Taylor on the Markets & Gold

March 12, 2002

IT'S THE DEBT STUPID

It is sad but true that the forecast outlined by Ian Gordon in our 1999 interview continues to unfold more or less as he predicted. Ian has coined a phrase that sums up our predicament better than any other. "It's the Debt Stupid." In our interview with Ron Gilchrist, which is going to press this coming week in our February issue, Ron underscores that debt is the key reason why our economy is doomed.

So to us, who have been pondering Ian's wise insights over the past two years, the recent revelation by Comstock Partners is not surprise. According to Richard Russell, Comstock Partners just released a study that shows how unique the current economy is. The study covered a period from 1915 in which the Fed lowered rates at least two consecutive times-including last January. Of the previous 19 times, in every instance but one, the market was higher a year later, and usually substantially higher.

In what instance did the market not rise following Fed easings? You guessed it! It was the rate the rate cut in late 1929. And now, we have a second instance in over the past 87 years in which Fed easing is not only failing, but an unprecedented 13 rate cuts have not only failed to lead to a rise in stock prices, but over the last 12 months, the NASDAQ is down 30% (but down 62% from its peak), the S&P is down 18% and the Dow is down 10%! The reason? As in 1929, we are entering the Kondratieff winter during which time the weight of debt burden begins to suck the economy into the black hole also known as a depression.

GOLD

"J TAYLOR'S GOLD STOCKS ARE ON FIRE!"

That is the heading for an ad we ran in the classified section of this week's "Barron's." The truth is, everyone's gold shares are on fire. Ian Gordon's gold shares, Bob Bishop's gold shares, Bob Chapman's gold stocks and those of David Tice who manages the Prudent Bear Funds and the Prudent Safe Harbor Funds (both combined comprise 50% of our Model Portfolio) are all up. The truth is, we have thus far seen only a very limited rise to still extremely paltry and depressed $300. But with gold closing up 8.91% so far this year, our portfolio of gold shares has advanced by 53.03%. That leverage gain of 6.6 times for the shares on an increase in the price of gold is of course one major reason why we weight our portfolios more in the direction of gold shares than gold bullion.

WILL MORE THAN ONE ZERO BE ADDED TO THE GOLD PRICE?

So, with just an 8.91% rise in the price of gold so far this year, we have managed to post a 53% gain in the shares. My wife, who works for a mutual fund in New York that invests in 3rd world debt, reported to me that her boss is convinced $300 is about as high as the price of gold can go. Of course he doesn't know about the work of Frank Veneroso. Nor does he know much about the wonderful truth seeking, courageous work of GATA and some of the key people like Bill Murphy, Reginald Howe, James Turk, all good friends of mine, I'm proud to say. I tried to tell the GATA story at last year's Christmas party, but there were not too many open ears. But hey! Who wants an old out of fashion gold bug spoiling the punch? Now all of a sudden these same people are beginning to ask some questions about the yellow metal. Yet, they are rather more interested in their own ideas about what is happening in the gold markets rather in trying to determine whether us Neanderthal gold bugs have anything to offer. Since they were not taught anything but Keynes and Friedman, they couldn't care less about what folks like von Mises or Exter have to say.

Most folks cannot begin to fathom the fact that the wheels are about to fall off the American economic wagon and that gold will rise by a factor of hundreds of dollars above its current price. Those of you who have subscribed to this letter for quite some time, are well aware of the rational for Frank Veneroso's $600 price. That equilibrium price was calculated by the brilliant Veneroso, who himself has been a consultant to Central bankers, about 4 years ago. Frank's $600 equilibrium price did not assume any increased transfer of wealth from fiat money to gold. In other word's Frank's econometric model, which employed (factored in to it) supply, demand and elasticity's of both supply and demand, did not anticipate any loss of confidence in the dollar. It was Frank's work that led to the creation of GATA and the lawsuit that now sits in front of Judge Lindsay in a Boston Federal court.

But once you begin to factor in a loss of confidence in the dollar, which most certainly lies in our future, I believe we are seeing the early evidence of what is likely to become a tidal wave of dollar selling - the potential price of gold boggles the mind. Why? Because so much money (and of course debt) has been created out of thin air by the U.S. Federal Reserve. Once confidence in paper is lost, the potential demand for gold is astoundingly great. So, how high might gold rise when the wheels fall off the American economic wagon? Here is what Ron Gilchrist had to say when I interviewed him for the February 2002 issue of "J Taylor's Gold & Technology Stocks."

GILCHRIST: "Trying to predict the price of gold is kind of like trying to predict when this economy will fully recover. I'm not a numbers man Jay, but I sincerely believe this, that we have embarked into a process on a global scale that will see the price of gold in dollars go beyond our wildest imaginations. I have friends who are talking about another zero being put into the price. But when I talked to Exter he said, "don't count on only one zero being added to the price of gold because when this finally bursts lose it will be a global monetary panic into hard assets. It won't only be domestic."

