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Taylor on us Markets & Gold

July 15, 2002

We hear stories from our government and establishment in general that everything is OK in the economy. But does anyone really believe government numbers anymore? Does anyone really believe anyone anymore in this age when we have thrown away any concept of absolute truth? Remember when a few years back Americans said they didn't care that their President committed perjury and obstructed justice so long as the economy and the market was booming?

Richard Russell, that wise old market analyst and World War II bomber pilot says the only thing he believes when it comes to the economy is the market. The market's performance is always telling us something. We may not always like to hear what it is saying. So now that the market is declining, you won't hear many folks on CNBC saying that the market is predicting bad times ahead. These same people were of course quick to point out a few years ago how a rising market was foretelling of a rising economy. But hey! There are no truths other than what you want to believe it is right?

Of course your editor does not subscribe to that nonsense when it comes to the laws of nature, theology, or markets. Truth is what it is, not what we want it to be. So we will try our best to stick to that theme even when it doesn't always feel good, as we did over the years in proposing you purchase gold stocks when they were the lousiest investment in the world.

With respect to our equity markets, the truth is that the S&P 500 continues to decline in price but it isn't getting any less expensive! This broad based index is down 19.75% so far this year. Yet, we have a constant flow of people selling their wares on CNBC who continue to tell us "stocks are cheap." Well, as a value investor, I do not see how they can make that claim. In fact, you get so little for what you pay for that stocks remain about as expensive as any time in history.

For example, the latest report on the P/E ratio for the S&P 500 for the week ending 6/12/02 stood at a still whopping 39.60 times! Dividing that number into 1.0 gives us an Earnings Yield (dividends + retained earnings) of a mere 2.52% which is divided between dividends (1.74%) and retained earnings (0.78%). Now as we enter the Kondratieff winter, a time may well arrive when a 2.52% return on your investment is good relative to other earnings possibilities. But for now, you can get 4.57% or $4.57 for every $100 you invest in the 10- year U.S. Treasury bond and you don't have to pay state and local income taxes on those earnings, which you do have to pay on S&P 500 dividends.

However, because we remain very bearish on the U.S. economy and the U.S. dollar, we are not inclined to recommend U.S. Treasury instruments longer than one year. Rather, we prefer the Prudent Safe Harbor Fund, which owns high quality, relatively short term debt instruments denominated in a basket of currencies. PLUS, and this may be the most important point of all, the Prudent Safe Harbor Fund also holds the only real legitimate currency on the face of the earth, namely GOLD. So far the Prudent Safe Harbor Fund is up 20.06% this year. Charts are suggesting the dollar has quite a ways further to decline before the fall is over.

Equity Charts Look Ominous

Richard Russell notes that as the bear market continues to destroy wealth, investors will be starving for income from their investments. As the U.S. monetary authorities and the Clinton Administration were blowing up the bubble of the late 1990's, we saw in action the greater fool's theory of investing. Most investors bought stocks not because they knew what they were buying, or anything about the intrinsic value of the shares they were buying. They bought them simply because they were 100% convinced that another buyer would always be there at a later date to take the investment off their hands at a higher price. That is the psychology of a bubble. And because people had such unrealistic expectations, it is likely that the pendulum in stock values is now about to swing from one extreme to the other. By the time the bear market has reached its bottom (likely to be several years from now) we expect to buy some of the strongest companies in America at PE Ratios under ten and providing dividend yields in the 5% to 10% range. So far since the beginning of the bubble deflation, we have managed to do quite well with our Model Portfolio. But I am under no illusion that this may not always be so easy in the yeas to come.

How long will it take to reach a bear market bottom? Your editor is now 55 years old. I expect I will be at least into my retirement age (62 to 65) before we will see a bottom in stocks, especially since the politicians will not be able to resist continuing to interfering in the market place "for our own good." In working for our own good, the politicians and the Fed pumped up the bubble. Now they will want to let the air out ever so gently for our own good. But by obstructing the natural forces of the market place, the time it will take to reach equilibrium will be far longer than if policy makers stepped aside. I'm not arguing at this point what the policy makers should do. I'm only observing that intervention will prolong the deflationary process, as it has done in Japan where that country is in its 13th year of economic and market declines.

Richard Russell marvels almost every day about how there has not been a single "90% down day" in the market this year, which is very strange in a bear market. Yet the market keeps drifting lower and lower. I believe the only reason we have not seen the bottom fall out of the market is because the Exchange Stabilization Fund and/N.Y. Fed is stepping in to buy the futures any time it looks as if the bottom is going to fall out of the markets. As they do that, they trigger short covering rallies, which temporarily encourages investors to keep their money in the greatest gambling casino ever created. If you still own some of the big name stocks that are still selling at high multiples (P/E's over 15 or 20 times and paying little or no dividends) you might want to look at using these interventionist interludes for your own good, as the big money apparently is doing. There is evidence the really big players and the insiders have been coming out of the market ever since the Dow topped in 1999. Like one big casino, the establishment is counting on you - the average investor continuing to throw your money away in the purchase of overvalued stocks based on the erroneous assumption that in the long run you can't lose in the stock market.


