first majestic silver

Precious Metals

July 1, 2002

If stocks have changed direction, where can you put your assets? Interestingly, the flight to quality has been substantially delayed by hope. We all keep hoping equities will recover. In the meantime, the Gold Council has launched a multi-million dollar campaign to promote the yellow metal in the face of recent fear and uncertainty. However, gold has been tarnished by lack luster performance over the past two to three decades. Investors have simply lost touch with hard assets.

Still, gold has managed an impressive rally from $265.90 in April to $320.00 today. We are suffering volatility as traders determine whether interest rate policy and the drop in stocks is good or bad for gold. After all, we have been out of touch with this market for a long time. People are not sure how it correlates.

The present picture is not particularly bullish. In fact, a penetration below 31600 suggests a drawback to 30000. Both the 40-day and 20-day moving averages have lost momentum with the 20-day turning to a negative slope.

Technical traders are seeking a dip of the 20 below the 40 as a sell signal. This would justify a drop to 30000 or even 29800. For those waiting on the sidelines, this would provide an excellent entry opportunity. It is not likely gold will fall back to April lows anytime soon. However, further declines in the Dow, S&P, and NASDAQ will surely be supportive of gold as long as there is sufficient liquidity to buy. If all wealth evaporates, there simply won't be any money to buy anything...gold included.

July silver may offer option strangles between 500 and 475. If there is sufficient premium, I believe this range will hold despite the onerous chart formation. The problem is that July is expired and the August's go off in two weeks. The strangle only offers 8¢ as of today. That provides a window between 508 and 467. The chart demonstrates support at 470 and the top of the range was 515. In reality, 8¢ is not bad. However, the stock market could spook precious metals higher...particularly if the 4th of July witnesses any terrorism.

Moving to the platinum group, weak summer auto sales suggest a dip in platinum and palladium demand through the 2002 manufacturing year that ends in late August. Based upon economic indicators and consumer confidence, expect to see layoffs and shutdowns moving into the fall. Low interest rates and incentive programs have proven unattractive. People are in "save" mode until the economy sorts itself out.

News that Norilsk Nickel was in contact with all the global automakers dumped both platinum and palladium. Although we saw this pattern in late April, sales were a bit more supportive.

My sources reveal that producers are taking non-catalytic technology more seriously. The huge sting suffered by Ford with its $1 billion write-off of palladium, and the hit on profit margins suffered by other manufacturers (as palladium soared above $1,000 per ounce) has been strong incentive to reduce catalytic metals in favor of computerized fuel and ignition systems.

According to the Platinum Guild and Johnson Matthey, "lean-burn" engines cannot meet California or New York emission standards. Yet, Nissan allegedly unveiled a gasoline car that produced "trace" pollutants at the tailpipe...well within even the strictest standards projected over the next fifteen years. The added benefit is efficiency. The new designs target efficiency requirements with average highway/city mileage above 26 per gallon.

With platinum below $460 and palladium constrained under $300, the widespread lean-burn implementation costs may be challenged. Perhaps this is why Norilsk Nickel was motivated to offer stable longer-term pricing. Unlike gold and silver, platinum and palladium are more sensitive to economic downturns because consumption is directly related to automotive and energy sectors. It is difficult to sell platinum while remaining bullish about gold and silver. Tradition suggests tandem trending. But an empiric approach calls for opposite positions.

So Close And Yet So Far Away!

The Dow Jones Index couldn't hold on for one extra day! Last Thursday, I wrote the Special Report with confidence we would see all legs of our short June Dow options expire worthless. We were poised to collect $2,600.00 in premium within less than 14 hours. Last week's rallies were just enough to pop the index back above 9500. It seemed too easy...too fortuitous. It was!

Friday's bust dropped the index to our breakeven point and it was over. All that wonderful analysis and anticipation disappeared in a blink. More frustrating was the fact that the analysis foretold a further decline, but we were anticipating sufficient support at 9500 through June to keep things cooking. With anxiety over July 4th terror threats and unusual European disapproval of President Bush's Middle East peace initiative, the market suffered from pre-weekend jitters and, of course, the option expiration did not add supportive incentive. Mix in a little WorldCom troubles, and the brew was right for poisoning any hopes of a micro recovery.

