Taylor On The Markets & Gold
Jay Taylor
Financial Markets
Your editor has always been a big-picture, fundamental analyst. As such, I
try to ignore the noise we get in the daily news and market action. But there is also a need to see things from a shorter-term perspective and to also read the language of the markets by way of technical analysis, which is why we have brought "Trader Rog" into our commentary to provide a shorter-term (2 to 4 month) perspective within the longer-term primary trends of the markets we feature in our Model Portfolio.
Roger and I are largely in agreement with the longer term so we can work well together. Roger's technical analysis is still calling for $502 gold by December. Given his views, plus general strength in gold and especially the gold shares, we feel now is an especially good time to add to your gold share portfolios. Then perhaps around the end of the year, it may be time to take some profits and build up our cash positions to prepare for the next leg up in the gold and gold share markets.
Shorter Term Trading Strategies
Trader Rog will continue to write a weekly column known as "Trader Rog's
Corner." The purpose of this column will be to provide a shorter-term
technical perspective on most of the markets we cover in our Model
Portfolio, while your editor will continue to focus on longer-term fundamentals.
But now, for a limited period of time (several more weeks), we are also
including in this weekly message, "Trader Tracks," which provides specific
buy and sell recommendations for traders. This service is provided toward
the end of this message and will be continued over the next several weeks
in order to allow our regular subscribers to see what this service will provide. Trader Tracks will provide "flash" e-mail messages whenever a buy
or sell signal is reached by Trader Rog. This will be a separate service
outside of J Taylor's Gold & Technology Stocks subscription service. It
will be a premium service and will be priced accordingly. We will discuss
more about pricing over the next few weeks.
The important thing to keep in mind is that Roger will continue to provide
shorter-term strategies within our Model Portfolio for those who wish to
take advantage of them, whether or not you choose to take advantage of
Trader Tracks, our premium service.
Stephen Roach and The Big Picture
Excluding Richard Russell, the one person I try to read whenever he provides public information is Stephen Roach. Why? Because Roach is one of the few mainstream economists who thinks outside the box within which an increasingly fascist America forces its corporate elite to live within. For
whatever reason, Roach appears to be free to speak objectively and to see
the markets in ways that are not always politically correct in order for his employer, Morgan Stanley, to sell their products. That is very unusual and we are not the only ones to wonder how he is able to speak so candidly about the growing major problems that the world economy is facing.
In his September 27 essay titled, "Collision Course," Roach explained why the day of reckoning for America and its irresponsible economic actions
might not be far off now. In bullet point form, let me see if I can
summarize in a very simplified manner what Roach said in that essay.
- The global economy is driven by: (1) the American consumer living beyond
his means, taking on enormous levels of debt, and (2) Chinese-manufactured
products which are being exported to the U.S. This trade surplus earned by
China is then used to finance still more borrowing by the United States,
which in turn is used to buy more and more Chinese goods.
- U.S. current account deficits are now reaching levels that have
historically been problematic when they hit a record 5.7% of the second
quarter of this year. The surpluses earned by China and other countries
(most notably Japan) are then lent back into the U.S., which is enabling
the U.S. consumer to continue living beyond his means. In fact, the U.S. is
now consuming approximately 80% of the world's excess savings, even though it has an economy equal to only about 30% of the world's GDP. In fact, America's net internal indebtedness (debt owed to the rest of the world) could approach 28% of GDP by the end of this year.
- Most problematic and fundamental to our pathological situation is the fact that most of the capital that is being imported now into the U.S. is not being used to finance productive capacity, which will not generate future income in the U.S. and thus not generate wealth from which to repay mounts of indebtedness that is leading Americans into impoverishment. And so, what we are now seeing is lending into the U.S. from foreign central banks for the purchase of U.S. Treasuries and not into direct investment into companies and projects and into U.S. equities by the foreign private sector.
- This is increasingly true simply because there are fewer and fewer good
investment opportunities in the U.S. Accordingly, most of the capital now
flowing into the U.S. is coming here for political reasons rather than
economic ones. The Japanese and Chinese want to keep their currencies weak so they can continue to grow their economies by exporting to an already over-indebted U.S. consumer. Accordingly, more capital by far is being sent into the U.S. by central banks (most notably China and Japan) than by private sector foreign investors.