"And the last time around as you know, it was the inflation in dollars that pulled Americans into gold. Other people in the world played the gold market against us. But this time around, everyone in the world will be into gold for the same reason. It's a whole new game. The dynamics of the new gold bull market were are now entering into will be of such a nature that it won't be cyclical and it will be secular. And I will quote Exter as saying that the price will go to undreamed of heights."

TAYLOR: "Well that was certainly true even in the "mini-bull" market for old that ended in 1980 with the yellow metal rising from $35 to $850. Very few people ever dreamed gold could rise to those heights."

GILCHRIST: "That was a fascinating period of time. Did you know that at the beginning of that bull market in 1970, less than ½ of 1% of the world's investors were participating in gold? And ten years later it had grown six fold to a paltry 3%."

"So where is gold going to go if you get a 10%, 20% or 30% participation? How do you put a number on that standing on where we are today. I don't know. But it means then that this mining industry that has a capitalization about equal to that of Microsoft is going to do things that are very unusual. The price of gold will obviously go to historical levels. That means that the potential earnings for mining companies in production will go to historical levels. It also means that because of the small capitalization and small number of shares out there, we are going to see price to earnings multiples that are beyond anything that we have ever seen before. I would fully expect that by the time this thing is finished you will have an active market trading in fractional shares!

WHY WAS VENEROSO THREATENED
IF CONSPIRACY CLAIMS ARE FALSE?

A British citizen recently made the remark that "everything about you Americans is a lie." Sadly, I had to agree. In our culture truth is turned into falsehood and lies are turned into truth. So it is that the Fed claims, by way of its balance sheet reporting, that the gold it has leased out or swapped to other countries via the Exchange Stabilization Fund is still in its vaults under its own ownership. What a bald-faced lie and example of intentional deception! The senior executives of Enron could not have been more crooked and dishonest than the defendants in Reginald Howe's lawsuit, of course assuming they are guilty of the charges brought against them.

It is interesting and I think poetically just, that as the Enron lies and those of a growing number of corporations become commonly exposed, the allegations of GATA with respect to our government's manipulation of the gold price is taking on additional credibility. Moreover, If Frank Veneroso, who rubs shoulders with the highest and mightiest central bankers in the world is not telling the truth with respect to the gold markets, why was he been threatened with harm if he continued to speak out about his findings on the gold market? Why did Frank stop saying what he believes via his "Gold Watch" publication? If he is simply emotionally unbalanced as a former Robert Rubin underlying suggested, why not let him speak his mind and discredit him on the basis of his arguments rather than threatening him with harm if he doesn't quiet down?

The most common way our increasingly dictatorial authoritarian government and establishment discredits credible, out of the main stream views is to marginalize those who speak out. So for example, Bill Murphy of GATA was given one and only one chance to appear on CNBC when he launched GATA. Despite mountains of evidence that have surfaced since then in support of GATA's allegations, he has never been invited back on CNBC to expose that information to the public. Nor have any other major U.S. media really given him the coverage he is due. Joe Kernan and "the Brain" can talk on "Squawk Box" about whether their hairdos are good looking or not, but CNBC has not got time to approach the serious allegations brought about by Bill Murphy.

Likewise, Reginald Howe has taken on the most powerful banking and rich folk interests in America in a Federal Court in what any fair minded person could only conclude is a highly credible case. Yet, the mainstream press has chosen not to even mention it. The same is true for the splendid work of my friends like Dr. Larry Parks, (www.fame.org.) and James Turk, (www.GoldMoney.org).

But when it becomes hard to discredit someone by merely keeping him out of the mainstream press, what is an increasingly desperate establishment to do?

One way of course is to cast dispersions about someone regarding his abilities or mental health. So for example, one former underling of Bob Rubin, tried to suggest to me that Frank's views are the product of emotional problems. This person remarked to me that Frank can't go out and say something that might be destabilizing to a banking system and then claim that he "forgot to take his medicine." Speaking out about central banks, according to this individual is against the law and emotional imbalance is not an adequate defense against those actions.

This is the kind of treatment we used to hear was handed out to dissidents in the former Soviet Union. I have personally met Frank Veneroso on several occasions and have spoken with him several more times on the phone. I sat next to him at dinner in Calgary a couple of years ago. Moreover, having worked my way through Rutgers as an employee in a community psychiatric hospital in Morristown, N.J. in the late 1960's and early 1970's, and having seen hundreds of neurotic and psychotic patients, based on my experience (admittedly I'm an amateur), you cannot convince me that Frank Veneroso is anything but lucid, rational and extremely bright human being.

