Questions and Answers

October 27, 2001

During the course of any given week we receive a good number of questions related to gold, the stock market and economic affairs. Some of these questions are universal, and therefore merit broader dissemination than a mere individual correspondence. Therefore, in the interest of answering some of the excellent questions, the following Questions and Answers are herewith presesnted for the benefit and enjoyment of GOLD-EAGLE readers.

Question: Do you foresee yet another quick spike in gold prices, followed by yet another sell-off before the price of gold really takes off? When is your best guess as to when the big move in gold will get underway?

Answer: In my opinion, I believe what we are looking at is a classic early phase bull market in gold. This is typical of markets that are beginning long-term ascents in that a.) few people believe it can happen and many believe it will actually go lower, b.) the combined tape/chart outlook shows enormous accumulation over the past few years, which is why gold has taken so long to get going to the upside. This is not a cause for concern but actually a further proof that accumulation is underway among strong hands and that when it finally starts heading up the upside potential will be explosive. The dynamics of the tape over the past couple of years shows undeniably the dominant presence of "market makers," including banks, large commercial interests, large international speculators, et al. I've seen this pattern before and it always leads to explosive upside moves when people least expect it. My strongest "guesstimate" is that gold starts moving up in a big way sometime in the first quarter of 2002, and continues up explosively throughout the year before its first big "breather" in 2003. Then a continuation of the upside in 2004-2006. The cycles point undeniably to next year being a huge "debacle" year in the stock market and the economy will continue falling in the deflationary spiral, and this is precisely the type of environment gold loves to shine in.

Question: How far down do you think the Dow will drop by the end of 2002, assuming next year materializes as a cyclical down year as you have forecast? Also, is a 200% gain in the POG (price of gold) possible by next year?

Answer: It is very hard to project downside target at this point so far in advance, but my best "guesstimate" would be a minimum of a 6000 Dow Jones - and probably lower (somewhere in the 5000s). I just had a conversation with Bud Kress, master trader of the S&P, and a renown cycle expert. He told me that his cycles show an almost continuous drop next year with only minimal rallies along the way punctuated with an outright debacle in October-November. That sounds about right based on my work. As for gold, I should think returns of well in excess of 200% are coming, especially when runaway deflation really gets out of hand.

Question: Sir, your forecast for a meteoric rise in gold and silver completely flies in the face of deflationary conditions in the commodities market. The two are mutually exclusive. How can you expect higher precious metals prices when most commodities are/will be declining in value?

Answer: Although it may seem so, deflationary conditions and a rising gold price are not mutually exclusive. What most people don't realize is that the price of gold performs at its best during deflationary conditions. Modern economics and academia have erroneously taught us to think of gold as a mere commodity, which admittedly would decline in severe deflation...if it were true. But gold is more than just a commodity. As the ultimate monetary unit, it responds in barometric fashion to increasing demands for money. And the demand for money is never greater than in runaway deflation. Also, it becomes the de-facto investment of choice since it represents the only true value and safe haven in a market where prices for almost everything are collapsing.

Question: How can you forecast a collapse in the real estate market and a major depression in the economy? Do you not realize that our grandparents lived through much worse economic times than ours? Safety nets have been installed since then to prevent against future depressions.

Answer: Yes, our grandparents experienced far greater falls in the economy, that much is true. But have you actually researched economic history in this country? Did you know, for instance, that the first "great" depression in the U.S. was in the 1880s, followed by an even "greater" depression in the 1930s? Depressions always increase in severity every time they descend, and the coming depression that has even now begun (and will worsen until 2004-2006) will be the third and "greatest" of America's economic depressions. Here's a helpful hint: shed your blind optimism and wake up to the reality that it isn't going to get better anytime soon. Then you will be in a position to better prepare for the coming depression.

Question: I'm not a high tech investor or anything, but I have seen and been stymied by the 'disconnects' you mentioned in your recent GOLD-EAGLE article. I held physical silver in the 1980 run up, and when it was peaking near $50/oz, I couldn't find any dealers to unload some to (I was in small town southern Oregon). I have watched silver ever since, and figured we should be getting close to a similar event. I wanted more liquidity, and started looking at the Futures markets. I finally convinced my wife I needed to have an account opened with a broker, and this is being completed now. However, the 'disconnects' such as cotton, coffee, etc. hitting 20, 30 year lows and still heading south, and gold and silver pretty much ignoring such things as war, attacks on America, biological events, severely cloud the issue. Things do not seem to be following any sort of 'life experience' pattern. How can I be careful with my pittance of investing (speculating) money, but still be positioned for what may come in this screwed-up scenario?

