Taylor On The Markets & Gold
Jay Taylor
Financial Markets
Last week was a good week for equities. The Dow gained 2.2% to close at 10188.45. The S&P 500 finished 2.25% higher to close at 1120.64, and the NASDAQ added 3.9% to its value to close at 1986.74.
When I hosted the Financial Sense News hour with Jim Puplava this past week (a task I found out I'm not very good at), one of the people I interviewed was Tim Wood, a Louisiana-based technical analyst. Tim confirmed my view that the U.S. equity markets are in a major topping pattern. Tim, who is a regular guest on the Puplava show, is a very competent technical analyst. He studies all the major markets. His views on gold are not as rabidly bullish as I would like, but it doesn't matter what I like or you like. The markets have a mind of their own, and technical analysis can sometimes help us perceive a market's direction long before events provide a rationale for that move. For example, we certainly saw how the rise in equities foretold of a stronger economy in 2004. And now, with the equity markets apparently stalling out, despite the greatest levels of monetary and fiscal stimulus in history, they may well be foretelling of economic decline.
Tim Wood is one technical analyst I feel can be more aware of the potential for market moves in the shorter run. You can hear Tim every week on the Financial Sense Newshour at www.netcastdaily.com/fsnewshour.htm. Also providing good insights into the energy market there is my friend Bill Powers, and on the gold and silver markets, another good friend, Dave Morgan.
Topping Patterns are Ambivalent by Nature
During a topping pattern (which equities are now in) or a bottoming pattern, a market's value relative to various moving averages can move into a bullish or bearish status very quickly. So for example, last week, of the 38 sector charts we watch, only 4 of those charts were bullish (price above its 20-day moving average) and 34 were bearish.
But what a difference a week makes. At the end of this past week, only 1 sector (oil services) was bearish. All the other sectors were bullish. Not only were 37 of 38 charts bullish, but 28 of 38 sectors had risen above their 200-day moving average. That resulted in a huge swing from a bearish magnitude of minus 77 last week to a bullish magnitude of plus 97 for the latest week.
What value does the effort to measure the bullish/bearish status have if it can switch so quickly from one extreme to the next in a single week? As a person with more technical leanings, this study helps me notice certain sectors that stand out from the crowd and thus, it raises certain questions. For example, why has the oil service sector chart been performing so poorly, not only this week but for quite a few weeks in a row, despite the significant rise in oil to around $40 per barrel? For that matter, why have the oil stocks themselves not been on a tear? Are these markets suggesting that the bull market in oil is perhaps about over? In fact, at least in the short run, that's what Tim Wood suggested when I spoke to him yesterday on Web radio.
On the other hand, Bill Powers, who views the markets from a fundamental viewpoint, sees it another way. Bill notes that the drilling rigs operation has not risen very much at all, which might help explain why the oil service sector charts have been so weak. The reason Bill suggests the oil rig business is not booming as we would expect with such high oil prices is that exploration opportunities, at least in the U.S., are not very abundant.
Lower Highs & Lower Lows
The chart of the Dow looks very much like most of our sector charts. Last week it was below its 200-day moving average. With last week's rise, it now stands above its 20-day and 200-day moving average, but clearly it has some heavy lifting to do to turn bullish. A clear break above all its moving averages and then a cut through the downtrend line would be a scary picture if you were short the Dow.
Clearly, efforts are being made to try to pump a sufficient amount of liquidity into the markets to keep the equity markets strong, at least through the election. But what is so amazing to me is the very poor performance of equities in light of this huge amount of liquidity that is being created by the world's central banks in an obvious effort to stave off the Kondratieff winter. Yet as we note week after week, all this is really doing is delaying the inevitable deep freeze and making it all the worse once it arrives.
While our own monetary measures may be growing at a reasonably modest pace, globally it is exploding. For example, according to my stats, M-3 over the past 52 weeks has grown by about 4.5% to 9,244 billion (or 9.244 trillion). By comparison, Global U.S. Dollar Liquidity has been on a tear. This measure of global liquidity, which is comprised of a monetary base plus foreign bank holdings of U.S. dollars, has risen over the past 52 weeks at an astounding rate of 20.39%! Clearly what has been happening is that the central banks have been printing their own currency and then buying our dollars (mostly U.S. Treasuries) in a 1930s-like beggar-thy neighbor currency devaluation scheme.
This of course is the fuel from which all manner of bubbles are being created. The big problem of course is that the mirror image of this chart is the dramatic rise in debt, which is growing much, much faster than GDP. And so, to ensure debt is paid so that we do not face an unraveling of our enormous debt bubble, the only answer our policy makers have is to administer more of the same drug that fuels even more debt and an even more vulnerable financial system. It is maddening, but this is what the combination of Keynesian and monetarist economics have brought us. Both of these schools of economic thought sold us a lie that policy makers can somehow overrule natural laws of economics as taught by the classical economists and more recently by the Austrian school of economics.
