The Reaper Market Comments

May 27, 2002

Right here in our late May turning point time frame, the U.S. Dollar is accelerating down to new lows, gold is blowing out to new highs (along with gold stocks), and the stock market is slumping.

The threat of terrorism is raising its ugly head again in this tumultuous time frame which carries into June 10. One gentleman wrote to say we would have significant UFO sightings in Nevada on or before June 10. Is Fantasy Land getting other worldly? Interesting, isn't it, how some crisis, some chaotic distraction, such as terrorism or even a UFO, occurs just when the economy is in for a major hit to the downside as it was 911. If the American people ever focused on what was really going on, they might demand change, meaningful change. So the federal forewarnings of another "crisis" in this time frame is no surprise to your editor.

A little over 50 years ago, the expression existed in Argentina, "rich as an Argentine." Argentina was richer than France, Germany, Italy or Japan. Then they embraced the Perons and socialism, and Argentina never recovered. The U.S. feels like it is on a similar cusp, now; that we are about to have a great leveling of the U.S. standard of living with the rest of the world. How convenient to bring the U.S. into a New World Order. We have had the "thesis" of monopolistic debt capitalism in the West, the "antithesis" of communism, and now we are seeing the great "synthesis," the Bush Sr. and Bush Lite New World Order. Russia has joined NATO as our ally, Former U.S. President Jimmy Carter went to Cuba and gave a nationwide address and talked about Cuban democratic reform. It seems to be all coming together. And as I have written for two decades, the only group that would stand up and fight and die against the NWO would be radical and religious hyper-masculine Islam, the "terrorists," even though bin Laden used to be on the CIA payroll. Ah, yes, we do live in interesting times. And interesting times make for market volatility and thus money making opportunities.

The CRB Index (commodities) double bottomed in 1999 and 2001 in the 180 natural turning point (precisely 183) support zone. The June CRB Index needs to clear 210 resistance to issue an all-clear major buy signal. And since commodities tend to rally as the U.S. Dollar weakens, the accelerated break down of the U.S. Dollar strongly suggests a breakout upside by commodities. And isn't it interesting how gold has redeemed itself in just the last year? It will be important to see how gold responds by the June 10 eclipse. Rising energy, gold and possibly even soon rising interest rates are signs of inflation. Anyway, Moody' s Industrial Metals Price Index is up 8.1% just in 2002. The prices paid component of the ISM Manufacturing Index sky-rocketed to 60.3 in April from 32 in November 2001. The Consumer Price Index was up sharply due to higher energy prices. The Consumer Price Index (CPI) jumped .5% in April, its biggest increase in a year. Import prices are up at a 13.2% annual rate over the past year and half.

This 30-year cycle in commodity prices is not expected to peak until August 2003 at the earliest. Weather cycles are changing right now, too, and could send these agricultural markets into a weather bull market later this summer. The rubberband "snap back" effect for basic commodities is overdue. Prices generally are up 100% since 1980, but commodity prices are down even in nominal terms. So, just the "snap back" rubberband effect should send commodity prices higher. Smart money is continuing to move into tangibles--real assets. And that, dear readers, is what my Cycle III and McMaster Online is all about--making money in this mess.

Metals

Wonder if gold is going to move up until it blows Barrick' s and the big banks gold hedges (short positions) out of the water. There are $63 billion of gold derivatives that U.S. banks and trust companies hold (as of the end of 2001). That' s more than the value of the entire gold share market which is $55-$60 billion. Barrick is short 23 million ounces of gold. That means every dollar the price of gold rallies costs Barrick $21 million. Gold at $350 an ounce means Barrick loses over $1 billion. (In all fairness to Barrick, 75% of Barrick' s gold reserves are un-hedged.) ...Gold is moving up as the U.S. Dollar moves down. Gold also moves up as the threat of terrorism/a Middle East war increases. But clearly, gold fever is with us now, too. Thus, a 50% increase in The Reaper' s Long-Term Investor's Portfolio in gold stocks earlier this year was appropriate. The XAU is up 55% on the year. ...Gold and gold shares hit new highs almost daily. The $325-$328 gold level, if exceeded, could lead to panic buying up-side.

And there really are not enough gold stocks to go around, either. When we realize that AOL lost $54 billion in one quarter, and $50 billion is one/eighth of the market cap of GE, the fact that all the gold stocks are worth slightly more than $50 billion puts this thin market in perspective. Fundamentally, of the world' s gold, Canada mines 23%, the U.S. 37%, Australia 13%, Papua, New Guinea 19%, South Africa 6% and Chile 2%. About 50 million new ounces of gold are mined every year and another 25-30 million come out of converted scrap. This 50 million ounces amounts to less than one-half of one percent of the world' s total gold reserve of 10 million ounces. Ten million ounces at $300 an ounce means all the gold in the world is worth $3 trillion. U.S. investors lost almost twice that much in stocks over the past couple of years. The amount of gold coming to market is less than one/tenth of the growth rate of the U.S. money supply over the last year that Alan Greenspan increased by $1 trillion. ...Gold selling by European central banks should not exceed 400 tones a year. Jewelry demand for gold puts a floor under the market. Present gold prices do not entice more exploration. Newly mined gold supplies peaked in 2001. Gold production is expected to fall 30% over the next eight years. Most gold mining companies are not selling gold forward any longer. (The gold mining industry had been selling gold short to the tune of 300 tons per year on average.) Japanese investment accounts took down 65 tons in 2001, primarily in the form of gold-backed savings accounts. The Japanese are expected to take down 200 tons of gold this year. European investors are buying gold for the first time in 20 years. Russian and Middle East investors have been buying gold hand over fist. (All the gold in the world could be placed in an 18 square foot cube.) ...Silver hit a 15-month high on May 21, following gold upside. The new annual silver mines deficit is around 100 million ounces. It will take $10 silver to have new silver mines come on line. It takes a year to get a closed silver mine back into production. Eighty percent of all silver is produced as a by-product of copper and zinc mining. The aboveground silver supply from all sources is estimated at 300-500 million ounces. The silver deficit over the past 12 years is over 1.2 billion ounces, equivalent to 18 months of total global consumption. Since 1990, demand has exceeded new mine supply by 100 million ounces or more. No wonder Warren Buffett and Bill Gates both hold silver. ...Ironically, amidst all this precious metals' bullishness, copper has remained weak as stockpiles hit 1.3 million tons, the highest level in at least 23 years. ...Palladium has languished along bottom as an industrial metal, along with copper. Platinum has attempted to rally but is doing so sluggishly, as platinum is also seen primarily as a industrial metal.

Gold is still being mined and refined at the rate of almost 2,600 tonnes per year.