Taylor on us Markets & Gold

December 31, 2002

Market Summary

Bullish Markets: Gold, commodities (XAU and the Rogers Raw Materials Fund), gold stocks, silver stocks and the U.S. Treasury markets.

Bearish Markets: The dollar and equities

Richard Russell on Equities and Gold into 2003

Richard Russell is a must read from my viewpoint. From time to time I share some of this market veteran's words of wisdom with you simply because I like to share good things with my subscribers and also because I hope you will take out a subscription to this national treasure. To sign up for Richard's newsletter visit www.dowtheoryletters.com. Because I view with all of the following words from Mr. Russell in his December 27th issue of "Richard's Remarks," I am passing them along to you for your enrichment.

"It's quite amazing, but despite the lousy action of the stock market, the latest poll figures gathered by Investor's Intelligence shows bullish advisors at 49.4% vs. bearish advisors at 26.5%. "Hope springs eternal.

"With the year 2002 almost ended, we can see that it's been another losing year in a continuing bear market. The Dow as of today is down 15.8% for the year. S&P is down 22.5%. Nasdaq is down 29.8%. Wilshire is down 21.22%. The Value Line is down 27.9%. Companies in the MSCI World Index, a global benchmark, have lost $1.2 trillion of market value for the year.

"In Europe the Stoxx 50 has lost 33% and the Dow Jones Stoxx has fallen 31%. Germany's DAX index, one of the worst performers, is down 42% this year. The Nikkei 225 has lost 17% for the year.

"How about China, which is where so many Westerners thought they could reap in the profits? China's index of B shares, which foreign investors can buy, has dropped 19% For the year. As for South America, Argentina's Merval plunged 48% and Brazil's Bovespa collapsed by 48%.

"It's a world bear market, and it's shaping as maybe the worst since 1929-32.

"What about next year, the year 2003? What do I know -- it hasn't happened yet.

"But I can guess. My own guess is that next year is going to be an S.O.B. In case you don't know what that means, S.O.B. stands for son-of-a-bitch. Translated that means that I think 2003 is going to be a very difficult year. (Editor's Note: if 2003 is also down, it will be the second time in all Wall Street history since there were four straight years of negative returns SINCE 1929-1932).

"Russell, why are you saying that?

"I'm saying it because -

"(1) There is still FAR too much bullishness, considering that this bear market is not even close to being completed.

"(2) This bear market is three years old, and the Dow has not lost as much as half of its bull market gains -- and I'm talking about the bull market of 1974 (Dow 577) to 2000 (Dow 11722). Half of the bull market's gains would take the Dow back to 6149. We're not there yet, but I think there will get there -- probably next year.

"(3) The market will be down three years in a row. This is a very rare and bearish series. I believe that this series is the market's way of discounting important deterioration in the economic, social and political fabric of the nation. This deterioration, I believe, will begin to show in 2003.

"(4) The Greenspan Fed has been a mainstay for bullish hope among investors. I believe that in 2003 Greenspan will be discredited and doubts will arise regarding the usefulness of the Federal Reserve (criticism of the Fed will increase, and many will begin to see the Fed as "part of the problem").

"(5) With the bear market deepening, Bush's popularity will plunge and many of his policies will be disparaged.

"(6) Unemployment will increase substantially in 2003, and consumers will become increasingly disillusioned. Debt will become a crushing problem and the operative phrase will be "With these low rates, where can I get some income?"

"(7) The dollar will continue its decline and the rising price of gold will tell Americans that "something is terribly wrong."

"(8) I think the housing bubble is living on borrowed time.

"What about gold? In the latest week the M-3 money supply was up $8.55 billion. That's just one week worth of bank credit. A quarter of that one-week increase could buy the entire gold industry.

"I believe the public is either ignorant about gold or oblivious regarding what's happening in gold. The fever hasn't started yet, but I believe that somewhere ahead we're going to experience "gold fever."

GOLD - Long-Term Gold Chart showing Gold rising through old resistance Levels.

Gold continued to display real strength last week and as the long-term chart above illustrates. Gold is looking very bullish. Spanning the time frame of this chart, there are no resistance levels in sight so from a purely technical viewpoint, all we can see for the foreseeable future is "blue sky." The yellow metal finished the week at $348.90, well above its 20-day moving average ($335.69), its 50-day moving average ($327.17) and its 200-day moving average ($313.86).

James Sinclair has provided some insight into policy changes at the Fed and in the U.S. Treasury that may well be changing the fortunes of gold investors. James lays out a very logical explanation for believing our policy makers may now have made a 180-degree turn from an anti-gold price manipulation policy to a pro-gold policy in an effort to devalue the dollar so that prices will rise in America so as to defeat deflation. I doubt it will work because a similar policy was tried by Roosevelt and failed in 1933. Roosevelt devalued the dollar by raising the gold price by 69.33%, from $20.67 to $35.00. Neither this policy nor major government work programs really did much good as evidenced by the fact that the "Roosevelt Kondratieff winter" was not over until about 1949. Yet, Fed officials have in fact referred to policies put in place during those years as a model for what they are getting ready to do now that Ian Gordon's 1999 prediction of deflation is starting to be acknowledged by the establishment.

So how does the Dow/Gold ratio stand now? The following chart tells the story.

With the price of gold closing in New York on Friday at $348.90 and with the Dow closing at 8303.78, the ratio has now fallen to 23.80 times. That's quite a ways below its highest ever ratio of over 40 times, but it is a long, long way from a 1:1 relationship. O'Higgins suggests that gold will rise to $6,000 and the Dow will decline to 6000 at the bottom of the bear market. The point is, whether the ratio is 6,000 to 6000 as O'Higgins suggests or whether it is at 3,000 to 3000 as Richard Russell suggests or to a Dow of under 1,000 and a gold price over 2000 as Ian Gordon suggests, the point is that by opting out of the fiat money system at this juncture, investors might expect to enjoy a transfer of wealth in their direction at the expense of all those who are duped by our policy makers to stay in a paper money system - to stay in stocks and bonds - while the seeds have been sewn for its paper money's destruction.

In every cubic mile of sea water there is 25 tons of gold