The money pump has inflated everything from stocks to bonds to housing to art objects. Only God knows how many other markets have been forced far away from equilibrium by the humanist action of increasingly godless global policy makers. This action has brought about a reprieve for the establishment and that is reflected in our less-than-stellar Model Portfolio performance so far this year. Clearly elections are on the mind of policy makers now. But they will try to do everything they can, whether it is to manipulate interest rates, currency rates, or the gold market to hang on to power. Longer term, their efforts will fail because the laws of nature as given to us by our Creator remain in force. Keynes may have been brilliant but he was only human, and the lethality of the poison he and the monetarists have administered to the global economy is becoming all too clear, at least to those of us who are capable of thinking outside of the box CNBC would put us in.
I believe that will become clearer in the weeks and months to come if, as I expect, the resumption of the greatest bear market in equities since the 1930s resumes. The topping pattern in our equity markets, even as enormous levels of monetary and fiscal stimulus are administered, suggest we could be close to a major decline in the equity markets that would cause many more folks to "wake up and smell the coffee."
Mixed Economic News
To the extent government figures are believable, there were several positive and several negative news items this past week.
Positives:
- Personal spending rose 0.3% while incomes rose 0.6%
- The Chicago Purchasing Manager's Index rose unexpectedly to 68
- The U.S. economy is expanding at an annual rate of 4.4%, which was faster than expected
- Consumer Confidence Index rose to 93.2 from 93
- U.S. Home Sales increased to 6.64 million units in April, more than forecast
Negatives:
- Gas prices continue to rise
- Drug prices continue to rise
- U.S. April durable orders fell 2.9%
- Mortgage applications fell again
- Wage index puts pay rises at under 3%
- Personal bankruptcies in U.S. increase 2.8%
GOLD
The U.S. Dollar Decline & Gold
Perhaps the most important market mover last week was the U.S. dollar. Given the dollar's status as the world's reserve currency, it can be argued there is no more important market in the world. So the decisive decline below its recent bear market rally up-trend line is very encouraging for gold.
Given all the problems of the U.S. economy noted above, what are the prospects for the dollar remaining as the world's reserve currency? Yesterday on the Financial Sense Newshour with Jim Puplava, I learned from Bill Powers that he has been aware of a continuing move on the part of certain Islamic leaders to move toward the use of the Islamic gold dinar as a medium of exchange for settling oil disputes. I believe we were perhaps one of the first newsletters to talk about the gold dinar several years ago. We don't hear much about that in our popular press but that should not be surprising. We don't get the straight talk about anything to do with gold from our mainstream press. For example, they never report on the work of GATA and the Blanchard lawsuit (which is in the discovery stage, by the way). All we get is ridiculous propaganda from the Financial Times, as we received in a flurry of reports a few weeks back, all aimed to discourage folks from owning gold. And because the conversion from paper money to an Islamic dinar for the settlement of oil would be such a blockbuster event, you can bet your bottom dollar you won't hear anything about it, because the last thing our bankers want is for you or anyone to take money out of the bank and start buying gold-or even more, to buy GoldMoney via www.goldmoney.com. So what I am suggesting is that you not be deceived by the absence of news about settlements of oil in gold dinars. Requiring that would be the most logical thing the Muslim world could do because it would ensure protection of wealth in gold, which is an honest store of value. And from their increasingly hostile anti-Western point of view, it could help wreck the U.S.-dominated financial markets.
We are very good friends with our next-door neighbors here in Queens who are Muslim. These people are as nice and gentle as any Christians we know, and they, like other Muslims, believe (correctly) that the theft of private property is wrong-unlike most Christians these days. Before you object to that statement, please realize that virtually all Christians condone our forced socialism via government taxation and a fiat money system that is nothing more than legalized theft at the hands of our ruling elite. And so I strongly applaud the move by Islamics toward a gold dinar. That, after all, was what our Founding Fathers also wanted when they wrote into our Constitution (which is no longer enforced by our legal system) that money should be comprised of only gold and silver! But if we had gold and silver as money, the ruling elite could no longer wage their wars and continue their move toward global domination into a one-world government.
Whether global transactions will one day be settled in gold or a gold-backed currency remains to be seen. But with or without that, the longer-term picture for the dollar is very bearish and, as the chart above shows, the dollar is now breaking down below its recent bear market rally, which no doubt served to suck a fair number of people back into the dollar markets. I am embarrassed to say I was one of those suckers when I suggested that we should allocate 10% of our Model Portfolio to a T-bill money market account. As an American it makes sense to hold cash, so that is a position I expect we will continue to hold through this year in our Model Portfolio. However, now that the dollar is apparently ready for another plunge down to test the recent lows, the Prudent Income Fund is likely to perform much better than any dollar T-Bill money market account.
