Taylor On The Markets & Gold
Jay Taylor
Financial Markets
Although stocks rallied last week after multiple week losses, the topping pattern that we have been talking about remains clear. Big money is coming out of markets while the establishment tries to convince investors to keep shoveling their hard-earned money into 401-K plans. It should be noted that
the failure of stocks to take out the old highs has come in the midst of an
enormously expansive monetary and fiscal policy. I believe these equity
markets are suggesting big problems are on the way for the U.S. economy and corporate earnings. There should not be any great surprise there because America is most certainly in decline vis-à-vis the rest of the world.
High paying jobs are giving way to much lower paying jobs. Energy costs are
rising dramatically and the possibility of a regime change in Saudi Arabia
that would be hostile to the U.S. and the Western world would, in general,
seem to be a real possibility. The fall of the current Saudi government
could be devastating to the U.S. economy, in my view. Bill Powers, for one,
who knows the energy markets far better than I, believes oil prices are
headed for over $100 per barrel. If $40-oil is hurting Wal-Mart sales by
taking disposable income out of the pockets of consumers, what will
$100-oil do? What will rising natural-gas bills do to consumable income?
Consider the lower wages, rising energy and food costs, and rising debt service requirements-thanks to the huge and growing indebtedness on the part of consumers who have been encouraged by government policy to live
beyond their means, not to mention longer-term problems of an aging
population that no longer pays into the U.S. Treasury but takes out for
retirement-and I think it should be clear why the U.S. economy is in
trouble. The only question is when will a major liquidity crunch usher in
the Kondratieff winter and a deflationary collapse of our financial system.
Rising Interest Rates Could Provide the "Tipping" Point
Clearly, interest rates are topping in the U.S., which makes me wonder if
rates are rising for good or bad reasons. A good reason for interest rates
to rise is a strong economy that is bidding for limited capital. A bad
reason would be if foreigners begin withdrawing capital or at least if they
stop investing as much in America as they had been investing. The U.S.
requires something between $1.5 billion and $2.0 billion in foreign capital
infusion today to keep the American credit junkie from withdrawal pains.
Then I read on page C1 in the "Wall Street Journal" on Monday, July 26,
2004, that "Foreigners Seem to Be Souring on U.S. Assets."
America has been able to live beyond its means for a long time, thanks to
the "kindness of strangers." We have all known that that kindness would
have limits. It may be too early to tell if that kindness is beginning to
wane, but if it is, this could be the start of the Kondratieff winter and
the debt repudiation process.
$43-Oil and Rising. Is This Inflationary or Deflationary?
Nobody is talking much about it, but oil is defying all the establishment
experts. Our friend Bill Powers has had it right, and Jimmy Rogers, too,
has been saying all along that oil and natural gas would rise and rise
dramatically in the years to come. Higher oil prices are defying all the
experts. Could it be something big is about to happen that is being
factored into rising oil prices? A regime change in Saudi Arabia? God
forbid, a terrorist attack?
Dollar Short Squeeze
The fact that oil is paid for internationally with dollars of course
increases the demand for dollars. Could that be one reason the dollar has
been as strong as it has been of late? Deflationist Bob Hoye is predicting
a stronger dollar as the debt repudiation process begins. And I think
Richard Russell's discussion of the possibility of a "synthetic dollar
short squeeze" could very well play into this dynamic. In fact, it was this
fear that prompted us to lighten up on our Prudent Global Income Fund
(PSAFX) and allocate 10% of our portfolio to the U.S. Treasury Cash Fund
(USTXX).
Here is what Richard Russell had to say on July 28 about the dollar's
surprising strength.
"Here's another story I'm watching carefully. It's the story of the
surprisingly strong dollar. And it's the move that nobody expected.
Furthermore, nobody seems to know what it means. I've been writing that the
current massive US debt represents a "synthetic short" against the dollar.
