first majestic silver

Taylor on the Markets & Gold

April 8, 2002

We sound like a broken record. But the fact is the stock market, as measured by the S&P 500 remains absolutely, ridiculously overvalued! Not since the pre-crash Japan have stocks anywhere in the world been priced so far in excess of their intrinsic value. And this is true even after $4 Trillion + of paper equity value has been lost since March of 2000.

Have we Americans gone mad? Yes indeed I think we have. We have priced stocks as if we are 100% certain that we will continue the wonderful low inflationary growth of the second half of the 1990's. Yet, many signs abound that this is but wishful thinking. We are indeed in a sort of "funny farm" mentality or perhaps more accurately we have, as a mass society, adopted the slogan of my youthful 1960's days, which was, "if it feels good do it." Now we say, if it feels good, imagine it, since many of us are now too old and in some cases too wise to do all the things we did in the days of our youth. So when Standard & Poor's didn't like the P/E ratio as measured by GAAP for so many decades, those folks simply donned their rose colored glasses and applied "operating profits" so that we could pretend things were still good and getting better. And since this kind of dishonesty is so pervasive in our society from every aspect of our lives, why should we believe anything of the government's economic statistics?

Once again, thanks to Carl Swenlin's ( we know that the latest GAAP Price Earnings ratio was a whopping 43.8 times. By dividing 1 by 43.8, we get the Earnings Yield, which at the end of this past week stood at a very paltry 2.28%. A turn to Barron's today reveals that the S&P500 was paying a dividend of only 1.41% leaving only 0.87% or 87 cents per $100 invested in this index in retained earnings.

So why on earth would people be looking to buy mainstream stocks when you can get a cash flow of 5.20% or $5.20 per $100 invested by simply buying 'risk free' Ten year U.S. Treasuries? Because the fantasy of how good things were back in the 1990's feels good. And I am convinced that most people simply get peeved if you bring to their attention objective facts that dispel their pleasurable fantasies. And there is no doubt in my mind that this same psychological dynamic is a major cause for the resistance and outright hostility directed toward the objective reports coming from Bill Murphy and the GATA crowd, as it pertains to the games our government is playing in the gold market.


"Three Powerful Destructive Forces Threaten to Take Our Economy & Markets Down."

An objective view of the world realty shows the pricing of American stocks at levels never before seen in our history to be a tragedy waiting to happen. I believe the views of highly regarded Morgan Stanley economist Stephen Roach do a good job in summing up some of the more serious problems our markets and economy now faces. His views I think support Ian Gordon's Kondratieff winter thesis as well as Jim Rogers commodity inflation thesis. Following was a quote from Stephen Roach published this past week in an article he titled, "More Global Angst"

"The global economy is caught in the crossfire of three powerful forces -- heightened geopolitical instability, mounting trade frictions, and the likelihood of a long overdue resolution of America's current-account imbalance. Any one of these forces would be enough to destabilize the global economy and/or world financial markets. But taken together, the potentially lethal interplay between them could well turn any macro view of the world inside out."

After going into greater detail about these three potential major problems, Roach again reiterated that these problems seem to be converging so that we could experience the devastation of all three at one time.

"Each of these forces in and of itself -- geopolitical tensions, trade frictions, or a US current-account adjustment -- would have potentially ominous consequences for world financial markets. But that's just the point -- in today's climate, each of these forces can no longer be considered in isolation. Moreover, it is the interplay between the repercussions of these forces that that has the potential to be so lethal -- the combination of higher oil prices, a weaker dollar, slower US GDP and world trade growth, and higher tradable goods inflation. Ironically, for a world that had been listing toward deflation, the outcome would, instead, be painfully reminiscent of the stagflation of the late 1970s, when the confluence of a second oil shock and a dollar crisis proved devastating for world financial markets. While the fundamental macro forces driving the world economy over the past several years currently seem so far away from such an outcome, the playing field has tilted. And as tough as that might be for the global economy, it would be even rougher for world financial markets."

Then this highly acclaimed economist made the following admission about how his profession behaves and how ill prepared they are for any major event outside of the norm.

"One of the great paradoxes of macro is that we macro practitioners tend to view the world with blinders. Understandably, we typically concoct a "baseline" view of the world by assuming away the things we know least about -- like political and military risks. Then when one of those risks comes into play, we scramble to reshape our views in accordance with our best assessment of the altered circumstances. It's not an entirely unreasonable way to operate, as long as you understand the assumptions that are embedded in your framework. But it can be frustrating. That's especially the case in this era of turbulence and instability, where the credibility of the baseline macro forecast seems to be drawn into question more often than not.

