Are We Underestimating the Inflationary Threat?
What really has your editor worried has been a seemingly total lack of response from the bond market to rising rates of inflation and a rapidly declining dollar. For the month of September producer prices rose 1.7% and consumer prices rose 0.6%. Both of those events should have resulted in a major rise in 10-year and 30-year U.S. Treasury rates. But as you can see from the daily chart on the left, the 10-year U.S. Treasuries treated the 1.7% rise in producer prices (which translates into an annual rate of over 20%) as if it were totally benign.
Meantime, the dollar index shown on your left has broken support and now appears destined to test a very long-term support level of 0.80. A collapsing dollar combined with very low interest rates makes you wonder how we can hope that foreigners will continue sending the $1.8 billion per day into the U.S. markets we need to keep living as if we were a financially strong nation.
There are indeed signs that foreign interests are starting to slow down the flow of their savings they send to us so that we can live a life of luxury. My good friend Warren Pollock pointed out to his institutional clients last week that the Japanese clearly stayed away from U.S. Treasuries during the month of September. Warren pointed to official statistics that showed the Japanese steadily increasing their net holdings of U.S. Treasuries each month from January of this year through August. In January 2004, the Japanese held $583.8 billion of U.S. Treasuries, and that figure rose steadily to $721.9 billion in August. Then in September, Japan's holding of Treasuries actually fell from $721.9 billion to $720.4 billion. One month does not establish a trend, and the reduction in holdings as you can see was very minor. But it may point to a change of heart with respect to U.S. dollar holdings on the part of one of our strongest allies.
Then I heard on the radio or TV one morning this past week that the Chinese are making a commitment to Argentina to invest $18 billion to help that country build up its infrastructure. Remarks were also made by the Russians last week that they will no longer support the dollar. When you add up this kind of anecdotal evidence combined with a sharply declining dollar, you start to sense a sea change may be in the process of emerging in the global financial markets. . . . which leads me to the question posed in the heading of this discussion: Are we underestimating the inflation threat?
Clearly something is wrong in the markets. With significantly higher rates of inflation and a crashing dollar, and with signs that foreigners are cooling toward the dollar, interest rates should have risen dramatically last week. Market professionals are at a loss to explain the bond market's lack of response to rising inflation. I believe something fishy as in "market manipulation" is going on here and so, apparently, do many bond traders. As the Wall Street Journal pointed out on Friday (page C4, "Bonds Don't Know When to Quit"), "The one factor, however, that seemed to gain the most traction among traders was a mysterious asset reallocation trade that allegedly pulled money out of European bonds to pump them into the Treasuries. The surge in trading volumes in bond markets on both sides of the Atlantic on Thursday and Wednesday triggered speculation that a hedge fund or a large institutional bond fund was behind the trade, although it was difficult to find someone who actually saw the flows."
This account of what is keeping the U.S. Treasuries from falling out of bed would make sense in light of Warren Pollock's revelation of waning interest for U.S. Treasuries by the Japanese. The U.S. typically uses a handful of major U.S. firms to intervene in the markets to implement policy as we have seen them do in the manipulation of the gold markets, as they reportedly do from time to time to keep the stock market from melting down. If the Japanese are no longer willing to print yen and sell them for dollars with which they buy U.S. Treasuries, then someone else would have to be found to buy U.S. debt. And with concerns in Europe of a too strong euro, perhaps the Europeans are now starting to do what the Bank of Japan had been doing?
The point of concern, however, with this kind of interference in the market is that the natural forces of the market that keep things in balance are not permitted to work. The work of my good friend Bill Murphy, who is responsible for www.gata.org, provides evidence of how the Clinton Administration used gold manipulation to underpin its "Strong Dollar Policy." That strong dollar served to start the ball rolling toward the enormous imbalances that now threaten to bring the global financial system down into an utter chaotic situation that endangers our well-being. But alas, while the current administration talks a strong dollar, it is doing little to hold it up. Perhaps it simply has an insufficient amount of gold left in Ft. Knox to dishoard, to continue the Clinton Strong Dollar policy. No one knows, because our gold has not been audited since Eisenhower.