Answer: All of these events are very much in keeping with general deflationary conditions since physical commodities can be expected to lose value in deflation. But gold and silver are not commodities in the truest sense-but rather are measures of monetary value and stores of wealth more than anything else. And in runaway deflation everyone will be looking for value. By default, they will run to gold and silver since these will be observed to be the only two tangible forms of wealth perceived NOT losing relative value. This will in turn cause an upward price spiral effect as everyone piles into the precious metals markets. But since most investors are still in denial, and do not believe severe deflation/depression can ever come to America, they have not yet made a run to the gold market.

Question: James 5:1-3. May I suggest you address this scripture in your next essay? There are many well-heeled Christians who are reluctant to buy gold/silver due to this particular scripture.

Answer: James 5:1-3 in the Authorized Version of the Bible says, "Go to now, ye rich men, weep and howl for your miseries that shall come upon you. Your riches are corrupted, and your garments are moth-eaten. Your gold and silver is cankered; and the rust of them shall be a witness against you, and shall eat your flesh as it were fire. Ye have heaped treasure together for the last days." Many have mistakenly interpreted the above verses in a Hyper-literal fashion as meaning that gold and silver will someday be completely devoid of value and utterly worthless. And within the context of the grand scope of eternity, this is certainly true. But to say that gold and silver-which in the Bible were the primary measurements of wealth, i.e., money-will lose value in these times misconstrues the actual meaning and import of this verse. Since the words "gold" and "silver" referred to money in the Bible, the sense of this verse is that the money and riches of rich men would be "cankered" and "rusted" in the last days. Why? Because they have "heaped treasure," that is to say, have not spent and invested their wealth wisely, but instead have selfishly stored it up I order to indulge their own desires.

The Bible makes it quite clear that all forms of temporal wealth-not just gold and silver-are subject to being "moth-eaten" and "rusted" on this earth. See Matthew 6:19-20 for an example of this. The Bible also warns against heaping up treasures of any kind, or laying in a disproportionate store of riches for selfish purposes for all people-not just rich men and not just gold and silver. In other words, the Bible teaches men and women to be good stewards of their God-given wealth, and to distribute it as they are taught and not to spend it on purely self-centered and immoral purposes.

From an economic perspective, if everyone did as these "rich men" did in James 5:1-3, the economy would be in a permanent state of depression -since there would be no investment spending or trading but only hoarding up of money to no one's benefit except the hoarders. This is an object lesson and should not be construed as a condemnation of buying gold and silver for legitimate trading and investment purposes.

Question: If there is a pending silver shortage, why is China (a country with a large electronic manufacturing base and significant government reserves of silver), a net seller of silver. One would think that holding their silver reserves or even adding to them would be a strategic advantage when the rest of the world was forced to bid up the price of silver and possibly unable to obtain significant volumes of the metal for their manufacturing base.

Answer: The outlook for silver can be determined solely from long-term supply/demand balance data. Reliable economic decisions cannot be made from the short-term factor analysis. Fundamental analysis such as the kind you have referenced is of no consequence, when attempting to forecast future price movements. This is because the silver market has factored in the significance of China's selling of silver well in advance of the actual event, and has already long since discounted it. How do you know but that China may once again become a net buyer of silver in huge quantities in the very near future? How does anyone know that the exigencies of a wartime economy and expanding worldwide depression won't lead to a higher demand for silver for various reasons? And don't forget, those who control the movements of silver and other commodities can alter the logistics and stop the flow of distribution at their whim, thereby creating an artificial "shortage," which would lead to a corresponding price hike. Bottom line: when it comes to the markets, always expect the unexpected and never assume that the facts are all contained in the fundamental data, which are readily available to all and generally useless for making trading decisions.

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.

The California Gold Rush began on January 24, 1848 when gold was found by James W. Marshall at Sutter's Mill in Coloma.

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