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Taylor on us Markets & Gold

July 30, 2002

Bearish Charts - All Below Their 200-day Moving Average!

Again this week, I checked the major indices and 152 blue chip stock charts. All major indices, save for gold, commodities and government bonds were bearish. These markets remain in bullish territory, though marginally bullish in some instances. In fact, most were clearly in bearish territory with their spot prices below the 200-day moving average.

The Dow Theory continues to illustrate we are in a primary bear market. And the valuations on a GAAP basis remain greatly over extended. At the end of this past week, the P/E ratio was 34 times. That is down from 37.6 times at the end of last week, but even at 34, stocks remain extremely expensive relative to earnings. If we were to go to more normal levels at the end of bear markets, the S&P would have to fall to around 350 or 400 from its close this week to be at a value point where the S&P would compare with past turning points.

But that doesn't seem to stop the liars and spinsters from telling people that stocks are cheap. It is a symptom of the dishonest times but it turns my stomach and makes me very angry when I see these guys going on CNBC and talking about P/E ratios of 12 times! One day last week one certain stock pimp was talking about how the S&P was at a P/E ratio of 12 times and with interest rates where they are, they could justifiably be at 23 times. Thus he was looking for a double in stock prices!

But wait a minute. Last week noted that the S&P ratio was 37.6 times. Why the difference and who is telling the truth and who is blowing us down? All I can figure is that the stock pimp on CNBC was a) using operating earnings instead of GAAP earnings and b) he was projecting forward the highly suspect earnings projections of analysts rather than using trailing earnings. This is in fact just a continuation of the dishonest policies that start with non other than our government who prints money it claims to be wealth.

How we View the Economy Going Forward

Morgan Stanley Chief Economist Stephen Roach speculated on the basis of evidence and forward projections that the American consumer is about to bite the dust. If so, we are indeed in big trouble. Indeed, the consumer equity charts look extremely ominous and would seem to be in agreement with the views of this gutsy main stream economist.

Again we want to sum up what we think the overall cause of our malaise is. First, we have excess supplies of everything that exists on God's little green earth. This represents the hangover from the excessive monetary creation by the Fed over the past decade. Excess supplies result in very poor corporate profits. Very poor corporate profits result in cost cutting measures. And since 70% of corporate American cost is related to wages, look for another round of layoffs which will in turn further reduce aggregate demand and hence further push profit margins still lower.

Job losses combined with the wealth effect from lost equity values combined with what we think will be a collapse in real estate prices, will ultimately lead consumers to throw in the towel. By then, it should be all over for the dollar and paper investment instruments in general as massive amounts of foreign capital, which built up with America's chronic trade deficits during the 1990's heads out of America.

I believe the stock market is telling us something. I sense it is telling us we have big economic problems ahead of us such as more disappointing earnings, massive unemployment and consumer defaults, huge and mounting debts which, when unpaid will trigger in domino fashion default after default and plunging incomes. But then again, this is what the Kondratieff winter is all about.


Last week shook gold bulls up pretty good. But this was no accident or random happening in my view. In fact a retrenchment such as we experienced is normal in bull markets. But the sudden and violent decline in gold and gold shares this past week led to a number of email questions from subscribers like the following:

QUESTION: I have been following your commentaries and find them both informative and interesting. The July 23 essay was particularly thought-provoking.

After reading this most recent commentary and observing the recent action in the gold and gold equity markets, I write to inquire if you see anything particularly disconcerting or ominous in the recent gold price action and also that of the gold shares. Do you perceive that the bull trend may now be in doubt, certainly with respect to the shares, many of which are nearer or through their 200-day moving averages, or is the recent action still in keeping with a bull market correction with better days to follow after the July-August consolidation?"

ANSWER: The mining shares led the price of gold very aggressively on the upside. In fact, mining shares were showing greater leverage over the price of gold than is typically true. At least that has been true in our portfolio. For example, from January 1, to the end of June, gold had risen by 17.21% to $326.30. All of the gold shares shown on the back page of our June issue were up 166.33% or about 9.7 times more than the percentage gain in the price of gold. Normally, I would expect a gold share to gold price leverage on the order of 3 to 5 times. So, I believe the shares had gotten ahead of gold itself.