Chinese Buying Fewer Dollars
The Chinese certainly do have an overheated economy. According to one report I saw last week, producer prices are rising at a 5% rate. No, that isn't an annual rate, it is for the month of April alone. And so the Chinese are trying to slow down their economy. The big question is whether they can apply just the right amount of constraint or whether they apply too little or too much constraint. Too much constraint could send the Chinese economy and the Asian economy reeling on the downside, in which event, we could see a dramatic decrease in the purchase of U.S. Treasuries by both China and Japan-which in turn, could lead to a dramatic decline in the dollar.
Too little constraint could mean that inflation will continue to rise dramatically. It is the blunt instrument of monetary policy that is so scary, not only for China, but for the U.S. as well. In fact, John Hathaway, who we interviewed this past week for our upcoming June 2004 monthly issue, opined that inflation is likely to get much worse here in the U.S. because the huge amount of debt now held by America will preclude any serious monetary braking action by Greenspan. In our interview, we talked about how Paul Volcker did apply the brakes very hard in 1980, and how that did in fact break the back of inflation. But it came at a huge cost. The 1982 recession was the deepest since the 1930s. The current debt levels are larger by a factor of several times that of the 1980s. Thus any serious application of monetary braking could be expected to send the U.S. economy and, indeed, the global economy, into something perhaps akin to or even much worse than what was experienced in the 1930s. Sounds like Ian Gordon's Kondratieff winter to me.
John Hathaway Predicts a $1,000+ Gold Price
Our feature interview for our June 2004 issue will be with John Hathaway, the portfolio manager for the Tocqueville Gold Fund. Knowing that John has talked openly in the past about the prospects for gold being measured in 4 digits rather than 3, I put the following question to him:
TAYLOR: I recall an essay you wrote some time ago in which you suggested gold during this bull market would be measured in 4 digits rather than 3. Do you still hold out the prospects of that happening?
Here was John's answer: "You can get to that in a very easy way. You can take the market cap of all the gold above the ground including central bank reserves and just mark it to the current market. It is about $1 trillion dollars. If you look at the market cap of all the financial assets, which would be the stock markets and the bond markets of the world, you are talking about $70 to $80 trillion dollars. And so the ratio of the gold market cap to financial asset market cap is 1:70. If you look at the last time that gold peaked out back in 1980, when gold was $800, that same ratio was 1:4. So when people were worried about their stocks and their bonds, they valued gold in such a way that the market cap of gold was roughly 25%. I don't know if we will get that far from a ratio of 1:70 to get to four digits ($1,000 or more)."
Gold Stocks to Plunge?
The chart above was sent to your editor by a subscriber who was very worried by the projection of gold down toward the 2001 cyclical lows. William Smith wrote, "Jay, Sometimes more information is not better, in fact it is confusing. I look to you for advice in the gold equities market. I have enclosed a link to a view just now being expressed by Adam Lass of the Taipan publication, one of the oldest financial newsletters going. I would appreciate your comments as quickly as is possible as the direction of this is very bad if it is to happen as Adam has drawn the chart. www.247profits.com/Home_Page/247_BUREAUS/TAIPAN.html?Source=/Sites/247Taipan/Archive/TaipanXAUAlert20040520.html"
ANSWER: Certainly, if these projections pan out, I would expect our gold share portfolio and many, if not most, of the gold stocks on our list would enter hibernation or worse. Because the future cannot be known or projected by any charts like the one shown above is one reason for our philosophical leaning, as expressed in James 4:13-17. All I can do is use my God-given sense to try to understand the world we live in. In my view, John Hathaway's contrarian approach toward buying assets when they are undervalued makes sense to me, rather than chasing after overly-expensive assets and riding any number of prominent fiat money-induced bubbles. Logically, what I see in the dollar, equity, debt, and real estate markets tells me the projection shown above is wrong. And so, accordingly, I have constructed a Model Portfolio that I think is the best place to invest, given this view of the markets. Does that mean I will always be right? Obviously not. So far this year, our gold stocks have taken a drubbing. But after enjoying back-to-back annual triple digit gains in the gold shares, I think it is not unreasonable to expect some consolidation in the gold and gold-share markets. From a long-term perspective, I continue to believe gold is undervalued and that it is thus a good buy. Presumably, if gold were to plunge to levels projected in the chart above, it would become an even better buy. Of course I'm not wishing or cheering for that outcome. For now, I would point you toward these long-term moving averages which continue to suggest the gold bull market remains in place. At the end of this past week, the monthly average was $383.90, the 20-month average was $367.14, and the 40-month moving average was $327.25.
June 1, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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