Yet so superficial are Americans in analyzing the news that they quite quickly accept what they wish to be true and do so on the basis of 20-second sound bites and character assassinations, like the one by this former Bob Rubin underling. In fact, anyone who automatically believes the establishment pap with regard to the gold markets without even considering the validity of Veneroso's arguments or those put before Judge Lindsay in a Boston Federal court by another brilliant Harvard graduate, Reginald Howe, are willingly fooling themselves.

IF YOU CAN'T MARGINALIZE - SILENCE THEM!

Given Frank's impeccable credentials (Graduated from Harvard with honors and has consulted for numerous central banks and large corporations), the establishment has apparently found it necessary to silence him, lest an increasingly number of higher-level establishment folks begin to understand the validity of his arguments. I hope and pray that what seems to have happened to Frank Veneroso is not true. Unfortunately, collaborating evidence from two sources that know Frank very well and who have worked for him tell me it is true. How can this happen in a country that is supposed to hold sacred our first amendment rights? Answer: We are no longer a democracy. Once the Federal Reserve was formed, the powers behind its formation began to quietly but most certainly erode our freedoms. Now, with the Kondratieff winter staring us in the face, and with war being waged around the globe, the disappearance of our liberties, which are supposed to be ours under our Constitution, are becoming ever more obvious. And what is really scary is that few citizens seem to care.

GOLD LOOKS STRONG TECHNICALLY

From a technical viewpoint, gold is looking stronger than it has for years. Gold has built a powerful multi-year base and it is now 10% above its, As Richard Russell pointed out in his Remarks publication yesterday, gold is now solidly above both its 50 day and 200 day moving average. And from a fundamental viewpoint, why should it not be? The global equity markets are in deep "doo doo". The global debt markets are wading in the same unpleasant substance. The dollar is hugely overvalued and ready to plunge. No one can believe any financial statements any longer because our "culture of lies" has proclaimed lying a virtue so long as you don't get caught. Now that liars are getting caught its not such a virtue (never was in my view).

As we pointed out in our January issue, debt is so great that it is quickly reaching a point in which the world's financial system will (not could or might) implode. Seldom in my 54 years have I seen a more powerful case for gold. Thus we continue to recommend allocating a minimum 20% to gold plus additional exposure via the Prudent Bear and Prudent Safe Harbor Funds as we have outlined in our Model Portfolio.

RICHARD RUSSEL ON GOLD

I don't miss a day of the excellent commentary from this seasoned and highly respected market professional. Richard is a great role model for me, not only because he knows what he is talking about but also because over time, he has learned that there is no place for arrogance when it comes to markets. Markets have a way of humbling even the cockiest of us at times. This is something that we gold bugs are going to have to keep in mind if, as I expect, our favorite metal is in the early stages of a super bull market. In any event, when I quote from Mr. Russell, it is only fair that I guide you to his web site and suggest you consider subscribing to his service as I do. To me his service is worth every penny of the $200 subscription price. Visit www.dowtheoryletters.com for more information.

Richard has turned increasingly bullish on gold over the past several weeks. He has been at least moderately bullish for several months. And he, along with some of the champions of our newsletter (David Tice, Ian Gordon, Dr. Batra, Dr. Larry Parks to name a few) was among the earliest analysts to conclude that we are in a primary equities bear market. In any event, here are some words from my hero Richard Russel published in "Richard's Remarks" on February 4th, 2002.

"The central banks of the world would love a world without gold. They would love a world in which there is no alternative to the paper money which they can create at will. Gold, which must be mined by the sweat of men's brows, cannot be created by faceless men sitting behind desks in central banks. Gold production is limited, and gold is costly to produce. As the mountains of paper money pile up, it must be measured as a ratio against the amount of gold that exists or is being mined.

"To put it succinctly, I believe we're nearing the crossroads. The crossroads I'm referring to is the point at which the world's central banks lose their battle against gold. Money is quietly pouring into gold bullion, gold coins and gold stocks. We can see it in the charts. And it's big money, important money. And significantly, we know a fair portion of it is Chinese money.

"Back in 1980 gold was over 800 dollars in price and the Dow was 796 at the low. That was a ratio of roughly 1 to 1 -- gold against the Dow. The ratio today is now 34.2 to 1 in favor of the Dow. But the unknown to almost everyone, the Dow/gold ratio topped out in August of 1999 at 42.1 then formed a lower peak in May of 2001 at 41.1.The ratio has now dropped to 34.2. The giant parabolic rise in the ratio has topped out, and when parabolic rises peak, they are usually followed by declines over a period of YEARS.

"Russell forecast -- I see an extended period, maybe multi-years, in which gold will outperform the Dow. It would not shock me to see the ratio return to 1 to 1 some day. More about this in the next Letter."

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

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