"That's basically the key risk to any macro prognosis right now. Several powerful forces are simultaneously bearing down on the world in a fashion that renders baseline forecasting all but irrelevant. In theory, each of these forces qualifies as a potential "exogenous shock" -- a development that, if it comes to pass, would have only a transitory impact on the macro outcome. The bad news is that the interplay between these shocks could pose a serious challenge to a baseline-driven consensus mindset. The good news is that shocks, by definition, are usually transitory events, unfolding over a finite period of time. As soon as the shock subsides, reversion back toward the baseline will occur -- enticing forward-looking financial markets to then opt for the rebound play. Unfortunately, as I see it in today's increasingly treacherous world, that's putting the cart well before the horse."

Meanwhile, the economic news this past week was anything but indicative of an economy on the mend as the labor department announced that the U.S. Jobless rate rose to 5.7% in March. And it was announced that contrary to what the government told us earlier, the number of Americans on the payroll DECLINED by 2,000 compared with an initial estimate of a 66,000 INCREASE! This is why people as cleaver and open minded as Richard Russell simply don't believe the government's numbers any more. There once was a time when U.S. economic statistics were as good as any there were and when we had a right to look down our noses at some of the economic numbers coming from 3rd world countries. Today it would seem as though we have proudly taken the lead at grand deception tactics.

Despite all the spin from CNBC, which is little more than a mouthpiece for Fed and Government propaganda we believe the U.S. economy, and thus by definition, the global economy is in deep dodo. Overall we think the deflationary scenario outlined by Ian Gordon remains in place. We have however come to believe more than in the past that we now run the risk of some higher commodity prices, even as the U.S. economy continues its decline. And certainly the existence of war, which looks rather open ended at this stage, could trigger much higher prices for hydrocarbon products which accounts for over 40% of the Rogers International Raw Materials Fund. Accordingly we are adding a 10% allocation to this fund as discussed later in this commentary.


The gold bullion market took a little breather last week, or should we say the manipulators thumped it on the head once again? In any event, from a technical and fundamental view point, gold remains very bullish. At the end of this week, spot gold closed in New York at $299.80, above the 50-day moving average of $294.03 and the 200-day moving average of $281.12.

How Many Golden Bullets Does Our Government Have Left?

When I recently visited Congressman Ron Paul, he remarked that the work Reggie Howe and GATA are carrying out is very important because it is helping to establish before hand, the causes of economic decline that we most certainly face. Yet, Dr. Paul believes as perhaps most of us free market advocates believe, market forces rather than a court decision or gold market transparency made possible by GATA induced enlightenment, will trigger a return to a natural equilibrium price for gold and other related financial markets.

That line of thinking then begs the question. How much gold does the government have left? How much longer can they trash the gold price so as to deceive the American public into continuing to buy stocks that are more overvalued than at any time in American history if not the history of the world?

To reflect on that question, it may be worthwhile reviewing the last written words of Frank Veneroso published in his Gold Watch on January 29, 2000. We think it is likely Frank was onto something in this essay. We have collaborating evidence from two people who know Frank well that under a threat from "people in high places" Frank has been told to stop talking and publishing his findings related to the gold market. In next week's hotline message, we will publish Frank's last article, titled "The Gold Conspiracy Question. GATA Provokes Interesting Responses From the Fed and Treasury." This article is in the public domain at So if you would like to read it now rather than waiting until next week when we publish it, be our guest. When you go to, you can find this article after clicking on the "Essays" button.

The Tocqueville Gold Fund (TGLDX)

One of the most hurtful things we hear from time to time are stories of investors who allocated a huge percentage of their wealth into one or two of the stocks we recommended in our newsletter, only to have what once looked like a very promising investment opportunity turn sour. Fortunately, we have not had many of such bad stories over the past couple of years, but we have had some in the past. Even highly regarded big cap stocks like Enron and Global Crossing can turn sour. But when you are dealing with micro-cap stocks, these companies that do not enjoy the following of major firms may face even greater risk of insolvency than do the big guys. Of course it is also true, especially in these markets, that many companies are so grossly over valued that big cap stocks are more risky now than usual.

But the need to diversify is why we have so frequently recommended that investors never place more than 2.5% to 5.0% of their total stock and bond portfolio into any one stock. If your portfolio is not large enough for you to buy a sufficient number of small cap stocks, then let us suggest when it comes to gold stocks, you consider buying the Tocqueville Gold Fund. This fund has excellent management with John Hathaway at the helm. His track record is about as good as any and this is the only gold stock with a five star Morning Star rating.

Many of the same stocks we have in our Model Portfolio are held in the Tocqueville Gold Fund. For example, they have Newmont, Agnico-Eagle, Goldcorp and Nova Gold. Country exposure is diverse, as follows: Canada 37.2%, South Africa 19.6%, U.S. 18.3%, Australia 10.4% and Peru 5.0%.

Over the past three years, the fund gained 9.84% during a time when gold stocks did not do well at all, as evidenced by a 3.90% decline in the XAU. The fund's closing Net Asset Value at the end of Business on 4/5/02 was $19.62. The minimum investment required to get into this fund is $2,000.

Nevada accounts for 75% of U.S. gold production.
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