To explain -- debt must be financed, and in the US you finance or pay off
your debts with dollars. Currently, it's estimated that the US is loaded
with $32 trillion of debt, and all this debt must be paid off or financed
with dollars. "There's so much debt "out there" that there's a need for a
huge amount of dollars to carry that debt. Thus my concept of the debt
mountain being a "synthetic short" against the dollar. If the stock market
decline continues, it's going to affect business adversely (to put it
mildly), and the need for dollars will become even more acute. An
interesting and potentially dangerous situation, any way you look at it.
"I've included below a daily chart of the Dollar Index. The action has the
look of a short squeeze. On January 16 the Sept. Dollar Index closed at a
peak of 90.42. As I write this morning, the Sept. Dollar Index is trading
at 90.23. Anything above 90.42 would represent an important breakout.
Note
that yesterday the Dollar Index closed above both its 50-day and 200-day
moving averages.
Seasonal Gold Chart
Gold has its seasons, just as the grains and other stocks, bonds, and
currencies.
Recent gold enthusiasts have been disappointed with our current profit
taking, but our seasonal gold chart shows we are soon headed into the big
upswing rally of the year. I have identified six regular trading swings for
gold on the 30-year seasonal gold chart showing time through 1973-2003. Our best one begins next month in August.
Today, July 30, 2004, ended with gold on the move, to its best rally in
three weeks. It has stopped around $393.50, my favorite support for the
December 2004 contract. Check our seasonal gold chart and you will see two
indicators: one showing the 30-year average, and the dotted line showing
the 15-year average. When evaluating this chart, it is best to skew your
reading toward the 15-year, which will probably most replicate what we can
expect for 2004.
We have been hovering in the 388-408 range since June, and according to our seasonal chart, you can expect more of the same for August, as gold
completes its "C" wave down to 380-393.50 support on the weekly chart. The
daily chart has almost completed its "C" wave down, slightly ahead of the
weekly. Traders and investors who try to market time gold in August are
going to have difficulty if the seasonal chart's choppy action is duplicated again. I expect that it will, as we are receiving overriding similar action from the Dow, Nasdaq, and T-Bonds. August is just a rough, tough "nowhere" month. The "August Futures" magazine cover says, "Stock Market Smackdown," but then offers arguments both ways on the inside story. This coming month is a very good one to do nothing. Just watch.
Now look at the end of August where we see chart bottoms for both the 30-
and 15-year gold action. This bottom is usually the third or fourth week of
August. Do not attempt to "market time" the rally beginning, as we have
other factors like geopolitical problems and the election thrown over these
dates. Look to position your investments in gold stocks and gold options in
the coming week, and expect to exit stocks the last week of September or
the first week of October, depending upon news events and market action.
Options will allow you to wait a little longer, if necessary.
We expect $502 gold by December 1, 2004. December Gold futures options
expire around the middle of November. You must be out of the December
options by 11-1-2004 or earlier. Chart action will show us the gold stocks'
exit points expected in the first week of October. If Dow and Nasdaq stocks have crashed in September, you will need to consider exiting your gold stocks sooner in October. If the big stock markets levitate and hang on
into October, you do the same with your gold stocks. You can never market
time perfectly, nor should you try. "Ranges of Ten Days" should be watched
for expectations based upon prior events. If something bad happens, gold
will moonshot, and you must plan to exit your positions before the top is
reached, or you may not be able to get out at your best price points.
If your favorite gold stock is $12.00 at the bottom base in late August,
and gold goes from $393.50 to $502.3, you could expect your stock to
register a gain percentage of three times the value of the bullion increase, yielding a nice return. Using my proprietary formulas, it is possible for gold, in this huge wave three, to rally to $748. I do not expect this, but under certain conditions it might. Should this happen, your gold stocks would increase proportionally. If you held a nice package of December gold stock call options with near "in the money positions," the return would be immense. Above all, take you profits when you get them. Do not give them back.
Trader Rog
August 1, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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