Panic Psychology Setting in; Durban Deep Saves the Day

November 1, 2001

Panic psychology is beginning to manifest itself among the trading public in ways not seen since the Great Depression. Where Y2K failed to stimulate the public's fear, the spate of recent bombings coupled with continued erosion of the economy and financial markets has conspired to engender tremendous fear.

As a recent example of this, our contacts in the Washington, D.C., area-where the Pentagon was bombed last month-many ethnic groups in and around the city, most prominently the Vietnamese, have taken to hoarding rice and other foodstuffs, are buying up gold and silver bullion coins, and are beginning to take money out of their bank accounts. Keep in mind that Asian immigrants living in this country are among the very few ethnic groups who actually have substantial savings. One person told us that she was turned away from the bank the day after the WTC bombing when she attempted to withdraw $2,000 in cash from her savings. She was told point blank the bank did not have the money at that time and was limited to withdrawing only $1,000.

There is talk of a mass banking withdrawal shortly after the New Year in order to avoid paying taxes in the current year. We warned of this earlier this year. A massive draw down on bank funds in the early part of 2002 fits our forecast perfectly since at least two major stock market cycles are due to peak at that time, leading to a sliding-board effect in the financial markets in early 2002. Also, several leading bank stocks have the look of equities on the brink of disaster. From the looks of things, January 2002 may be the "Y2K" crisis delayed by two years.

How very interesting that the same people who in 1999 would not think of buying gold and silver are now beginning to run the coin shops in 2001. Again, this is a fundamental confirmation of our ongoing technical forecast of a runaway gold bull market that will soon begin.

The outlook for gold equities, however, is not quite as impressive in the short-term, that is, with the exception of one junior mine (any guesses as to which one?). For example, the short-term cycle channels for the XAU are at a slight downward trajectory once the current up-move ends around 56-57. Ditto for the Rydex Precious Metals Fund (RYPMX). Leading blue chip mine Barrick Gold (ABX), after a likely upward move into the first week of November, should meet with resistance near $18 then reverse.

Our favored mine, Placer Dome Gold (PDG), actually shows a bullish short-term outlook with the important cycle channels in the ascending phase over the next few weeks.

By far the most attractive outlook belongs to Durban Roodeport Deep (DROOY). We once again called latest up-move in Durban (see our recent article "Durban Deep the perfect hedge against an October smash"). At the time Durban was trading at $1.12 when we wrote, "Durban's cycle channels support a move to as high as $1.50-$1.60. This would represent quite a jump on a percentage basis." Indeed it would, as Durban proceeded to climb nearly 17% in less than three weeks. Considering the volatile nature of the gold stock market, not to mention the risks inherent in a low-priced equity, that's not a bad return in a short period.

Michael S. Jenkins, a respected market analyst and fellow newsletter writer, recently made a very cogent observation about the state of the U.S. economy and the Federal Reserve Board's response to it. His words bear repeating:

"The economy is going off the cliff and the government is trying everything to make it brief and save the stock market. That remains to be seen since the backdrop is a twenty year bubble mania stock buying binge that won't likely be repeated for another twenty years, and the normal reaction of most participants is to sit tight and wait for the big rally to come to break even and then sell stocks. The most likely outcome is a dull, long-term flat where its too late to sell but rallies can't get going since all the traders are scalping 10% advances and there's always plenty of overhead. Real bull markets get going from massive accumulation brought about by new money coming into the market from profits generated by corporations coming out of a recession. Right now those conditions don't exist and the money has run out.

The FED can make interest rates go to 2% but they can't get loans to people who need them, and they can't convince business men to start new ventures when the outlook is bad. That was our 1930's experience and the great academic debate since then was how to prevent it. The Japanese failure for the past decade to bring their market back to life is our current algorithm, and since that didn't work I doubt ours will either. In Japan the problem was bad bank loans to corporations that the government refused to let go bankrupt. In our case it will be Fannie Mae and Citicorp who will own nothing but non-performing first and second mortgages that in the current political environment can never be repossessed and will eat up the banks' capital and prevent an earnings recovery."

