Taylor On The Markets & Gold
Jay Taylor
Financial Markets
As we go about living our daily lives, the bigger picture is easily lost because what is happening here and now is so much more real in our minds than what happened months and years in the past. And so with recent economic news being positive, we "feel" as though things are good and getting better, even though a view of the past several years reveals a trend that is, at best, lackluster. No doubt the equity bull market is still indelibly imprinted in the psyche of American investors. Since bull market is the only kind of equity market the majority of Americans have known, they naively expect that to continue indefinitely into the future. They have little use for the study of market cycles because they like bull markets, and it is easier to simply project the known past indefinitely into the future.
I know about projecting the past indefinitely into the future. I have been
there and done that with gold. I watched and profited from the gold bull
market of the 1970s, and then came the 1980s, and I rather liked future gold price projections made at what turned out to be the end of the 1970s
gold bull market. And so I think I kind of understand the mentality of
masses of Americans who have built their lives and future expectations
around perpetually rising equity prices.
But the chart below shows that equity markets have not perpetually risen.
In fact as the chart of the S&P 500 illustrates, equity markets are displaying an unmistakable topping pattern of lower highs and lower lows.
And as Richard Russell points out, there are indications that the really
big money continues to come out of the market, just as it did prior to the
first phase of the current long-term secular bear market. The S&P 500 is
lower than it was in 1998. The NASDAQ is still far below its peak of over
5000, and the Dow is still a long way from its peak of over 11700. What is
truly remarkable is the fact that these major indexes have failed to even
come close to their all time highs, despite the most aggressive monetary
and fiscal stimulus in the history of mankind. What is going on here?
The inability of the Fed to drive equity prices to new highs was predicted by my good friend Ian Gordon when I first interviewed him in 1999. Ian said then and he says now that the huge and rapidly growing debt that was created during the Kondratieff autumn would not be equaled or surpassed in
his lifetime. (Ian only recently turned 60. And since the Kondratieff peaks
occur only every 60 or 70 years, Ian would have to live to be 120 or 130 to see the next peak.)
Watch the CEOs, Not the Stock Salesmen
So, income cannot keep up with the parasitic growth of debt, which-owing to
rapidly rising debt-servicing requirements-emasculates the demand side of
the economy. And, as that process matures, the prospects for business
growth decline, which is exactly what America's CEOs seem to be predicting
by their behavior if not their words. Like birds and animals that detect an
impending earthquake, CEOs are in a most enviable position to sense the
future business climate. As Wistar Holt recently pointed out, CEOs are selling far more shares of the companies they own than they are buying. And
as Richard Russell pointed out last week, corporations are also paying down
debt at a rapid clip. And this past Thursday, CNBC reported that CEOs
believe we have peaked in economic growth this cycle.
Thanks to being dumbed-down, the American consumer blindly believes what he is told and continues to dig himself deeper and deeper into debt. He
continues to buy stocks to safeguard his future, even though stocks are at a level historically that suggest we are due for a huge decline in equity
values and when debt levels suggest the next deflationary depression is
bearing down upon us. And now, the equity market, which is a leading
economic indicator, seems to be suggesting the corporate leaders are right.
At major market tops, the masses of average folks get hurt real badly. Never before in our history have so many people been caught up in the mania
of our day, namely the equity and housing market bubbles. Never before has
there been a better time to practice a contrarian investment philosophy.
Sell stocks. Buy gold. Pay down debt. Hold cash
History suggests that we who have taken a short position via the Prudent
Bear Fund will yet be vindicated, though the fund is down sharply this
year. Likewise, history suggests our gold positions should also pay off big
time as the deflation events of the current Kondratieff winter take hold.
Certainly, a case could be made that in this early stage of the deflationary unwinding process, gold could, like most other commodities, come under some pressure. However, once the markets begin to view gold for what it is, namely money and not a commodity, gold will shine with exceptional allure because only the yellow metal and perhaps silver as well, will be the only widely accepted and trustworthy mediums of exchange. The reasons will be the same now as throughout history. These are asset monies, which have value that is not dependent on the ability of others to pay their debts. And as it becomes increasingly impossible for people to pay their debts with paper money because the value of paper depends on the solvency of your bank (which has made all manner of bad loans) you need to ask yourself what kind of money you will accept as payment or require in exchange for working for someone.
