first majestic silver

Taylor on us Economy, Markets & Gold

March 25, 2002

We sound like a broken record, but overvaluation of the stock market is so severe that we must continue to hammer away on this theme week after week. According to Decision Point the latest GAAP measured PE ratio for the S&P 500 is 44.3 times. ( Normally, bull markets peak at about 20 times earnings and then decline to under 10 times at the bottom of bear markets. With the S&P closing the week at 1148.70, based on current earnings levels, it would have to close at 518.60 just to be in line with prior market peaks. A decline to 10 times earnings would take the S&P 500 to 259.3!

The bulls counter this logic by saying, "yes, but you are measuring earnings at the bottom of an earnings cycle. Wait until the economy begins to grow again and you will see earnings take off." To that we reply, "we don't think earnings are going to grow much if at all over the next several quarters." Sure the quarter-to-quarter comparisons are going to be much easier this year than last year, so that a leveling off of earnings from last year might be possible. However, we do not think earnings are going to rise to levels anywhere near great enough to justify current equity prices.

Why are we so bearish on profits? First, a glut of global supply in almost every good and service continues to exist. This is due to mal investment and over investment related to the greatest money printing binge in history, thanks in no small part to the Clinton Administration's gold price rigging schemes and Alan Greenspan's willingness to go along with that scheme for the benefit of his bosses, the banking establishment.

Second, with China and other poor populous countries joining the world markets, a supply glut will continue for the foreseeable future, thus continuing to rob producers of any pricing power they would hope to have.

Third, and perhaps most significant of all with respect to pricing power for U.S. corporations, is the overvalued dollar. As long as the establishment is able to keep the dollar artificially overvalued, American companies are going to continue to face disadvantages in the marketplace. When the long anticipated dollar decline arrives, this could change the fortunes of mining, manufacturing and agriculture in America. However, so much damage has been done to basic American industry by way of the phony Clinton strong dollar policy (by the trashing of the gold price) that a very large number of companies have been lost to America forever.

Fourth, and also very significant, is total U.S. debt which now exceeds $30 TRILLION! The cumulative effect of debt on the U.S. economy cannot be over stated and even more significant is the direction of its growth, thanks to Greenspan's insatiable desire to keep various bubbles inflated. Debt is the raw material from which money is manufactured in a fractional reserve banking system. As debt grows exponentially compared to GDP, which grows consistently between 2% and 5% over a long period of time, effective demand in the economy, from corporations, consumers and local government alike MUST decrease as more and more of national income is consumed in paying interest and principal on debt.


For all the rightful concern about the attacks on America on September 11, 2001, far more destructive to our nation has been the gold rigging, dollar-enhancing lie put forward by the Clinton Administration and now supported by the Bush Administration. The overvalued dollar is doing far more to undermine American strength than the terrorists did. And to make it worse, very few, even in Congress seem to understand just how damaging the dollar lie is to American industry.

Dr. John Whitney, the CEO of Itronics and the mine engineering firm of Whitney & Whitney, explained to me last week his analysis of certain Chinese industries. John looked at industries that are highly capital intensive and in which high levels of capital rather than labor are being employed in China as well in the U.S. His conclusions was that due almost entirely to a fictitiously overvalued dollar, American industry is closing its doors thanks to Chinese (and other) exports. I do not take Dr. Whitney's analysis of this problem lightly. This man, who earned his Ph.D. in mineral economics, knows what he is talking about. The trouble is, most of the politicians in Washington are on the take from big banks and big corporations to such an extent they are blinded by this obvious problem. Otherwise, they would be more concerned about the issue of a rigged gold price which has made possible the overvalued dollar and the drunken stock market orgy Americans have indulged in over the past number of years. But alas, it seems as though the party is just about over. All we can do is try to see clearly this freight train that is roaring down the tracks toward us and prepare best we can for survival.

Why buy Stocks that Yield So Little and Contain Such High Risk?

