom of the gold market. They last tried talking down gold on
September 11th, 2003, when gold was at $379, just weeks before gold began
its year-end advance that ended in January at $426 per ounce.
"So the FT is making it easy for us by identifying the present turning
point in gold. Gold is in the process of bottoming - the FT's track record
says so.
April 23, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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