Taylor on us Markets & Gold

December 24, 2002

Bullish Markets

Gold Prices

The move last week above a steel wall of resistance in the $325 to $330 range for gold has kindled optimism among gold bugs. Thursday morning, gold actually moved upward to $355 before the Philippine government reportedly sold 4 tons of gold to knock the price down to $350 that day. Still gold finished the week at $340.30 which is comfortably above the stubborn resistance levels of just a few days ago. With the spot price of gold at $340, compared to a 20-day moving average of $330, a 50-day moving average of $323.71 and a 200-day moving average of $312.51 and with the price rising dramatically above a key resistance level from the middle of the year, from just a technical viewpoint, gold has not looked this bullish for quite a number of years. We would expect some backing and filling on the gold charts before it begins another significant rise.

XAU

Gold Stocks - This index of major gold stocks has turned bullish over the past two weeks. It closed this week at 74.88 vs. its 200-day moving average of 67.64. However, the shares have not performed as well as the price of gold has, perhaps in large part because this index is comprised of some heavily hedged gold mining firms like Newmont, Barrick Gold and Placer Dome, all of which do not stand to benefit fully from higher gold prices because of their hedges. And in fact some of them may in fact find themselves in some financial trouble if the price of gold continues to rise.

Silver

Silver has been lagging gold, but it too has turned bullish over the past couple of weeks. At $4.61, it stands above its 200-day moving average of $4.55.

CRB

This commodity index has been rabidly bullish from February until the present. Its moving average of 236.68 at the end of this week stood above the 20-day, 50-day and 200-day moving averages. This past week it slipped below a short term resistance line, but given the enormous amount of money being pumped into the system, we would not be surprised to commodity prices continue to rise especially if a war with Iraq significantly limits supplies of oil and as the dollar continues to weaken. Actually we view rising commodity prices as being hugely DEFLATIONARY for Americans because in effect it represents a major tax against dwindling incomes a growing amount of which is already being taken out of the demand side of the economy by a surging debt service burden.

US Treasuries

While interest rates have risen slightly, U.S. Treasuries of all durations remain in a fabulous bull market. We continue to watch the debt markets very closely to see if weakness in the stock market continues to fuel higher Treasury prices. If/when stocks continue to decline AND the bond market also goes into a bear market, we should see a major decline in the dollar and a huge rise in gold. Given the huge dependence on foreign capital, we could see a major rise in interest rates even as the economy continues to weaken.

Bearish Markets

The Dollar

Just as gold rose sharply above its key resistance level, the dollar has plunged below its short-term support level to close the week at 103.46. That compares to a 20-day moving average of 104.79, a 50-day moving average of 105.70 and a 200-day moving average of 108.85. This is about the most important market there is for an American, especially given the huge dependence we have on foreign capital to keep us solvent. In my view, any country that has to rely on an inflow of capital to the tune of $1.5 billion per say is not a financially healthy nation. If as we expect foreign capital not only fails to flow into the U.S. but reverses out, we could witness a wholesale demise of the dollar as well as the bond and equity markets. Gold and perhaps commodity prices in general could benefit, though we continue to buy Ian Gordon's argument that powerful deflationary forces are likely to ultimately overwhelm commodity prices though not gold, which is first money and only secondarily a commodity.

The Equity markets

The Dow and the S&P 500 remain in a huge bear market. Both of these key markets remain below their short and long term moving averages and both seem poised to soon test the October lows. We think both markets will eventually fail that test and continue their plunge to much lower levels. Ultimately we think the Dow and Gold will trade at a 1:1 ratio when equities hit bottom as has been the case in prior bear market bottoms (the 1930's and 1970's). With gold closing at 340.30 and the Dow at 8512.01, the current ratio is 25:1 Whether the bottom comes as a result of an $8,000 gold and an 8,000 Dow or $1,000 gold and a 1,000 Dow, the relative results will be the same. Gold will triumph over stocks big time!

Strong Dollar Disinformation Continues From Establishment

With the dollar weakening, the establishment is coming out of the woodwork to make sure the truth about the Clinton Strong Dollar policy is obscured. A good example of this misinformation campaign came in the form of an answer to a question on Wednesday from a CNBC host about how policy could lead to a weaker U.S. dollar. C. FRED BERGSTEN, (Senior Fellow at the Brookings Institute, CFR member, Bilderberg member and Trilateral member), said that the Clinton Administration actually did not have a strong dollar policy but that it simply used strong dollar rhetoric to drive the dollar higher.