With respect to the equity markets, we need to remind our readers once again that equity prices remain hugely overvalued and far, far from their
bottoms. With PE ratios at over 20 and dividend yields at only around 1%,
and given all the signs that equities are in a topping pattern and that the
super rich investors are exiting from stocks even as unsuspecting common
folks continue to pile in with their retirement money, I think it is time
once again to suggest now is the time to add to your position in the
Prudent Bear Fund, which shorts stocks and takes a long position in a wide
range of producing and junior gold shares. At the bottom of the equity
markets, when the strongest companies sell at PE ratios of 5 to 10 times,
and when those companies pay a dividend yield of 5% to 10%, we will not
recommend the Prudent Bear Fund-unless of course my good friend David Tice chooses to rename his fund The Prudent Bull Fund which he may well do.
Indeed, I recall in my interview with David he suggested a day would come
when yields are at market bottom highs when he would turn bullish.
But for now, we remain convinced the best positions to take are short equity (with professional management only), long gold and long cash. We believe that as this year draws to a close and as we enter 2005, interest rates may well begin to rise dramatically, not because business is strong, but because it is weak and default rates begin to rise dramatically. That may well be the force that grabs all control out of the hands of policy makers and forces the ugly and vicious debt repudiation phase of the Kondratieff winter. At some point, when interest rates are much higher, we think it will also be an opportune time to buy U.S. Treasuries. But that time is most likely years rather than months away.
GOLD
Viewing the gold market from 36,000 feet up rather than next to the daily action, we see the market remains very positive. In fact, as some technical folks are suggesting, the present time may prove to have been a very opportune buying opportunity for the junior gold stocks as well as gold bullion, assuming that the recent pullback which began about six months ago has now about to end. At the end of this past week, the average gold price for the month of June was $389.37 compared to its 20-month moving average of $370.78 and its 40-month moving average of $330.43.
Either Way, Gold Is Going to Get Ya!
Trader Roger Wiegand forwarded the following to me, and with his permission I'm passing it on to you.
"Just completed more analysis on the stock and metal markets. Here's some notes on what I have determined using fundamental and technical analysis on these markets since 1924:
"1. Homestake Mining from 1930 to 1935 had a dividend increase of $7.00 to $56.00 (annualized).
"2. It appears we are in circumstances similar to 1979 or 1986/1987. I think it's a '79 rerun now. If so, gold should move from 385 to 503 by 11-1-2004, and 873 by January-MINIMUM. If Bush loses the election due to a fall crash, which I expect, Kerry is elected, and the markets get much worse. Not because of Kerry but due to unsettled conditions.
"3. The 30 year, Dec. monthly, and current weekly gold charts all have
definitive cup and handle formations which precede major rallies. We're in the handle now with one more gold sell off before the August rally.
"4. Treasury Bond market has priced in 35 basis points of increase. I do not expect a rate increase at the June fed meeting. They are too scared. The markets, however, are TRADING TODAY WITH 35 BASIS INCREASE IN THE TRADE. I expect no increase until fall at the earliest, and probably not until next year.
"5. The juniors (metals) averaged 395% increase in 120 days during the August-November rally of 1979-1980.
"6. I expect GG to be big runner this fall due to no debt, stated increase in 'mine and hold' gold, second shaft coming on line to double production, big cash horde, major investments in several top notch juniors which help propel GG upward. January calls at 12.50 strike are $1.35. Minimum goal is $18.00, which after costs should return 400%. I see GG stock at $132.00 per share by 2007, based upon Fibonacci and Elliott wave projections. Their projected 2004 dividend is $.28 per share. Forecast out, comparative to Homestake in the 1930s, GG dividends should be at about $2.24 per share.
" 7. The big stock markets continue to look sick and the geopolitical
situation continues to worsen. I believe the next messes will be Saudi
Arabia and Iran who announced today they intend to be a nuclear power on their own. Further, Syria is holding all of Saddam's nasty stuff, which was reported as trucked off before and during the war. Conceivably, we could be in conflict with all four or more of these countries.
"8. Oil reserves have peaked, and Canada's energy resources will peak in 2006, as just reported. I expect natural gas to double or triple by 2007 and crude oil to be between $55 and $70 per barrel. Soon we'll see $5.00-a-gallon gas in the USA. These costs will destroy the American airlines industry.
"9. Car sales are dropping, as is real estate, which is headed down the
slide.
"10. Bankruptcies are skyrocketing, and real unemployment rate is between 9-15% and worsening.
"11. Previously, I had a difficult time projecting gold over $1,000, but
now view this as a given and with a package of technical projections, now see gold topping at $2,500 to $3,000 per ounce. $2,500 is my projected number. Others have regularly said $3,000, including Richard Russell.
"12. Projections show ONE MORE GOLD RETREAT OF MAGNITUDE BEFORE THE AUGUST WAVE THREE RALLY BEGINS. I SEE STOCKS HAVING ONE MORE UP RALLY AND THEN 7200 MINIMUM BY OCTOBER; PERHAPS EVEN 6250-5000. ROGER WIEGAND"
June 21, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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