Taylor On The Markets, US$ & Gold
Jay Taylor
Financial Markets
"Let us be blunt about it. The US is now on the comfortable path to ruin.
It is being driven along a road of ever rising deficits and debt, both
external and fiscal, that risk destroying the country's credit and the
global role of its currency. It is also, not coincidentally, likely to
generate an unmanageable increase in US protectionism. Worse, the longer
the process continues, the bigger the ultimate shock to the dollar and
levels of domestic real spending will have to be. Unless trends change, 10
years from now the US will have fiscal debt and external liabilities that
are both over 100% of GDP. It will have lost control over its economic fate.
"What cannot last will not do so, as the late Herb Stein famously remarked.
But we can choose how it changes. The US Authorities can allow things to
take their course or they can develop a policy to reverse these trends. The
essence of the needed changes is quite clear: a further substantial
devaluation of the dollar, together with a sizeable rise in domestic
demand, relative to potential output, in almost all other important
economies of the world. Politicians wait until crises hit. Statesmen
foresee and then act to prevent them. What is the chance of such an
economic statesman emerging after the election? Almost none, I fear."
Those words may sound like something yours truly might write in this letter. But those words are not from a small time newsletter writer; rather, they were published in an editorial written by Martin Wolf in the August 18 edition of the Financial Times. From what I know of Martin Wolf, he is a Keynesian so I don't expect we agree with what should be done about this mess we are in. What really must be done is for the world to return to an honest monetary system rather than having global fiat money that is used
to manipulate markets and finance wars according the whims and wishes of
the prevailing super power, which for the moment is still the U.S.
Wolf's remarks are stunning to mainstream folks who watch CNBC for the bulk of their financial "wisdom." But when one takes a longer-term view of what is transpiring in the world, it is so obvious. He concludes that the U.S.
must start consuming domestically produced products and export more. That
is obvious if we want to reverse our huge trade imbalances. But what Wolf
doesn't address is that the self-correcting mechanism of free markets has
been done away with by our floating rate international fiat currency system. With the current system rather than a commodity based monetary system (ideally gold and silver), politics and geopolitical considerations rather than market dynamics hinder a return to equilibrium. Wolf would have governments impose increasing intervention in markets rather than to have
governments reduce their intervention to give markets a chance to
self-correct. In other words, given his Keynesian indoctrination, Wolf has to depend on politicians to fix market imbalances. Have we forgotten everything Adam Smith taught? Even if the politicians had the wisdom to fix
the problems (which they demonstrably do not), they would always have
political pressures imposed on them to enact policies that avoid exactly
the kind of economic pain required to restore equilibrium.
So what we are left with are short-term solutions that make the longer-term problem worse and worse, until the day that the system reaches its limits. Roger Wiegand believes he sees some early cracks in the global financial system that suggests those limits may now have been reached. As noted in Trader Rog's Corner, two markets in particular suggest to Roger that we may be on the verge of some major changes in the international markets, including:
- Rising interest rates in a continued weak economy that are likely to lead
to a housing bust and an increasing economic malaise especially in America
- Sharply lower equity prices
- Sharply lower dollar
- Sharply rising gold and silver prices
- Sharply higher commodity prices, at least for a time
These are exactly the conditions we have long believed are heading our way
and for which we have created our Model Portfolios. If Roger is right about
a major sea change now taking place, our Model Portfolio should resume its
long-term positive performance that started in 2000. Until this year, our
Model Portfolio has outperformed the S&P by a long shot. However, what we
believe is a secular multi-year bear market in stocks and a secular
multi-year bull market in gold has been corrected. That has resulted in our
Model Portfolio losing 7.1% so far this year, compared to a loss of 1.22%
for the S&P 500.
Gold, Silver, and Oil: Hitting Peaks and Limits
Last week precious metals provided the beginning of strength for our
expected fall rally. Most interesting of all was the recoupling of gold
to the U.S. dollar Friday, as they both rallied in tandem. Previously,
trading has been inverse, showing us opposites with great precision.
I see two things here: gold may be beginning to act as a currency itself, and the U.S. dollar may be nearing its near-term intermediate bottom. While I expect the dollar to bottom at 80 eventually, we will see another small dollar rally before it gets there, and gold may not pay any attention at all and just continue its climb to December $502.
Based on several charts, I expect this to happen next week. If gold does
not come back and goes into a choppy sideways market, this means it's
coiling for the next big rally, and might rise even faster. Remember, the
longer the sideways move, the bigger the up move when it arrives.
Friday's silver move compared to gold's was mild. Silver seems stuck at
$6.85 resistance, and while it did not rally like gold did Friday, it has
seen the limits of this leg up and should chop or sell off with gold next
week.
Oil has been a big story this past week, setting new highs and scaring some
traders as well as the politicians. Checking the charts, however, oil closed at $46.72, selling back 0.92 for the day. Oil's range was $48.37 high and $46.60 low. With the close near the low range, I believe the magic $50 price point should prove formidable resistance to higher prices for the near term. Later on, however, I still expect oil to close between $55-$70, which is the inflation-adjusted range of oil compared to the 1973 oil spike. This seems hard to accept for now, but I believe those prices are coming this fall.
To summarize the past week and forecast next week: We are on target for $502 December gold. This past week was one more positive step to our goal. This week, expect profit taking or choppy intermediate action. Silver will chop or sell off, and oil is expected to do the same. Geopolitical factors can
change this outcome, and so could something very negative and unexpected in
the larger economic reports. Personally, I do not expect much in the way of
any more market action until after the Republican Convention, scheduled to
begin August 29.
If you want to position yourself for gold stocks or gold futures options, a
little breather this week may provide the opportunity. If you are holding
gold and silver stocks and waiting for the big fall rally, hang on now and
do not sell anything. Patience is the path to profits. Very soon this is
really going to be fun. -Trader Rog
August 22, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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