The reciprocal of the PE ratio gives you the EARNINGS YEILD. The earnings yield is comprised of dividends plus retained earnings. As of the close of business on Friday, the earnings yield was a mere 2.26%. For some reasons, this week's "Barron's" was not available at my local newsstand. However, with few, if any earnings announcements last week, we doubt that the breakdown between dividends and retained earnings have changed much since last week when dividends paid were 1.36%, meaning that retained earnings, questionable as they are, amount to around 0. 90% or 90 cents for every $100 you invest in the S&P 500.

So with Michael B. O'Higgins like simplicity, we continue to argue against owning mainstream stocks. The S&P 500 is extremely expensive. Unless you can make a case that earnings are going to EXPLODE! (which we cannot do for reasons outlined above), the logic for buying the main stream equities in general, as continuously touted by CNBC, is hard for me to grasp.

Our Model Portfolio is up 22.43% so far this year.

At this stage, we remain very comfortable with our Model Portfolio which is up 22.43% so far this year, compared to an S&P gain of 0.05%. Leading our gains are gold shares (+70.72%), Energy Stocks (+39.3%) and Tech stocks (+29.8%). So far, the Prudent Bear Fund (+3.66%) and the Prudent Safe Harbor Fund (+6.65%) have pulled our average down. However, given our very bearish views on both the dollar and U.S. equities, we think these two funds, into which we have allocated 50% of our portfolio will serve investors well by year end.



"In the midst of the drama of the gold market it is easy to lose focus. Refocusing is as simple as asking us why does the cartel exist that has so affronted the laws of supply and demand? Why has so much effort and capital been put into massaging the chart formations of gold bullion's price? Was it a simple law of nature that put supply into the market recently at $304.60? No, not a chance! It was selling with the clear intention of preventing a close of the gold bullion's price above the key technical level of $305.

"Why all this effort? Why all this risk? Why is there a gold cartel in the first place? The answer is not to prevent gold from functioning as a barometer of true inflation thereby affronting the peace of the equity markets. It is not because gold is threatening to replace the dollar as a currency. No it is not because some large speculative short position is protecting itself.

"No, it is not to protect the gold producers who have used the gold derivatives to hedge Practically ALL NEW Production ten years forward to obtain non recourse borrowing and off balance sheet loan capital. No, it is for a much greater and potentially dangerous reason. The Gold cartel exists because should the gold market move into a bull phase the basic faulty structure of the gold derivative will cause a collapse in the ability of the derivative transaction to impair its ability to function.

"The size of the gold derivative nominal value outstanding measured by reporting entities is larger by orders of magnitude than the amount required to hedge all new gold production tens years forward. It is made obvious by simple arithmetic that the gold derivative "so called" market has found perverse uses that have absolutely nothing to do with gold other than as a mechanism to create loan capital. It is obvious that the gold producer gave birth to a market that has been used in greater volume by non-gold producers. The gold derivatives market is truly the "Rosemary's Baby" of the "Spawning" gold producers, seduced by almost free money and off balance sheet financing. Did it ever strike anyone that if you can borrow hundreds of millions of dollars at 5/8 of 1% something might be wrong?

"The gold Cartel must succeed since if the gold derivative fails, which it is destined to do, then all other derivatives will come under the scrutiny of the public just like Enron and Arthur Andersen have."

EDITOR'S PARTIAL REBUTTLE: Mr. Sinclair's views on the urgency for the gold cartel to hold the line at $305 gold is no doubt very valid. However, I would not agree that this was the INITIAL motive of the Cartel. Certainly the academic paper co-authored by Lawrence Summers in 1988, on the topic of Gibson's Paradox, suggests a macro-economic motivation. In his paper, Summers demonstrated that he knew that if the U.S. were going to engage in bailing out the world, it would have to "cap" the gold price. Otherwise, with more paper money in circulation, interest rates would decline and the gold price would rise vis-à-vis the dollar. A tanking dollar would be counterproductive for the Clinton Administration from an economic and hence political perspective.