- Conventional wisdom, or what Roach calls the "New Paradigm crowd,"
believes the current order is a perpetual motion machine appropriate for
the New World Order. They argue that China and Japan have to keep funding America so American consumers will keep buying their products. It is simply in their best interest to continue lending to America, so we can count on this process of Americans getting a free ride to last forever. But Roach suggests this argument is flawed, at least in part by changes taking place in China. Most notably, Roach is concerned about the reluctance of the
Chinese to slow their economy with interest-rate rises. As true communists,
they are allocating credit politically rather than allowing the market to
do the work. Roach states that "by freezing currency rates and interest
rates, China is, in effect, forcing its own imbalances to be vented in
increasingly dangerous ways." Roach sees the likelihood of some or all of
the following policies taking place in the near future that will likely derail the increasingly perilous financial imbalances of over-consumption in the U.S. and over production in Asia:
- Growing risk of politically-inspired protectionism as U.S. jobs continue to be lost from the imbalances caused by a failure of politicians to allow markets to adjust to equilibrium.
- Chinese inflation is on the rise as a result of the government's refusal to allow higher interest rates to allocate credit and by continuing to rig its currency at artificially low rates. Eventually remedies for rising inflation could burst the Chinese economic bubbles that are growing especially in the large cities and that could then result in a loss of capital flows from China and Japan into the U.S., which in turn could tank the U.S. bond markets and thus the U.S. bubble.
- Europe is being asked to share more of the burden to correct an
overvalued U.S. dollar than it would if the Asians allowed their currencies
to float. As such, recession in Europe could well result from this unnatural, politically-inspired pressure to allow the euro to appreciate. It was reported in the news since the Roach essay that pressure is being put on the Europeans in the G-7 meetings to allow the euro to rise 20% vs. the dollar. Roach thinks the resulting soft European economy increases the prospects of Europe also pushing for protectionism.
Roach finished his September 27 essay with the following remarks:
In contrast with the claims of the new paradigmers, the stresses and
strains of an unbalanced world are growing worse by the moment. These
imbalances can be sustained only if the major nations of the world all
march to the same beat. With the world's growth dynamic now being
effectively driven by just one consumer -- America -- and just one producer
-- China -- the odds are growing short that such an increasingly tenuous
arrangement can be sustained. China is probably the weakest link in this
chain. That's where I would look first as the potential trigger of the
coming global rebalancing. I now suspect that China will flinch sooner
rather than later.
Sticking With the Primary Trends is Paying Off
It is interesting to note that the Chinese have now been invited to attend
the G-7 meetings that are coming up soon. These are very interesting times
because, as we know, economic realities ultimately win out over politics.
They have to because the world eventually ceases functioning when humanist
policy makers try to defy economic laws. Whether the Chinese will flinch
and allow their currency to rise sooner rather than later, I don't know,
but there will certainly be pressures to push them in that direction from
the U.S. Treasury Secretary.
Perhaps Keynes was the originator of the saying that "markets always do
what they are supposed to do, but not when they are supposed to do them."
We can see clearly, as Roach does, that the global economy as it is now
functioning is on an unsustainable course. Just as certainly as the rumblings at Mt. St. Helens this past week has indicated something bigger is about to take place, we can see that some very basic forces are at work as evidenced by the primary direction of our markets.
- The equity markets remain in a major bear market from their 2000 highs
- The dollar remains in a long-term bear market
- U.S. interest rates are abnormally high for a country that is short of
savings and living beyond its means
- The gold market has begun a major secular bull move that cannot be held
down, even as the gold cartel tries its hardest to do so.
Gold Bull Market Remains In Place
The gold cartel had managed to push gold down very significantly below its
equilibrium. In fact, that was the unspoken cornerstone to the so-called
"Clinton Strong Dollar Policy." The "strong dollar" helped bring in major
amounts of capital into the U.S. during the 1990s, and thus helped start
the huge and growing global financial imbalances that Stephen Roach
constantly talks about. When people ask me why it matters or why I care
that the gold market has been suppressed, or as Lawrence Summers said,
"capped," in addition to my concerns about the economic imbalances that the
rigging of the gold markets caused, my answer is a more practical one. If
the gold markets have been forced far under the equilibrium price, and if
we can gain some sense of where the equilibrium price for gold should be,
then on a fundamental basis we can set a minimal and reasonable upside
target for the price of gold.
