Taylor On The Markets & Gold
Jay Taylor
Financial Markets
The equity markets remained on the weak side again this past week as evidenced by the Dow, which closed below 10,000 at 9966.74. That was actually below the Dow's 200-day moving average of 10,000.55. The NASDAQ also fell below its 200-day moving average, though the S&P 500 managed to stay marginally above that key average, which markets seem to pay so much attention to.
The deterioration of these averages mirrors our sector summary, which
displayed continued weakness. For example, of the 35 sector charts we
review at the end of each week, only four sectors displayed bullish charts
and 37 with bearish charts. We define a chart as being "bullish" if its
closing price is above at least its 20-day moving average, and we define a
chart as "bearish" if its moving average is at least below the 20-day
moving average. The sectors with bullish charts during the week were:
Airlines, Banking, Gold Mining and Real Estate. However, even these charts
were only barely qualified for "bullish" status by exceeding the 20-day
moving average. None of these sectors had values exceeding either their
50-day or 200-day moving averages. And so the bullish magnitude was a mere
4. Perhaps the stabilization of interest rates this past week encouraged
the banking and real estate sectors. But we should not make too much of
any of these so called "bullish" readings given the lack of conviction of
these particular indexes themselves not to mention the overall deterioration of the equity markets in general. The big question in my mind is whether interest rates, or I should say Treasury rates, fool everyone again and start downward as a signal of impending deflationary pressures or whether they rise not as a result of robust economic activity but due to a repatriation of capital from the U.S. markets. The reclamation of capital by foreigners from U.S. soil that sends interest rates skyward could be the trigger to usher in the Kondratieff winter given the huge debt taken on by Americans as our policy makers tries to defy realty by continuous expansionary monetary policies. By the way, if you would like to get some sense of just how rapidly the Federal Government's debt is increasing, click on the following link: www.toptips.com/debtclock.html
One of the lessons learned by the ruling elite after the Great Depression
of the 1930s was that we common folks had to be educated to spend our fool
heads off when deflationary pressures came around the next time.
Individuals, for the good of society, had to be trained, the Keynesians
said, in order to keep them from acting in their own best interest by
saving for the "rainy day" or to save more during the "rainy day." The
Keynesians said even though saving may be in the best interest of the
individual, that behavior had to be changed for the good of the society as
a whole. If everyone takes care of their own interest, it will be detrimental for the economy because as aggregate demand decreases, sales will decline, companies will close their doors and people, workers will be fired and a vicious deflationary cycle will result.
So, with the Keynesians came credit cards and the notion that you could in
fact have something for nothing. The Monetarists also added to this myth by
agreeing to print as much money as necessary to "grease the wheels" of
commerce. And so we have been trained to scoff at the notion of saving for
a rainy day. Instead we spend and consume as if there were no tomorrow. But eventually, perhaps sooner rather than later, that behavior will be death
of our economy because the consumer will become so over-indebted and have
so much more in the way of tangible goods that he will, at some point in
time stop spending. And given the horrendous amount of debt on the books of all sectors of our society, that will, I believe, be the undoing of this,
another Keynesian myth.
Because the consumer is such a large portion of our economy (something like
two-thirds), it is very important to watch the charts to see what they may
be saying about the future of consumer spending. Wal-Mart is so large that
it can easily be seen as a proxy for the American consumer. A peek at this
chart at the end of this week indicates continued weakness for Wall Mart.
Is this suggesting the boom may be nearing an end? Could higher gasoline
prices be pinching the Wal-Mart consumer, who is, in general, at the
lower-income end?
While we will continue to need many perishable consumer items such as are
purchased at Wal-Mart, the need to buy a new house, car, or other durables
does not take place every few days or weeks or months. Incredibly, through
the brief recession we had a couple of years back, we never did see the
normal downturn in autos and housing that we usually see in a recession.
So, my thinking is that the current growth spurt (which I think was induced
by historically high monetary and fiscal stimulus) may not be sustainable.
GM, a proxy for the auto industry, also looks weak, as does the primary
driving force behind the current housing bubble in America, namely Fannie
Mae. The most recent price for both of these charts is comfortably below
their respective 200-day moving averages.
Summing up the equity markets this week, as we said above, 34 charts out of
38 were bearish, which compares unfavorably to 36 out of 38 for the week
ending 5/14/04. Stating it the other way, only 4 out of 38, or 13% of the
industry sectors we follow, were bullish at the end of this past week. And
although improved somewhat from minus 80 last week to minus 77 this week,
these are very weak numbers considering that the absolute largest negative
reading is minus 114 and the absolute maximum bullish reading is plus 114.
These are certainly anything but strong equity markets. All it took was a
tiny rise in the interest rates a few weeks ago to trigger this market
weakness. Remember that we believe we are still in the very early stages
of a huge multi-year bear market akin to or worse than that of the 1930's
and that the Dow will ultimately decline to a level of parity with gold. In
other words, gold and the Dow will approach a 1-to-1 relationship. Whether
that relationship is $3,000 gold/3000 Dow, or $5,000 gold/5,000 Dow, or
$1,000 gold/1,000 Dow, I don't know. But history suggests when equity
markets bottom you will not only be able to buy equities that pay hefty
dividends real cheap, but gold will at that point in time, be very
expensive, vis-à-vis equities.