When the Gold Anti-Trust Action Committee was first formed, Bill Murphy and others associated with it, including Reginald Howe, the plaintiff in the anti-gold price fixing case, did not know of Mr. Summers' insights into the relationship between interest rates and gold. They observed, starting in about 1994-95, certain very strange market patterns in the trading of gold. For example in something like 92% or 94% of the time, the price of gold finished lower in New York at the close of trading despite the fact that there exists an international market for gold. That meant that purchases of gold outside of New York were on average at much higher prices than for purchases of gold in New York. And there were a host of other bits of circumstantial evidence as is so well documented at and at

So what bailouts were the Clinton folks engaging in starting in 1994-95? Remember Mexico, followed by Long Term Capital Management, Asia, Russia and Y2K? What do you think would have happened if when we began bailing out Mexico, the gold price ran up to $500 rather than declining to $260? Do you suppose our stock markets would have evolved into a state of "irrational exuberance" as they did from that time on until 2000?

What really was at the heart of the Clinton "strong dollar policy"? Well, Rubin, Summers and Greenspan too like to sanctimoniously talk about "efficient U.S. markets" and about how the U.S. markets were fair and clean and transparent, unlike those of other countries. They liked to talk about the technology genius of America and how that was making us so much more productive. What they never did talk about, but which was at the heart of the strong dollar policy, was the trashing of the gold price. So, as gold continued to decline, Lawrence Kudlow and other supposedly supply side, free market types like Jack Kemp and Steve Forbes could talk about how wonderful the U.S. economy was. They pointed to a declining gold price (declining because it was rigged) and suggested that a lower gold price was reason enough for Greenspan to continue putting the pedal to the metal at the Fed. The declining gold price fueled a stronger dollar which helped drive an-ill advised mania in dollar denominated financial asset prices that we are now beginning to pay dearly for.

So, Mr. Sinclair may very well be right in suggesting that the urgency on the part of the Cartel is now to keep the entire banking system from imploding. However, I continue to believe that the initial motivation was to spin the U.S. dollar and hence its financial markets into a false sense of superiority for the purpose of political gain. It is hard to see how this kind of manipulative behavior - which is more akin to what one would expect of a banana republic than of a Jeffersonian democracy - can end in anything but tears. That holds true even for those of us who may reduce the pain of our future by owning gold. I fear that the economic dislocations have become so severe that when the end comes, it will be hard to see how any of us will be better off than we were before these evil interventions in the markets commenced.

Intervention in fact begets more intervention. In fact it is exactly the case where one lie begets another and another and another, each designed to cover up the prior lie. Markets are very much like that. When governments intervene, they throw markets out of equilibrium and to make provide immediate relief from problems caused by earlier interventions a growing number of subsequent interventions are required. So if we really want to trace back the gold price manipulations starting in the mid 1990's we really have to go all the way back to the establishment of the Fed in 1913. Both major parties have been willing partners to the Fed, which honest Constitutional scholars agree is unconstitutional.


Gold finished out the week very strong in New York. Gone are the days when 90+ % of the time gold finishes lower in New York. Lately it seems to close higher as often as it closes lower. That in itself is a drastic change from the past.

With spot gold closing in New York at $297.40, it is comfortably above the 50-day moving average of $291.03 and the $200-day moving average of $279.60.

Could it be that the gold cartel is finally losing control? Perhaps so. In chatting with Bill Murphy last evening, he told me that conversations he is having with a trader for one of the well known hedge funds (who is also a backer of GATA) revealed that the very well known hedge fund he works for, is turning very bullish on gold. The way this particular fund views gold is that there might be $10 or $15 of risk on the downside. However, that pales in comparison to hundreds of dollars of upside potential.

With all the geo-political and economic problems that the U.S. faces, is should not be surprising that a growing number of hedge funds are starting to nibble at gold. After all, the hedge funds in general are devised for wealthy investors who by their nature tend to be more independent and lest apt to allow themselves to be led to the slaughter by the establishment. These are the folks who ARE the establishment!

The 1849 Gold Rush sped up California's admission to the Union as the 31st state in that year.
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