The work of Frank Veneroso strongly suggested gold's equilibrium was
somewhere around $600 as early as 1998. James Turk, in looking at the
recent rise in the price of oil, noted that based on the historical relationships between oil and gold, and with oil at $48.80 per barrel, the
price of gold should be around $668 per ounce.
And so, with gold now around $415 as we go to press, I believe the picture
of a secular gold bull market shown above is likely still in its infancy. The chart above displays the average gold price for the month of September
2004 ($405.02), for the 20-month moving average ($389.61), and the 40-month moving average ($340.67). With the price of gold artificially low (thanks to substantial dishording of gold from central banks in an attempt to
mislead people into thinking paper money is better than gold money and to
convince people that Keynesian and monetarist economic theories are better
than classical free market economics), major, major dislocations in the global economies have resulted. Gold would not be rising if the policy makers were able to keep it down, but they are not able to suppress it. Like Mt. St. Helens, we are seeing the first seismic rumblings of some major global economic disruptions, which will end with gold becoming the monetary king, while paper assets will be tossed in the trash bin. This isn't what we hope for because it is likely to result in major political upheaval and a decline in our freedoms and safety. But it is the way we see the world, and thus we are preparing our financial affairs accordingly.
Argentina Buys More Gold - You won't hear about it in the major news media
because their job is to keep you in the dark on basic and important financial news regarding the truth about fiat money vs. gold. The very existence of the current political order requires stupidity and misinformation on the part of most Americans when it comes to monetary issues. So we have seen the refusal of CNBC to discuss gold manipulation issues from GATA and the Blanchard anti-gold manipulation lawsuit, as well as Reginald Howe's anti-gold manipulation lawsuit. You will never hear about countries that buy gold. Only those that sell gold.
The last thing the establishment wants us to think is that buying gold makes good economic sense. And so when Reuters published the fact that Argentina added to their gold reserves this past week-even as they refuse
to pay back dollar obligations to foreign creditors-we think it is very, very noteworthy. I also believe Argentina's purchase of gold may be the first of many more central bank purchases in the years ahead as the Keynesians and monetarists finally learn their lesson-namely, not to meddle in the natural ebb and flow of markets. Though Argentina's holdings of 1.77 million ounces are small, the notion that they would buy gold after their horrendous experience attaching their currency to the dollar suggests that country has learned the hard way about what is and is not sound money.
TRADER ROG'S CORNER
GOLD RALLY BREAKS OPEN ON FALLING DOLLAR
Pressures have been building for a gold rally this week, and it responded
strongly to several market factors. Gold closed the month at $420.20 on
December Futures at 2:00 p.m. on Thursday, 9-30-2004. Precious metals and
copper got help from a falling U.S. dollar, heavy Chinese gold buying, and
falling (or preparing to fall) stock markets in Asia, the United States,
Japan, and Europe.
In my opinion, the dropping dollar was pushed lower on G-7 announcements
that the buck would have to be reduced about 20% to realign trade
imbalances, along with some lesser factors. The bond traders have seen
volatility both ways this week, with the markets acting like they should go
lower, while having other reasons to go higher, or tread water. Now that
some key trends appear to be in place, I expect gold to begin moving in
earnest to our next resistance at $424-425.
The key breakout for gold will be the dollar touching .8533, and continuing
to fall below .8500. There are eight major annual lows of support for the
dollar at .8500 since 1978. When this point is broken, and we close three
times below .8500, there is nothing left below but air until we touch .8031. When the dollar hits .8031 and/or drops below it, gold will be rallying so fast that we will all have to run to catch-up. The U.S. dollar closed at .8752, down -.77, which is a large, one-day move. I think a planned 20% drop from near dollar support at .8800 to .7040 USDX would be a disaster.
October 2, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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