This we think is total "bunk." We know, based on the excellent work of GATA and on the basis of Reginald Howe's lawsuit that the Clinton Administration engineered their strong dollar policy by trashing the gold price and that this process started with the Mexican crisis in 1995. We are sure that based on a paper co-authored by Lawrence Summers having to do with an economic relationship known as "Gibson's Paradox," that the Clinton Exchange Stabalization Fund (ESF) was aware that if they were teem up with the Fed to create billions and billions of new debt money created out of thin air to bail out Mexico, Long Term Capital Management, Russia, Asia and Y2-K, they would have to cap the gold price. Otherwise, as real interest rates declined (thanks to increased supply of money) the dollar would begin to decline, in which event, the U.S. would not be able to attract enormous amounts of capital into America to allow the bubble to expand into what became the most excessive financial bubble in history. (To read more about the what Summer knew about why gold had to be manipulated, visit: http://www.goldensextant.com/commentary18.html#anchor196905.

Unfortunately, the booming stock market and booming economy was, stimulated on the basis of a couple of falsehoods that could therefore never lead to a lasting prosperity. Those falsehoods were: 1) A strong dollar and 2) the notion of a "New economic paradigm" that defied all the laws of the universe. The strong dollar was a falsehood because it was orchestrated by gold market manipulation which served to make the dollar look stronger than in fact it was. And when Alan Greenspan buckled under to political pressures following his irrational exuberance comments in 1996, he joined interventionists of the Clinton Administration to tout the New Paradigm myth.

The booming days of the late 1990's made us feel good and that helped save President Clinton's bacon from impeachment. But it was a phony "feel good" caused by enormous amounts of debt money created out of nothing. And so, unfortunately the boom of the late 1990's was a myth caused by enormous amounts of funny money. And now, we are starting to pay the price as the truth about the U.S. economy and our currency are beginning to be exposed.

The establishment is now trying desperately to keep an honest examination for the cause of the bubble from the public conscience. Thus, you hear Fred Bergsten denying there was anything of substance behind the strong dollar policy. And you NEVER hear anyone in the mainstream argue that the bubble and accounting fraud was at all related with the enormous amounts of money created starting with the Mexican and subsequent bailouts which coincided with the beginning of the gold market manipulation. The only exception to that is Congressman Ron Pual, M.D. who sits on the House Banking Committee.

Mr. Bergsten may or may not be aware of the gold manipulation scheme. But whether he knows it or is simply carrying some water for someone higher among the elite company he keeps, this secrete groups he is a member of are the folks who really control the American political process, so the outcome is the same. The elite do what they can to keep the American people ignorant with respect to the why's and wherefores of the 1990's financial bubble and the awful aftermath of the Kondratieff winter that is only now starting to play itself out. Were these truths to come into the open, the outrage of the public would demand revolutionary change in our government.

It is the social injustice as much as the economic chaos the elite has caused that gets your editor's blood boiling. But from a practical point of view, it is essential that we understand what is REALLY going on, as opposed to what CNBC tells us is going on, because only if we can see behind the establishment fed misinformation will we be able to properly establish a winning portfolio strategy for 2003. Knowing as we do that the gold markets have been manipulated and that the dollar has been strong not because of a strong economy but because of deception created by government manipulation, allows us to position ourselves on the long side of those markets to benefit from the inevitable shift back toward equilibrium, that will ultimately occur because NO government, no matter how powerful can control forever market forces forever. Knowing what we know, as we draw the curtains on 2002, we can confidently position ourselves on the long side of gold and on the short side of the dollar and U.S. stocks as we start 2003.

Will Greenspan Return to Policy he Really Believes in?