The long-term cycles are indeed pointed downward for the next 3-4 years, and there is nothing the FED can do to change that. One apt analogy is that of a person standing on the ocean shore as a 100-foot tsunami approaches-the best that can be done under such a circumstance is prepare for the inevitable crash. The worst response would be to try and stop the killer wave, which would be nothing short of impossible. Along this line, SineScope Bud Kress wrote in a recent letter, "One must remember that natural forces cannot be negated-the best man can do is temporarily defer or delay the inevitable."

He continues, "Spin doctors have shifted into turbo drive. We live in a world of overstated positives and understated negatives. The former is created with hype while the latter is mitigated via buzzwords, euphemisms, or totally avoided by reticence. Prognosticators, economic or market, continue to be reactionary in lieu of anticipatory. Ask yourself what percentage of economists predicted a collapsing economy in 1929; 2001? What percentage of market analysts predicted a bear market in 1929; in 2000? The political and social peer pressure biases opinions consistent with what the public wants to hear. Those who do not are considered deranged and become pariahs. Presently, economists are evaluating the state of affairs as "negative growth." What in the world is this? Are not the words mutually exclusive? Market analysts are now touting that "it is too late to sell;" "The market is approaching a bottom." Media activity borders on criminality. "Bubble Vision" concentrates and conveys all this boiler plate and palaver to the masses-"Stay the course;" "reassess your long term goals;" "the stock market has proven the best place to be;" etc., etc. A critic could very well view this as intellectual irresponsibility and masterful deceit, but one must remember the objective is to keep all the sheep in the flock. Is it any wonder the majority of "long timers" who opt to remain parochialized and in denial are well on their way to destroying their equity wealth!"

"You're in the driver's seat," proclaims a recent news headline touting 0.0% financing being offered by most car dealers right now. "In an effort to jump-start auto sales and boost a sagging U.S. economy, General Motors, Ford and DaimlerChrysler have rolled out interest-free financing deals on a wide range of new vehicles," the article said. "The Big Three are all offering interest-free, 36-month loans on 2002 cars and trucks through Oct. 31." The Big Three have suddenly taken a benevolent interest in restoring the soundness of the U.S. economy and the plight of the "little guy." Or could it be that they are simply trying to rid their lots of vehicles that suddenly aren't moving like hotcakes anymore due to a deteriorating economy? "That's darn good," says Paul Taylor, chief economist at the National Automobile Dealers Association. "Zero-percent financing is awfully attractive, even compared to 2.9 percent." That last statement falls under the "no duh!" category. The article continues, "With an interest-free loan, you don't pay a single penny of interest. Zero-percent financing means you pay zero interest over the life of the loan." You mean zero-percent means zero percent? You don't say!

The foregoing "news" article, far from being informative in scope, is a rather poorly disguised attempt at encouraging consumerism on the part of Americans. Even worse is the fact that it is being encouraged in the face of a deepening recession where consumer spending should be drastically curtailed in the name of fiscal responsibility. The government should be encouraging savings right now yet it makes appeal after appeal to the public to "spend, spend, spend," promising that this will lift the country out of its economic morass if enough people buy enough stuff. Aside from being bad economic advice, the above appeal to Americans to buy cars using as an incentive the 0.0% interest rate is actually a rip-off at this point. Even though the interest rate is nil, consumers are still paying top-dollar prices for a new car even as the prices of top-quality used cars are falling like a rock. If the interested car or truck buyer can hold off on purchasing, he will be shocked to find sticker prices on new automobiles 40%-50% lower at this time next year across the board. This will be a rare instance of "reverse sticker shock." Problem is, few will have the money to afford even these drastically reduced prices one year from now. Deflation is a killer!

Our Bear Market Portfolio continues to rack up the percentage gains as we head deeper into late runaway deflation. Our Durban Deep Daily forecast scored an 87% accuracy rating for the past three-month period. Far and away, Durban remains the winner for day trading purposes.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

Seventy-five percent of all gold in circulation has been extracted since 1910

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