INSIDER SALES ACCELERATE WITH MARKET RISE
Corporate insiders keep pulling out of stocks while common folks buy. Manipulation of the bond markets? Bonds barely budged on news of 1.7% rise in PPI in one month!
With the stock market's recent rise, we have seen an acceleration of the sale of insider stock by the captains of American industry. During the latest week shown above, $47.40 of insider stock was sold for every $1 that was purchased. This brings the average for the past five weeks up to $37.22 of insider sales for every $1 of insider purchase.
As the healthy part of the American economy dies away at the expense of the parasitic growth of government and the banking sector, we see an even bigger loss of confidence in American industry taking shape. If we take away the financial sector from the latest weekly numbers (which is really a fascist industry partner of our government), the ratio would have been $72.10 of insider sales for every $1 purchased.
Those who rely on the mainstream media for all their news and information would have a hard time realizing what is really going on in the markets because this kind of information is rarely discussed. The idea is to keep the "sheeple," as Roger Wiegand calls all us common folks, sending our money in to the stock market so the privileged few can exit at the top. This has always been the case at market tops. Those who can filter out the noise presented by the mainstream to keep us ignorant will be in a much stronger position to survive and hopefully thrive during the impending hardships of a bankrupt USA.
People are just starting to demand gold which is why these easier methods of owning it are being made available. But as Richard Russell recently pointed out, with more public discussion of gold, we have just begun entering Phase II of the gold bull market. This is the longest phase-the phase in which professional investors just start to become aware of the virtues of gold as an investment. Indeed we are starting to see more discussion of gold on CNBC, and the launching of the ETF will certainly help popularize gold on the part of Americans. But at this point, I doubt that 1% of Americans seriously consider gold as a necessary investment for their portfolios, which is one reason we are still very early in the gold bull market. Ultimately, gold, and especially junior gold shares, will become a mania akin to what took place in the Internet bubble. I witnessed a gold share mania back in the 1970s. When the current bull market in gold turns into the next gold mania, I believe it will make that 1970s mania seem like child's play by comparison. Why so? Because the amount of paper available to run into gold-honest money-is awesome by comparison. In 1980, when the price of gold hit $850, M-3 stood at slightly under $1.8 trillion. Today, M-3 is at $9.3 trillion. A similar ratio of the price of gold to M-3, based on the existing M-3 (don't forget the Fed is still printing and may print much more rapidly if foreigners stop lending to us), would take gold to $6,072 per ounce. So you see, there may be a very good reason that such a level-headed, well-considered John Hathaway of the Tocqueville Fund suggests gold will be measured in 4 digits rather than 3 before the end of this bull market.
TRADER ROG'S CORNER
"Economists are people who work with numbers but don't have the personality to be accountants." Anonymous
Gold and Silver
Gold has been moving along and trending up to a daily high on December's contract of over 441 then closing at 440.30.
Price behavior shows a smooth uptrend with more buying power available. The dollar has been correspondingly weak and closed today, November 16, 2004, at 83.87-down .0018 for the day. Silver has followed gold and pushed up against resistance at 7.585-close to its recent highs.
While other analysts and reporters see gold and silver selling soon with the dollar moving back up from recent lows, I say not yet. First, indications show the dollar needs to bottom at 0.80. Should this occur, the gold and silver could move up in a ratio or proportionate amount. As previously reported, if the dollar reaches 0.80 before gold touches 502, gold will stop and reverse with the dollar's 0.80 support. Should gold move up quickly toward 500 before the .80 dollar support is reached, we could achieve 502 gold this fall.
Election cycles and attendant pressures, in my opinion, threw the timing of prices out of kilter. With no election this fall, gold might have reached its fall top earlier and perhaps the dollar would already be recovering. Please be very careful of your investments in metals stocks and bullion relative to the gold top. Should 502 gold be achieved, the selling will be fast and furious. At or near peak prices, junior gold stocks will sell hard and you must exit into strength to get out with a good profit. Buyers will be absent at the peak prices.
Long-term buy-and-hold metals stocks investors have some choices. They can sell it all just before the peak, or sell a half or a third and retain the rest, knowing full well the stocks will come down for awhile. For those who prefer to buy and hold indefinitely, they can just wait it out, and hang on for probably the next 3-4 years, at least.
November 20, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
http://www.miningstocks.com