We have been hearing about a gold backed dinar to be put into effect by the Islamic countries. This I have viewed as a very shrewd move by those who despise the U.S. As the U.S. financial system rots from inside out, one non military way for our ideological opponents to defeat us but good would be to establish a sound money system. After all, it has been true throughout history that countries usually crumble from within from immorality and decay and nothing has become a more key element to the decay of American morality than our dishonest and undisciplined monetary system. By pushing trillions of dollars of debt manufactured money into our society, we have not only encouraged a whole nation to think they can get rich without producing anything, but it has resulted in an unbalanced global system that is headed for a major collapse, unless some major changes are quickly made. Recognizing the internal pathology caused by a dishonest monetary system, the Islamic community may be able to make far greater geo-political inroads against the American "Satan" by simply doing namely by doing what America should have done all along, namely stay with an honest and disciplined gold backed currency which forces a most despised trait on many if not most politicians, namely honesty.

To me, Alan Greenspan has been an extreme enigma. On the one hand, in February of 2001 advised one member of the House Banking Committee that he still believed in the virtues of gold as money that he had written about in 1966 in an essay titled, "Gold & Economic Freedom." Yet, from the time he became Chairman of the Federal Reserve in 1987 through the end of this past week, he had seemingly become the most irresponsible Federal Reserve Chairman EVER! For example, from 1987 through the end of this past week, M-3 grew from 3.52 trillion when Greesnpan took office to $8.55 trillion at this moment in history. In other words, in a mere 14 years, the Greenspan Fed created produced $5.02 trillion of new debt money, while during the first 211 years of American history, "only" $3.52 trillion was manufactured.

Given his self-acknowledged reverence for the discipline of gold and the freedom and protection of private property that results from using gold as money, I always believed Mr. Greenspan would have acted in a more responsible manner. I thought for example that he might behave more like Milton Friedman earlier had suggested in setting a steady but slow monetary growth path akin to an economy's natural growth rate, with minimum intervention. Indeed, it seemed Chairman Greenspan did act very responsibly in terms of his oversight of money growth until the Mexican crisis followed and then more significantly following his infamous "irrational exuberance" remarks in 1996. But from that time on, money supply skyrocketed as the Clinton Administration, Wall Street and many Congressional members expressed their outrage at Mr. Greenspan apparently "taking away the punch bowel from the party."

If you examine money supply growth from that time on, Greenspan put the pedal to the metal like no other Fed Chairman before him. He has made the rapid inflationary money growth of former Fed Chairmen Burns and Miller (during the 1970's) look like kids stuff in comparison. I recall on more than one occasion expressing my confusion over Greenspan with two good friends, namely Dr. Larry Parks and James Turk, both of whom have paid a great deal of attention to Greenspan who has libertarian roots. Both of these men, who have followed the moves of Greenspan's career at the Fed far more closely than I have, thought he may in fact have a method to his money creating madness. Both Larry and James have speculated that the "Greenman" (Richard Russell's nick name for Alan Greenspan) might be laying the ground-work for a return to a gold monetary system once again. He has always said privately on more than one occasion that the reason he doesn't follow his beliefs is because he is the only one at the Fed who thinks this way about gold. Thus he gives in to the majority. But could it be true that Greenspan has all along strived to create so much money, giving the banking establishment the food for their profits via easy money that he knowingly has set the stage for the demise of fiat money and a return to a gold standard? That seems a bit far fetched, but in that vein, here were some very interesting observations made this past Friday by James Sinclair based on a speech Greenspan gave in New York on Thrusday, December 19, 2002.

James Sinclair Suggests We Are Heading Back to a Gold Related dollar

The brilliant gold market analyst and trader, James Sinclair wrote an extremely interesting and perhaps most significant article yesterday. You may read this in its entirety by visiting our web site at www.miningstocks.com . For now I will paraphrase the article as best I can, but before I do, it is necessary that I quote a paragraph from Alan Greenspan's December 19, 2002 speech at the Economic Club of New York.

"Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But, in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, has allowed a persistent over issuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess."

Is this not an acknowledgement of a failure of fiat money and a need to return to gold? Is this not an acknowledgement that the great financial bubble of the 1990's was allowed to happen because of an absence of gold to avoid excessive money creation?

Again, I would suggest you read the article in its entirety, but here are the major points Sinclair made on this issue:

Gold Cover Clause - A Gold cover clause will be used to limit the amount of money that can be created out of thin air and thus avoid the problems of the 1990's. (Greenspan didn't say this but there is no doubt that is what was on his mind).

