Taylor On The Markets & Gold
Financial Markets
In the early days following the elections, the U.S. equity markets appear
to be quite happy with the Bush victory. But foreign interests may not be
so pleased. We have seen a sharp sell-off in the dollar, and interests
rates on longer duration U.S. Treasuries have begun to rise. A pro-equity
market posture by the Bush Administration may provide the basis for
short-term euphoria. But to the extent foreigners may be tired of sending
their savings to America for us to simply consume as opposed to generating
income with which to service that debt, the weakness in the bond and dollar
markets may not be good signs for Americans and for the Bush Administration.
There are "good" reasons for interest rates to rise and there are "bad"
reasons for them to rise. A good reason for interest rates to rise would be
a rising and strong economy where productive users of capital compete for
limited savings and thereby send interest rates higher. A bad reason for
rates to rise would be the curtailment of foreign capital into the U.S.
because of a lack of opportunity to generate competitive returns compared
to elsewhere around the globe. And given our lack of savings, continued
support from foreigners is essential to keeping the U.S. economy from going
off track. In fact, a lack of investment spending by American companies,
who have been building up cash and/or paying down debt at a clip not seen
in 35 years, combined with a massive sale of insider stock suggests
economic opportunities for investment of plant and equipment in America may be in sharp decline.
Also confirming that view are reports that most of the foreign capital
coming into the U.S. is from central banks that tend to act politically
rather than in response to market signals. For example, it is no secret the
Japanese have been printing their own currency and then using that to buy
U.S. Treasuries in order to keep the yen from rising as rapidly as it
otherwise would. But alas, a time will come when foreign governments will
also stop sending money to the U.S. as the currency and/or rates rise
dramatically, thus sending the value of their treasuries lower. And as
discussed below there may some offensive as well as defensive reasons for
central banks to back away from the dollar and other currencies as well as
gold, even by central banks. Indeed there are good indications that central
banks are slowly starting to see the need to include more gold as a reserve
holding.
In our interview with Marshall Auerback that was published in our November
monthly issue, we were told that the folks at David Tice & Associates are
watching the equity markets and the real estate markets, but especially the
real estate markets for evidence of a tipping point from an inflationary
environment to a deflationary environment. Certainly we think a decline in
housing is likely to be key, but leading to a housing decline is likely to
be rising interest rates so we will be watching U.S. interest rates very
carefully. Also, some other key markets in addition to housing and stocks
we want to watch are copper (because it is a great indicator of global
economic demand), the dollar with a view of what impact a declining dollar
may have on interest rates, and also the Global U.S. Dollar Liquidity
statistic that we watch and chart every week. At present with that measure
of printing press money continuing to grow at a rate of nearly 20% per
year, and with the U.S. housing market seeming strong, inflation (not
deflation) is clearly still dominant.
Regarding the 30-year U.S. Treasury Bond, on the daily chart shown on the
next page, we see it has declined below an uptrend line that dates back to
June of this year. Could this be a start of a major increase in interest
rates and a secular bear market in Treasuries? Its too early to say. In
fact, a glance at the monthly chart of the Long Bond dating all the way
back to the start of the bond bull market suggests the bond bull is still
very much alive.
Although the bond bull market may still be alive, the continued weakness in
the dollar and surging strength in gold suggests foreigners may be getting
their fill of the dollar not to mention our war driven foreign policies.
The dollar has fallen rather decisively below its support just under $0.85
while gold has risen decisively above resistance of just under $430/oz. How
much longer can these trends continue without U.S. bond and equity markets
coming unglued?
Mad as Hell, They Won't Take It Anymore!
One of the most egregious acts by American leaders since World War II in my view has been the abuse of our position as the world leader: robbing
people around the world by way of our currency debasement. Only the United States could get away with unilateral currency default in 1971, when in August of that year, Richard Nixon announced that the U.S. would default on its obligation under Bretton Woods to pay one ounce of gold for every $35 of paper U.S. dollars that were presented to our central bank by foreign holders. Through this default, Nixon paved the way for a massive banking and military abuse that has effectively stolen wealth from foreigners and put it into the hands of America, in particular, our bankers and large corporate interests. Politicians, too, have benefited from this arrangement because given the ease of money creation through the printing press, they have been able to fund their re-election campaigns very easily, thus creating the unholy alliance between wealthy American special interest
groups and American legislation, which has also enabled special corporate
bigwigs to gain special positions in markets overseas.
Not surprisingly, the rest of the world is getting mad as hell about the
abusive use of American printing press money in a system that it set up
after World War II. This system allows America to print trillions of
dollars of paper money and then use it to buy up the world, and wage war.
Certainly if President Eisenhower were alive, he would have been one of the
leaders against this dishonest and irresponsible geopolitical and financial
behavior. Eisenhower cared about gold. In fact he was the last President
that seemed to revere the yellow metal as a national treasure, evidenced by
the fact that he was the last President to order an audit of our national
horde. Eisenhower also preached against irresponsible fiscal behavior and
about how fiscal immorality, not foreign military threats, was most often
responsible for the destruction of nations and their governments.