As mentioned, investors' confidence is being challenged as never before. Even the Crash of 1929 had integrity. Sure, there were thieves and insiders back then, but the total disregard for the few rules and regulations that were in place was tempered with a sense of polite stealing. Today, we see reckless disregard for everything...raw greedy avarice. It has tainted the entire corporate system and placed an incredible burden upon the investing public. Even politicians are asking, "Who do you trust?" We have to know that when the issue of "trustworthy" banters about the halls of our legislature, we have sunk to the lowest common denominator of honesty and sincerity.

I apologize for cynicism, but the current mess goes well beyond skepticism. Indeed, with the second largest long distance carrier trading as a tittering penny stock, investors are forced into a sense of pending doom. Let's face it. Cisco is still a new hot-shot. AT&T's Lucent spin-off represented a new high-tech venture. While WorldCom is, itself, relatively new, it was a backbone of the entire telecommunications sector...not just here in the U.S., but abroad as well. The ease with which WorldCom hid $3.1 billion in operating expenses raises the specter of other major accounting abuses in other cornerstone corporations. Worse, chief executive officers are caught between a rock and a hard place...Should they investigate their own accounting closets?

This confidence crisis is not in a vacuum. The economy has serious structural problems that would represent a challenge to stock indices even if WorldCom, Enron, and others were squeaky clean. Corporate performances have been lacking. The high-tech sector was extremely overbought. Durable goods were over accumulated. Prior high energy prices drained consumer discretionary spending. Tax receipts were down and the deficit is back. We are fighting World War III against an amorphous enemy that has the ability to attack on multiple fronts simultaneously.

Thus, my forecast for a dip as low as 7,000 in the Dow should not appear as stunning as so many believe. Look at the rate of decline since January. Consider the relatively short distance to 7,000. More frightening, consider that P/E ratios will still be historically high at that level. At the same time, the Fed is policy choked. How much lower can short-term interest rates go? How much narrowing can the yield curve endure?

This generation of Baby Boomers and Xers has never experienced a severe depression. The recession of the 1970's that was brought about by major structural transition took place when everyone was young and reasonably unaware. Back then, the slogan was "Make peace, not war." We protested Viet Nam and placed flowers in the barrel ends of soldiers' guns. Things were tight and there were odd/even gas lines for a while, but we did not experience a meltdown.

This is not to preach Doom & Gloom. We have pulled off amazing recoveries over the past three decades. There could easily be a formula for success. The issue is that we should be prepared if good fortune fails to materialize over the next several months...if not years.

Technically, the Dow appears to have a potential head and shoulders pattern that suggests a test of 8700; the distance from the head to the neckline is approximately 900 points. Of course, with the Dow already reaching 8900, another 200 points is not a significant distance.

Okay, so what if we dip to 8700? It is still above the September low. The problem is not necessarily with the short-term chart. The monthly picture going back to 1983 raises the question of our position within the much heralded Grand Cycle or Kondratieff Wave. If you add 60 years to 1929, you arrive at 1989. However, this assumes 1929 marks the turning point. The Grand Cycle is not necessarily correlated to the Great Depression.

From a physical perspective, the cycle allegedly corresponds to the sunspot cycle that occurs in 11-1/2-year intervals. The total cycle is approximately 69 years or 6 of the 11-1/2-year interim cycles. Whatever one uses, the phase of such a monumental wave is bound to shift. Fibonacci advocates are quick to point out that the Golden Ratio automatically skews the cycle forward.

Regardless of the precise timing, we see that the secular trend established in the beginning of the 1980's accelerated through 1999. The behavior has significantly changed over the past three years. Most notably, the trendline has been powerfully penetrated. The potential "flag" that might have projected to loftier levels has deteriorated. Volatility has been extreme. These are not particularly positive signs.

Anyone observing the monthly chart will have a difficult time identifying a bullish pattern. Strategically, the long-term chart does not provide the perspective for successful shot-term speculation. Within the topping formation, there were rallies that could have decimated any modestly funded short seller. However, if you are holding a stock portfolio for the "long run," this chart above has an important message.


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