GOLD
GATA chief, Bill Murphy, provides the following take on Friday's rise in
the price of gold:
"Gold Surge Halted By $6 Rule/HUI Up Six Days In Row
"The arrogant Gold Cartel did it again. Gold began to firm nicely after the
Bernanke Fed Fund comments late yesterday afternoon and remained that way
around the globe. We came in $3 higher and after a brief dip, gold surged,
rising $9 at one point. After another takedown, roared back, and with 15
minutes to go, it was up $8. I was hoping to lose my bet with my friend
Wistar Holt. A close above $7.20 and I would lose an 8 beer (Pilsner
Urquell) bet, one I was hoping to lose. Nope! The arrogant creeps did it
again by taking gold down nearly $2 as we came into the close.
"Over and over again, the same drill. Gold takes off in the first half hour
and then The Gold Cartel's capping operation kicks in. By day's end, with
excitement building all session long, the $6 rule would finally be broken
(an indication the crooks were having some problems); gold closed lower
than it had even during much of the early trading. Always the same drill.
Cap, cap, cap - then attack when the moment suits them or outside market
conditions are in their favor. And the head of the CFTC has the gall to say
he can't find any evidence of market manipulation in the precious metals.
"The action above and below $380 has been frenetic. Jump up, then a
tanking, then back up, then a thrashing. Technically, this is a good sign
as it portends an end to the down move. A market which behaves like this
often changes its trend.
June gold making a rounded bottom:
"Why did gold take off today? This says it all:
"Kansas City Star 05-20-2004 Fed fiddles as inflation roars to life
Speaking of price capping:
"Hi Bill,
"Just thought you would like to know that around 03:50 edt on the 21st of
May, June gold was being quoted 382.10 bid at 382.20 and from 382.20 to
382.70 there was a cumulative 1675 lots offered! There was 1000 lots
offered at 382.50. Whoever places these offers on the system seems to only
want to cap the market. If you really needed to sell all that gold at the
best price possible you wouldn't show your hand. In my experience you would
slowly sell in small clips of 5 or 10 lots over a period of time. All the
best, Mario"
Bill also reported that the Commitment of Traders Report showed a further
switch of the so-called commercials to more long and less short. They
reduced their shorts by 8,378 contracts and increased their long positions
by 3,485 contracts. In silver the commercials decreased their long
positions by 1,403 contracts and decreased their short positions by 4,166
contracts. From a technical standpoint both of these changes are
constructive."
It is usually true that the commercials (which include the likes of those
being sued in the Blanchard anti-gold market manipulation, namely JPMorgan
Chase and Barrick Gold), are on the right side of the market. If you wonder
why that is true, all you have to do is begin to get familiar with the
Blanchard case. If the alleged facts are true, as I believe them to be,
what you have is collusion between JPMorgan Chase and Barrick to influence
the price of gold and to position your trade according with a
pre-determined market direction. Statistically, what is most fascinating is
the statistic that came out of my interview with Don Doyle, CEO of
Blanchard & Company. Amazingly, Barrick's short sales were profitable in
every one of 60 consecutive quarters! What is so amazing about that? Well,
a short sale is a zero-sum game, meaning that half the time your position
should make you money and half the time your position should lose money, if
it were a market free of manipulation. The fact that Barrick's hedge book
was profitable for 60 quarters in a row is about as likely as this 57-year
old man ever making a visit to the moon.
Apart from this apparent manipulation of the gold markets by the JPMorgan
Chase/Barrick team, which may well extend to collusion with central banks
(indeed that was one of the arguments put forward by JPMorgan to try to get the case dismissed), I do not want to suggest there is no randomness. But the "commercials," which include the big bullion banks and major gold
mining firms, are on the right side of the market most of the time, which
suggests they possess information and means that most of us mere mortals do not possess. So the point is, if the "commercials" are reducing their short
position and increasing their long position, that might strongly suggest
the worst of this gold bull market correction may now be over. Let's hope so.
One sign of encouragement came late last week when the senior gold shares
began to show some signs of stability. And again this week, as can be seen
from the following chart, the seniors displayed some strength as the AMEX
Gold Bugs Index closed at 190.95, good enough to put it above its 20-day
moving average for the first time in 5 or 6 weeks.
As a long-term gold bug who rode gold down into the pits of the mid $200s,
it may be easier for me to ride out the kind of bull market corrective
challenges we are hopefully now coming out of. I will admit, however, that
if the monthly average gold price were to drop below the 20-month moving
average, I would begin to get nervous about our long position in gold and
gold stocks. One never knows for sure, which is why I like to quote James
4, but it seems possible we may now be ready to move onward and upward once
again in the gold market, especially if the bear is emerging in the dollar.
Unless the monthly average gold price ($381.72) drops below the 20-month
moving average ($367.03), I am going to assume we are still in a long-term
gold bull market. If the monthly price of gold were to fall below the
40-day moving average, I would probably have to concede I was wrong about
the long-term bull market. With governments loathing gold but still having
some gold left (no one knows how much for sure), which it can use to
suppress the gold price, we should never rule anything out. But clearly,
market forces seem to be overcoming the rampant manipulation against gold
by the establishment who jealously guard their license to rob the common
folks by printing money. When/if people dump dollars in favor of gold,
market forces take away this license to steal. Hence we should expect all
manner of evil and unfair games will continue to be played against us until
market forces overwhelm this kind of evil behavior. That this kind of
manipulation by the establishment comes to the light of day is why we hope
and pray the Blanchard trial continues to move forward, as I understand it
is now doing. But whether the evidence in that case is suppressed or not,
market forces ultimately overwhelm self-serving fibs told by the ruling
elite. That has always been true in the past. It will always be true in the
future. That doesn't mean a lot of people are not hurt badly in the
process. But our Founding Fathers understood that the laws of markets are
not to be conned. Unfortunately, those lessons will have to be learned by
our existing rulers the hard way.
May 23, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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