Taylor On US Markets & Gold
Financial Markets
Richard Russell -Something's Wrong
This from the grand old man of Dow Theory fame, namely Richard Russell, in
"Richard's Remarks," dated January 7, 2005:
"There is no use kidding ourselves, the market is telling us something's
wrong. The widely heralded 'Santa Claus rally' hasn't materialized. Santa
said, "See ya," and headed back to the North Pole."
A few lines later he wrote:
"Normally, January is 'supposed' to see new money flowing into Wall Street
-- new investment money. If it's coming in during 2005 it must be sneaking
in, because I don't see any signs of it. No, something is wrong here as we
greet the new year. Wall Street appears to be turning cautious.
"This is all the more curious because we're being flooded with bullish
economic news. Housing is 'holding' at high levels, retail sales are good,
cars sales are better than good, US exports are picking up, and President
Bush insists that he will be slicing the deficits in half by the time his
tenure has ended. So what's wrong with the stock market? Can't it see that
the economy is improving? The answer is that the stock market sees this and
more, a lot more. The truth is that the stock market sees everything -- and
well before you or I or "The Wall Street Journal" see it.
Perhaps the "animals" of the markets-the natives who run the companies
whose stock you and I are enticed by CNBC to buy-know something the general populace doesn't know. What could that be? I don't know for sure, but last week I suggested that the Fed would rather let the U.S. economy hit a deflationary depression than lose the dollar as the reserve currency; that would mean ceding power to the other side, which I believe increasingly
means an emerging "collation of the willing to put America in its place."
namely countries like Russia and China and the more militant Islamic
countries-not to mention the growing number of hostile nations of Europe.
Then this past week, as Stephen Roach pointed out in his essay of January
7, 2005 in this post election period, the Fed is suddenly voicing concerns about inflation. Roach cautions us that if the Fed is really serious, we are
going to suffer through some enormous pain in America in the coming years.
It is a pain he thinks we should endure but it will be very uncomfortable.
For one thing, he notes that it will be "game over" for the housing market.
Wait! The housing market? What did Marshall Auerback say the folks at the
Prudent Bear were watching as a clue for a tipping point from inflation to
deflation? The housing market? That's it! Secondly, I recall he said he
wanted to watch the stock market.
But wait, wasn't it just a year ago that Ben Bernanke had his helicopter
flying 24/7 to ensure we avoided deflation? Keep in mind that inflation and
deflation are two different sides of the same fiat money coin. You can't
have one without the other. You can delay deflation but you cannot
ultimately destroy it. The problem for the Fed is that at this very late
stage of this Kondratieff cycle, they are now forced into a balancing act
between inflation and deflation that becomes ever trickier with each
monetary bailout. Why? Because as they print money they create debt, and
increasing amounts of debt make the system subject to ever increasing
probabilities of a cascading default where each defaulting party enhances
the likelihood of more defaults, not to mention the inevitable slow death
through debt strangulation.
Time will tell whether Larry Parks' more widely held view that deflation is
impossible is true. What we are trying to do with our Model Portfolio is
prepare for both events. Gold is a financial savior, good for inflation and
deflation. While gold could suffer a decline as we switch from dominant
inflationary forces to deflationary forces, I have no doubt that it will
ultimately prevail over the dollar, even though in deflation by definition,
the dollar will gain purchasing power. Gold will gain even more purchasing
power, because in times of uncertainty, gold is the most liquid and most
trusted money of all, whether during inflation or deflation.
GOLD
The price of gold has taken an early year hit which Trader Rog expects to
last until mid January. It is for such times, that I like to step back and
look at the big picture shown in the chart on your left. So far in January,
the monthly average is down sharply from the monthly December average. But at $424.03, it remains bullishly above its 20-Month moving average of
$397.76 and its 40-month moving average of $356.48. Of course this doesn't guarantee you anything about the future, but it does put the recent
pullback in perspective. Not that since the bull market began we have had
any number of similar corrections.
It is worth noting that in a new bull market, the psychology is one of
worry while in mature bull markets, like what we see in the equity market
right now, there are few market participants who are of a mind to worry.
This is why they say bull markets "climb a wall of worries." Most recent
experience in gold causes people to feel in their gut that we must have
seen the bulk of the move in the gold bull market. By contrast in the
equity market, most folks remember the good old days of the late 1990's and expect they are just about to return. Remember also that at major turning points, the majority of folks are wrong.
Thanks to my good friends Bill Murphy and Chris Powell of GATA, following
is an article written on this subject on Friday January 7, 2005 by Mark
Hulbert of CBS MarketWatch.
"ANNANDALE, Va. -- Gold bullion's plunge over the past month is likely to
be a mere correction within the confines of a long-term bull market.
"That at least is the conclusion of contrarian analysis, in light of how
quickly most gold timing newsletters have jumped on the bearish bandwagon.
More typical of a market top is stubborn bullishness, and what we've seen
in recent weeks is anything but.
"Consider the latest readings from the Hulbert Gold Newsletter Sentiment
Index (HGNSI), which reflects the average exposure to the gold market among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. As of Thursday night's close, the HGNSI stood at negative 23.2 percent, which means that the average gold timer in this group is actually net short the market.
"As recently as the end of November, when an ounce of gold bullion was
trading for nearly $30 more than where it's trading today, the HGNSI stood at plus 78.6 percent.
"That means that, over the past month, the gold market exposure of the
average gold timing newsletter has dropped by more than 100 percentage
points. That's more than just an orderly retreat. That's a veritable rush
to the exits.
"On the contrarian theory that markets like to climb a wall of worry, this
is good news.
"In fact, the average gold timing newsletter that the HFD tracks is now
more bearish than at any time since late 1997, more than seven years ago.
Furthermore, the HGNSI's level at that time -- negative 31.3 percent -- was
not that much lower than the current reading.
"It's amazing that the HGNSI today is anywhere close to its low level of
late 1997, if you stop to think about it. At that time, gold was more than
15 years into a severe bear market. Despair was an entirely understandable
reaction to where the market stood.
"Today, in contrast, bullion is higher than it at any time in years, but
for a few trading sessions at the end of last year. And yet the average
gold timer appears to be as dejected as he was near the depths of a
punishing long-term bear market.
"Another perspective on gold market sentiment comes by contrasting gold
timers' recent behavior with stock market timers' reaction in March 2000,
at what turned out to be the top of the stock market and the bursting of
the Internet bubble. During the first 10 percent correction after that top,
the average stock market timer actually increased his equity exposure.
"Now that is stubborn bullishness. And we all know what happened next.
"This is not at all the situation that currently prevails among gold timers."
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January 9, 2005
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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