Unfortunately, we have not had many, if any, high level statesmen in our
Executive Branch since Ike. Lacking Presidents of Ike's stature, Americans
have been lulled into not caring about gold by the Keynesian and monetarist
lies that tell us we can live high on the hog and never need to pay for it,
both on the domestic and international front. But that is a lie. And it is
catching up with America.
By behaving in this manner, our ruling elite have become richer and
politically more powerful. But through this abuse of power and privilege,
America has set the stage for its own demise. We are addicted to foreign
credit to the extent that we are doomed financially. It isn't a matter of
if but when the day of reckoning will arrive. Marshall Auerback talked
about a tipping point in the U.S. economy from inflation to deflation, and
he pointed to the housing markets and stock markets as something we should
keep our eyes on as a possible indication of impending deflation.
Powerful Bull Market in Gold Continues
We may not be happy about the performance of our gold stocks, but
increasingly, powerful international interests are buying the bullion
despite huge short positions by the dollar-printing institutions that have
profited most by our post-1971 dishonest money regime. The chart on the
left tells the story. The average gold price so far in November is at
$430.62, which is substantially above the 20-month average of $388.20 and
the 30-month average of $348.50. Looking at longer term charts $500 gold is the next major resistance level. Will we see it by December 2004 as Roger Wiegand previously suggested? Frankly it really doesn't matter as long as we are right about the primary trends for the various markets we follow.
However, so far, the gold shares are not performing nearly as well as gold
bullion. As you can see from the following chart and the gold chart above,
gold shares as measured by the XAU index have failed to match their January highs. Stocks did reach a top in January when gold reached a top, but failed to do so in April when bullion matched its January high. What is
going on here?
I have a hunch this disconnect is because most Americans still believe the
tooth fairy will deliver surging stock market profits. With the equity
markets showing post election strength coupled with the recent experience
of most investors, the belief in equities remains quite strong. It is hard
to put to rest the indoctrination of the major media that in the long term
you can't go wrong with stocks, since most folks still recall very vividly
the 18+ year bull market in equities that ended in 2000.
Weak hands from momentum players briefly entered the gold stock sector
which in my view is what sent gold shares to higher levels early this year.
When the next leg of the bear market stocks hits, I expect we are going to
see money pouring into the junior gold sector. That should take the junior
gold shares to and eventually beyond levels that will be most surprising,
even long term gold bugs like myself. The good news is that as the rest of
the world becomes increasingly and understandably uneasy about their dollar
holdings, wealth will move into gold bullion, which provides a stronger
fundamental case for owning the shares. That 99.9% of Americans are unaware
of the potential gold share profits is fine with me because it means we
have more time to find some real gems like our new buy recommendation this
week.
*********************
TRADER ROG'S CORNER
NEW SUPPORT, RESISTANCE ON KEY CHARTS
Our main market driver, the United States dollar, broke support at .85 and
continued lower. Its breakdown is continuing this week and expectations
indicate we should firm up slowly as we sink to .80, where we finally stop.
The dollar is expected to slide much lower than .80, but first it will have
to touch .80, chop and rest for awhile, then reverse and head back for .85.
Central banks worldwide are selling dollars, while some of them are still
trying to support them for trading reasons. Our massive debts and trade
imbalances have messed with fiscal global equilibrium to the extent an even
keel will not be seen again for a good long while. Eventually, this dollar
wreckage should drift into the .70s and possibly even lower. This,
thankfully, should take years to resolve. We can manage the bad stuff if
radical market moves can somehow be avoided.
Naturally, gold's reaction was to rally. Precious metals lovers were
smiling broadly, as gold rose and the dollar fell. On late Monday,
11-8-2004, gold broke through a 16-year high and moved a little more on
Tuesday, the 9th. Today, gold is in purgatory, not rising, not sinking, as
it's balanced on the tipping point of $434-435 resistance and support. This
is where we now separate the men from the boys. The boys will run scared
and sell out of positions, and the men will buy more, keep stops tight, and
watch it like a hawk. A critical and noteworthy event today saw gold rise a
little while the dollar also rose a little. This is not supposed to happen.
Gold is shaking itself loose from dollar effects and attempting to cut its
own path. If you think about it, this should happen if gold is going to
rally and make some huge moves. It cannot be dollar tied and make $502,
which is our next big goal. With a Federal Reserve interest rate increase
of ¼ point on Wednesday, a holiday on Thursday, and contract rollover dates
hitting some trading products, this week is about done for any serious
market action. Gold should now move on to $440-450 resistance. While the
Dow Jones Industrial Average is not affecting gold as much any more, its
topping action is showing us preparation for a down leg, which some will
perceive as a helper for gold. The psychology of this helps gold somewhat,
but other stronger factors are the real drivers for the precious metals
rally.
The Dow, S&P, and Nasdaq are all showing prominent topping and preparation
for a sell-off. This indicator, in my opinion, is not the final move into a
big slide, but a smaller down move to be followed by a small recovery,
choppiness and then the bigger wave down to 8450-8400, followed by a larger down leg next spring or fall to 7,000 and 6,000 Dow. Some would say this is a crash, but I view it as a long, tortured adjustment headed to the bottom. We do not need, nor should we wish for, a smash like 1987, when the entire game nearly went into the drain. Slower is better. We can manage slower.
November 13, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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