Taylor On The Markets & Gold
Jay TaylorFinancial Markets
Oil Up & Bonds Up. What Gives? Inflation Leads to Deflationary Pressures
Of course we realize that you can't draw any concrete conclusions from
brief day-to-day movements, but since the equity markets are a
forward-looking mechanism, you have to think it is discounting at least a
short-term pull back in energy prices.
I'm even ready to concede that Jim Rogers may be right and that we may be
only on the first leg of a major, major bull market in commodities. I think
this is very possible if a cataclysmic global deflation along the lines of what Ian Gordon talks about is avoided, and if China and India continue their rapid growth. And we are certainly seeing some dramatic action in the energy sector. There are longer-term geological concerns about the ability to supply growing demand and there are more immediate prospects. That is why Bill Powers is so convinced we will see oil north of $100 in the not-too-distant future.
But all these movements have limits. Not only do higher energy prices strip
consumers of their disposable income, but dramatically rising debt service
requirements also are pinching consumers. Because Americans have borrowed to live high today, they will sacrifice their standard of living in the future. A read of Peter G. Peterson's book, "Running on Empty," will clearly display for you the handwriting that is on the wall for us Americans. Clearly we are a nation rapidly hurdling toward bankruptcy. What happens to demand for oil and gas when the $2 billion per working day of foreign capital comes into the U.S. and when interest rates begin their ascension toward double digit? What happens when declining incomes for Americans no longer enable them to pay their gigantic mortgages and when the housing market tanks as a result? What happens to the price of commodities then?
To the extent China and India and other emerging economies are not affected by America's bankruptcy, I suppose those commodities may remain strong for quite a while. Jim Rogers may indeed then be right. But if he is right, then it will be all the more painful for Americans as the cost of living
skyrockets while incomes continue to shift away from Americans and toward the Chinese, even as costs for Americans are skyrocketing. Will the Fed then be able to print money to try to overcome this loss of wealth? Of
course not! Wealth cannot be created from the printing press. The more
units of currency the Fed and the banking system create out of thin air, the more prices and debt-servicing requirements will outstrip income! To print money will be an exercise of futility and will result in more and more impoverishment for Americans as they continue to spend rather than save for the future.
I find it interesting to note that the weak jobs report that came out on
Friday and which really roiled the markets (see Trader Rog's Corner below)
was, according to Warren Pollock, not due to a slowdown in oil prices but a
cutback in real estate and financing related to the real estate slowdown,
though oil was to blame according to the media. Which leads me to wonder, are we nearing an end of the real estate bubble? Certainly, consumer stocks
seem to suggest we may be nearing an end of consumer excesses which has
kept the U.S. economy from falling off a cliff, starting in 2000. But the
question of a housing slowdown is more than an academic question to Mrs.
Taylor and me. We sold our house two years ago and began renting it from
the new owner ever since. The prices have risen dramatically, so as usual,
your editor's timing was way off. But I sense a sort of manic mood out here
in the Queens, New York market that feels like a top. I hope it is because
given our unwillingness to take on a big mortgage, we may soon be priced
out of this bubble market.
If I could accept the premise that commodity inflation is here to stay and
that the limits of the inflation play are 10 or 20 years away, I would be
aggressively buying energy stocks and other commodities. I understand the
bullish arguments for inflation. But I also believe the bubble limits may
be much closer than folks like Jim Rogers think.
Sure, the establishment can continue (and probably is continuing) to dishoard gold to keep gold from rising dramatically and causing investors to flee from paper into real money. But there are real signs that day is quickly drawing to a close. Gold has not risen from its $255 low because politicians have wished it to, but rather because in spite of their desire to see gold trade at the same price of copper (the Johnson Administration), market forces are demanding a higher price. China is encouraging its people to own gold. Vietnam has said they will sell dollars and buy gold as a monetary reserve. (Let's see if the IMF doesn't stop or hasn't stopped that.) At some point, the attempt to hold gold down (and thus keep people confident in paper money) will be akin to the little Dutch boy holding back the ocean by keeping his finger plugged into the dike.
Inflation to Deflation Transition Period?
Some folks, including Bob Hoye, think we are at a transition point between
inflation and deflation and that is why the gold stocks are not performing
well. On top of that of course, gold is a manipulated metal given the still
large supply in central bank coffers. But the very fact that gold has never
been allowed to meet its market equilibrium (which Frank Veneroso
calculated to be north of $600 back in 1998) suggests to me that
deflationary pressures on gold, unlike commodities should be quite limited.
We know from history that gold is money. As such, it performs well (retains value) during inflationary periods of time and during deflationary periods. When the cost of living rises, gold rises along with it over time. Even when politicians try to suppress the gold price (as they have throughout history), eventually it busts loose from the tyrannical control of oppressive governments. During deflation, people opt for gold over fiat money because
the fiat money system, being a liability system, will implode. On a very small scale, we recently saw how gold responds positively to deflation in Japan. The Japanese have always guaranteed 100% of deposited money in their banking system. This practice led to very irresponsible banking practices, which were part of the inflationary equity and real estate bubble markets in Japan during the 1980s. After the collapse and failure of the economy to respond to monetary and fiscal policies, it began to dawn on the Japanese leaders that they needed to put some risk into the equation for the lenders by reducing the guarantee of safety for depositors. In theory, if depositor money was safe, banks would be threatened by possible withdrawal of savings and thus would become sharper and more astute lenders and some of the structural problems that have plagued Japan would be resolved.
So what happened when the Japanese announced a policy to reduce depositor insurance? The Japanese people suddenly began to take their yen out of the bank, and they began to buy gold! Realizing that they could lose control over the lives of the Japanese people, the authorities quickly reneged on this reform that of course would have been better, longer term, for the Japanese people. So rather than face this reality of the market, the Japanese, just like every other nation these days, continues to try to fool Mother Nature and the electorate into sticking with the status quo.
My December weekly gold chart has formed a perfect a, b, c corrective wave after its earlier double top we last reported. Further, this dandy little chart shows a nice little leg up to $402.1 on December futures and looks like maybe a wave one of our predicted five-wave fall rally. I said maybe, folks. It's still too early to be certain but that sure was a cute little pop for the gold buyers today. Our weekly gold chart, shown below, portends of the gold rally as well, after first forming a "continuing pattern" and trying to demonstrate the wave on blip at the end. (You can see the wave one uptick more clearly on my Future Source Gold Weekly Chart. Note: While the gold front month is not December yet, this is one you want to use for your gold futures evaluations through the fall period and from now on.) Yesterday's December gold futures open interest was 145,474 contracts. The August gold futures contract closed at $399.80, up $7.50, and the August silver was up 0.27 to $6.676. All in all, a good week for us PM folks.
August 7, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
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