Of course there may be a good reason gold stocks have risen more than gold. With governments continually manipulating the gold price downward in order to con citizens into accepting paper money rather than gold, the suppression of the bullion price may have encouraged people to buy gold shares instead. Then the momentum players jumped in leading to even greater overvaluation in relation to gold bullion. Remember that during the 1930's the government also suppressed the gold price by making gold ownership punishable by a $10,000 fine and ten years in jail! But Homestake Mining exploded in price, and rose even more than the 1920's Federal Reserve induced bubble stock market that set America up for the bursting of that bubble and the Great Depression.

I would suspect, though I have no direct evidence, that some games were being played in the gold share markets too last week. Some well placed short sales of key gold stocks could have for example caused the XAU to plunge which in turn could then have triggered some of the momentum players out of those issues. And in sympathy with a few of these larger gold mining firms the juniors would have then followed suit.

And indeed, according to one of my best friends who works for a financial institution in New York, rumors abounded on Wednesday that intervention in the gold market itself was underway.

QUESTION: I truly enjoy your work and am following your philosophy and advice. But here is a question for you. Is there any possibility Greenspan and the PPT are holding gold prices down so they can surreptitiously acquire precious metals and store them in Fort Knox for the upcoming wars of World Gold Standard Competition?

ANSWER: The U.S. government can and apparently does what it wants with increasing disregard for the Constitution. That is apparent but unrecognized by most Americans who are too busy getting rich, getting high and getting laid to concern themselves with such trivia. Mountains of evidence have been assembled by GATA indicates our government is defying the basic rights of Americans to equal protection of their property under the law, But not enough people so far have been sufficiently concerned to force their elected representatives to stop the legalized system of theft at the hands of our government and their symbiotic friends on Wall Street.

Inherent in fiat money is the biggest and most basic lie told to Americans by our government and their friends at the Federal Reserve Bank. To preserve the dollar lie to Americans and the world, our policy makers have been trashing gold systemically for decades. As Congressman Paul told Alan Greenspan last week, our government sold 2/3s of our gold during the 1960's for the purpose of deceiving Americans and citizens around the world into believing our dollar was as good as gold. Of course, if that were in fact true, there would not have been any need to drive the price of gold lower by dumping it on to the market. But dump they did. What is important to keep in mind is that it worked in suppressing the price of gold for a little while. Eventually it rose dramatically from $35 to $850 in January of 1980 which marked the end of the inflationary Kondratieff summer.

The Latest Gold Manipulation Will Also Fail

And now we know, notwithstanding Mr. Greenspans claims to the contrary, that the U.S. has been lending gold and almost certainly swapping some of it out of our Treasury. Just as in the 1960's, the purpose of the gold manipulation since the mid 1990's was to keep people holding paper by deceiving them into thinking gold was a bad store of value and medium of exchange.

But eventually, these "evil doers" will run out of gold. Based on the supply and demand work of Frank Veneroso, and evidence since his "retirement", there is very good reason to believe our con-artist policymakers may be very close to the end of this game. It is already becoming increasingly difficult for countries to sell gold openly as the price of gold has risen considerably from its bottom. The British policy makers look very stupid now having sold gold at prices $20 or $40 below the current market price. So politically it is difficult for them to continue selling openly to keep the fiat money lie from being exposed.

But what about the continued clandestine gold sales by governments wishing to perpetuate the great fiat currency lie? Couldn't that go on for quite a while yet? Yes, I suppose it could go on for at least a little while longer. If we assume the U.S. has only about ½ of the gold it claims to have (remember it counts gold it loans out, even though it may never retrieve it) it may still be able to continue suppressing the gold price by lending or swapping gold to other nations. There is evidence this in fact was recently carried out with Germany. And indeed, this would be easier to carry out at this early stage of the gold bull market than later one when a growing number of people become gold believers.

