Of Babes, Bear Traps and Bullion

March 8, 2001

Sometimes we should cast aside our charts and listen closely to what Wall Street is saying. Then leap to do the opposite. Yesterday, for instance, there came such a potential telltale from The Street, Circe-like, in the form of a stunning blonde who held forth briefly on CNBC. She was seated behind a desk, so there was no judging how well she stacks up against the reigning callipygian of moviedom, Jennifer Lopez. But above the waist she was very nearly the equal of Charlize Theron, or the young Tuesday Weld. Or perhaps Mod Squad's Peggy Lipton. Pressed into a public relations role by a retail institution whose name I did not think to write down, this vision of heaven made as improbable a Wall Street bear as any we could have imagined. Yet, the Dark Side was the ostensible substance of her message, which took a deeply skeptical view of Amazon's unwonted, 2 5/8-point leap earlier in the day. Putting aside our suspicion that her employer has probably been touting Amazon's virtues throughout the last 50 points of its decline, we couldn't help but remark the fact of their pointed reluctance to view the company's shares as the perfect candidate for a meteoric rally. Traditionally, is it not the role of the retail analyst to vent his suspicions of a dead-cat bounce when a stock that has fallen from $112 to $10 in a little more than a year summons the gumption to rise from the dead?

True, Amazon's surge may prove to be nothing more than the bear blip so many seem to suspect. But when it is greeted with such blunt incredulity by Wall Street's best and brightest, it behooves us to take note, in contrarian fashion, of other possibilities. Such as: Maybe this rally is the real thing. Moreover, perhaps it presages a broader upturn in stocks that have been beaten down nearly as hard as Amazon. We should not be overly eager to infer this is so, but neither should we reject it out of hand, as our Wall Street centerfold evidently has. To state the case more succinctly, we should be prepared to give the bull the benefit of the doubt, at least for the next 4-6 weeks, if the broad averages gain upside momentum in each of the four sessions that remain this week. Accordingly, my minimum target for the S&P 500 futures would be 1320.00, mid-way through an ugly downside gap on the daily chart that was made in mid-February. If the March contract can close above 1320.00 by Friday -- with the stealth of a big cat lengthening its stride as it closes on its prey -- a fine trap will have been sprung on shorts, and they will be panicking from the opening bell next week to get 'em back. We shall see. (Late note: A repeat of the aforementioned CNBC segment reveals that Wall Street cuddlebun is one Sara d'Eathe, representing Thomas Weisel Partners.)

Meanwhile, it is not too early to consider what we shall do once this bear rally has runs its course and stocks resume their descent into the abyss. Gold bugs in particular should already be forming some useful ideas, given the promising surge of bullion futures from mid-February's lows. Gold's further resuscitation will depend, of course, on the condition of the dollar, which after a decade-long bull market is finally starting to show signs of fatigue. Expect it to linger, then to gain momentum later this year. I have long argued that the dollar's strength in recent years has been driven, not by global trade in goods and services, as in generations past, but by demand arising from leveraged financial transactions. This is self-evident, given the fact that a world GDP approaching $30 trillion has given rise to a dollar-denominated derivatives market exceeding $100 trillion. The ratio has a close analog in the U.S. stock market, which in recent years has traded a daily dollar volume of more than three times the daily GDP -- a fact of which Alan Newman of H.D. Brous has made much in his highly regarded newsletter, Crosscurrents. From this relationship we might infer that the dollar's eventual fall from grace will be similar in demeanor to the stock market's. Which is to say, it will occur in rolling fashion, with steady losses first against the euro, D-Mark and British pound, then against a basket of relatively weaker currencies, most significantly the yen. As this process unfolds, gold should remain buoyant at the very least. But in another 6-12 months or so, when the dollar and the still-strong blue chip stocks begin to plummet in unison, gold will take off from what by then will be a base near $300. Given the huge amount of forward hedging by bullion producers, we should expect spot to reach $420 without even drawing a breath. Thereafter, it will quickly make up for the disappointments of the last two decades.

The first use of gold as money occurred around 700 B.C., when Lydian merchants (western Turkey) produced the first coins

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