Conversion not Immediate - Sinclair thinks they will delay the conversion to a gold related currency for now because they have to continue inflating the dollar. However, by the time the dollar index gets to about $0.70 (Its about $1.03 now), they will institute the new system to avoid seeing the dollar spiral downward in value.

$450 to $550 Gold in 2003 - Sinclair said "I think the price of gold is heading higher without significant interruption. I firmly believe that gold is headed back into the monetary system in a control mechanism with an adjustable market mechanism. Gold will be trading between $450 and $550 in 2003.

While a $450 to $550 gold price would do wonders for our Model Portfolio, we are anxious to understand more about the gold related monetary system envisioned by James Sinclair. Somehow, given the erosion of freedom that we have been experiencing, it is hard to believe these developments will be positive in terms of our basic rights. But we can always hope and pray it is positive.

COULD GOLD'S RISE BE FOOLING US?

Could the recent rise in the gold price be just another of many false starts that we have seen in the yellow metal's twenty year bear market? Might it be true that the dollar truly is valuable and that it will being rising again seemingly defying the laws of nature as it did during the Clinton years when tremendous amounts of new money creation did not result in a declining dollar value but saw the dollar surge to higher values even as its supply skyrocketed?

Richard Russell reminds us frequently that markets can do anything. And anyone who thinks they know for certain what lies ahead is a fool. Your editor knows what that feels like to be wrong about markets. In the twenty-year gold bear market, I have been cut down to size many, many times. I do respect the power of markets and know first hand that Richard is right when he says markets can do anything.

There are many reasons why I believe very strongly we are in the early stages of a long term bull market in gold. But still there are some very bright and independent people out there, like Bob Prechter for example, who are very, very bearish on the stock market but who also think gold could take a plunge to levels not even gold haters have in mind. James Turk was becoming a bit concerned a couple weeks back about gold's apparent inability to break through the $325-$330 resistance levels. I talked to James yesterday. He said he is feeling better now that that key resistance level has been penetrated, and he voiced his hope that the $340 level could be held as it was with gold closing at $340.30 on Friday.

But consider this fact. The recent run in gold coincided exactly with the timing of Treasury Secretary O'Neil's resignation. Starting that very day, gold became stronger and stronger. Remember we have every reason to believe the Exchange Stabalization Fund (ESF) has been used to manipulate the price of gold downward. Remember also that under U.S. law, created during the Roosevelt days, only two people are required to know what clandestine activities are being carried out in the foreign markets by the ESF. Those two people are the Treasury Secretary and the President. This is a most undemocratic, fascist/socialist like law. And we think it may be very revealing that Mr. O'Neil guarded the ESF's secrets regarding its activities in the gold markets so closely from questions asked of him by Congressman Ron Paul. Dr. Paul proposed legislation in Congress that would require the President and Treasury secretary to advise Congress when the ESF engages in any gold trading. Mr. O'Neil said the ESF never does anything with gold so the law isn't necessary. But then one wonders if the ESF does not ever engage in gold related transactions, why it would be such a big deal for such a law to be passed that would allow the American people to see what their government is doing with their gold, which provides stability to the Treasury's balance sheet, whether or not Keynesian educated economists acknowledge that fact or not.

So we wonder. Could it be that the price of gold has managed to rise higher simply because there was no one available to tend the ESF store? Or might we have finally arrived at that magical moment in history when market forces are simply too powerful for interventionist measures to continue defying those forces?

Soon enough, a new Chief Economic Advisor to President Bush will take office. He formerly shared a leading role at Goldman Sachs with Bob Rubin, the orchestrator of the strong dollar policy, which was orchestrated through gold price manipulation. We would thus suspect he would certainly have knowledge of the anti-gold cabal and how its aims and manipulations of the markets could best be carried out. As an advisor to the President, one would think he would be in a position to work with the President to protect the status quo banking establishment who hates gold the most because is honesty vastly reduces that industry's ability to engage in theft via debt/money. Soon after the new economic team takes office, we find out if the recent rise in the gold price has been related to Mr. O'Neil's departure and more importantly, whether or not the U.S. still has more bullets available to drive the price of gold lower again.

The California Gold Rush began on January 24, 1848 when gold was found by James W. Marshall at Sutter's Mill in Coloma.