But even this behavior has its practical limits. The U.S. has gotten rid of so much gold over the years even as it proceeded to create mountains of fiat money from mountains of debt. As a result, at current gold prices the U.S. has only about a 1% - gold backing for its currency. This contrasts sharply with a 15% backing for the Euro. In addition most of the European central banks still hold a considerable amount of gold in their vaults which provides an additional foundation for monetary growth that far exceeds what the U.S. has.

So what happens to the U.S. when the harsh Kondratieff winter freezes up American economic activity as it has in Argentina now? What happens as bankruptcy begets bankruptcy and as a result, fiat money (the dollar) is no longer accepted as a medium of exchange? What happens to the U.S. when, having gotten rid of its gold, it has no foundation upon which to build a new currency in which the public can be confident? What happens when American politicians have literally bankrupted America by getting rid of our gold?

It is at that point when I think Americas will be in danger of a second gold confiscation, the likes of which may make the 10 year, $10,000 penalty of the 1930's look like child's play. How will America rebuild its monetary system when it no longer holds any gold but when, because of doubt about the value of our currency, the world will demand a return to a gold backed currency? Certainly the Fed can see this potential down the road.

We can only hope the Fed is thinking in these terms and that it will stop short of dishording all of its gold. We say that not out of any greed orientation, but rather for love of country. We can only hope and pray the Fed will not have trashed all of its gold, leaving it with no foundation upon which to build a new currency when the current one is trashed by the market's loss of confidence in it. But at the present time, I do not believe the Fed is most worried about ultimately running out of gold as much as it is worried about keeping its crony capitalist friends from a derivative imploding at J.P. Morgan and Citicorp. Though, as James Sinclair suggests in some comments below that the interests of the Fed in preserving a gold monetary base and the interests of the bullion banks to simply stay solvent may soon diverge.

However, at this juncture, pending evidence to the contrary, it seems the Fed is still trying to suppress the gold price in an attempt to inflate America out of the horrendous debt it holds. When it becomes apparent that the Kondratieff winter has emerged the most powerful force, the Fed will then only be able to wish they had not handed over all America's gold to the Indians, Chinese and Muslim countries at bargain basement prices.


Typical Action of a New Bull Market

This was a week of considerable discontent for gold bulls, especially new ones. For those of us who have held a bullish view over the past 20+ years, this week was not pleasant, but not earth shattering. In fact, I would say the psychological behavior is fairly typical for the early stages of a bull market, especially a long 20-year bear market in gold that we have just traveled through.

The gold market is the mirror image of the equities market which has been in a 20-year bull market. Since people always trust their recent experiences over longer-term experiences and especially past history that they have never experienced, the belief on the part of most new participants in the gold investment arena is not very strong. Hence they can and were this past week triggered out by a sudden decline. Conversely, we are seeing how hard it is for equity investors to give up the conventional "buy and hold" wisdom that worked so well for stocks during the past 20-years. So it is not uncommon in a new bull market to see fairly significant retracements such as we have experienced in gold and gold shares over the past couple of weeks.

The following comment from my good British friend Marshall Auerbach, an analyst for the Prudent Bear Fund who writes a brilliant weekly column that you can access at

"Yes, gold was a bloodbath this week. I have been waiting for this washout for a while, as I suspected that there was a huge amount of momentum players in this sector, who would dump at the first sign of trouble. A commodity market usually undergoes a very sharp 5/8ths (Fibonacci) retracement before it moves to the second and bigger leg, and I think this is what we have going on right now.

"I think any of us in the gold camp have to be braced for an all-out war on the part of the powers that be. This is the Battle of the Bulge right here."

So there you have it from a market pro. Not only has the decline in gold not come as a shock to Marshall, he was looking for it to happen. This kind of retracement is natural and healthy in markets. It shakes gold out of the weak hands and gives those of us more hardy longer term players a chance to buy at lower prices before the second wave - a more powerful one - gets underway.


Moving Averages Still Bullish for Gold

At the close of this week, according to my moving average for gold, spot gold at $302.80 fell below the 50-day moving average of $305.54, but remained almost $10 above the 200-day moving average. So at worst, from this perspective, gold remains neutral to mildly bullish. What I hope for and believe we will see next week is a consolidating and base building pattern for gold in the $302 to $305 range.

Gold is using for heat dissipation in some cars.
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