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.

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