The gold bullion and XAU charts are continuing to paint a bullish picture. Gold has been very kind to us so far this year. Our producing gold mining shares ("A" quality) are up 125.66% and our Speculative mining shares are up 155.18% so far this year.

Compliments of the Gold Anti-Trust Action Committee, here is the latest from famed gold trader Jim Sinclair

"The gold dealer's cartel is running out of ACES

"A US session end for the gold bullion cash market above $317.40 will result in another assault of $330. It will most likely be turned back slightly before that point for another decline and rally back.

"The method of operation of the gold dealer's cartel has changed and this shift of strategy is telling. Now the cartel is running away from strong demand and selling only when the demand appears temporarily filled. Before this, strong demand was meet by greater supply. The supply of gold that has been sold by the gold dealer's cartel has mainly been arranged via gold leases from cooperating central banks to the gold dealers and their preferred clients, probably now themselves.

"It may well be that central banks have, after selling huge amounts of gold via leasing the gold for sale, come to the realization that there is a credit risk for them in this type of transaction. It is clear to the central banks that the borrowers of the leased gold are NOT the gold producing companies anymore. In fact, that is what I hear. As such the central banks are lending huge amounts of gold via the lease programs to credit risks without production capacity. Assuming then that my information is correct, Central Banks will become reluctant to fulfill the ENDLESS leasing wishes of the gold dealers cartel.

"These dealers have been GREATLY enriched by this transaction for the last eight years. The change in the selling gold tactic of the gold dealers cartel is a major anomaly in their 8 year profile. Therefore, this change of tactic is strong evidence that the gold dealer's cartel is running out of ACES (the central banks willingness to continue to enrich the gold dealers endlessly in an environment calling for more transparency and an environment in which good credit rating have been destroyed in only a number of days when clearly the gold producing industry is not the final client). Hung Fat and Dr. No did their thing when the gold market was pounded late in the day the Friday before last and quietly in each session thereafter. I believe gold is headed higher here and now.

"My conclusion is that this is the REAL THING. We are in a Long-Term Bull Market in Gold of dimension both in terms of price and in terms of time. As such, I believe, that the purchase systematically on reaction of gold and gold related items plus the selling of part of the same in a systematic manner into strength always remaining long will result in excellent profits. The gold trader need no longer fear the gold dealers cartel because it is running out of ACES.

"Soon management of the gold dealers cartel will have to decide if they are going to hold their position or fold their position, walk away or run. They are on the defensive now. That is demonstrated by their selling technique which now runs away from demand and sells only when they sense a temporary fulfillment of the demand's wishes in late hour or Australian gold market raids. First comes signs of the oppositions weakness. Then the Asian gold bull predators will sense a kill and then the kill is executed. Nothing changes, ever!" (Jim Sinclair - email: [email protected])

I think Jim Sinclair is correct which is why an article written in the "Financial Times" on 7/11/02 is so egregious. The Financial Times is in fact an instrument of misinformation when it comes to gold because it is owned by the establishment and used for establishment propaganda purposes. The Financial Times has not even considered the merits of GATA's arguments and they have refused to enter into an intelligent dialog with the intellectuals that have aligned themselves with GATA.

With respect to the use of major news media by the establishment to shape behavior of the masses, I would encourage you to read a book titled, "The Shadows of Power" by James Perloff. Specifically with respect to the Media, you need to read Chapter 12 titled, "The Media Blackout." This book goes a long way in explaining why the main stream media has not given Bill Murphy the time of day, and why many other anti establishment (though very much Constitutional) ideas are painted as "off the wall."

In any event, the "Financial Times" article was titled, "No neat Pattern Can Explain the Fortunes of Gold." This article is nothing but a blatant lie! It tried to confuse the reader into believing that gold is a hit or miss investment so that investors don't go off now and dump paper in favor of gold. The information in the article was taken from so called research by Donald Straszheim, Merrill Lynch's former chief economist. But this is the kind of misinformation that is in fact criminal activity carried out by the elite members of our society! It is no different than the Carnegie's and Mellon's ignoring warnings that their dam was about to collapse and kill the people of Johnstown. They were getting theirs. To heck with the common riff raff in the valley below!

As I reviewed the charts at, the clarity of gold as an investment struck me once again. Gold is the most negatively correlated asset you can buy for your portfolio. It goes up when paper goes down. It goes down when paper goes up. To say that there is not rhyme or reason to gold's behavior is a mistruth aimed at leading common ordinary folks over the cliff so that the establishment can retain the exclusive use of the greatest counterfeiting operation in this history of mankind via the Federal Reserve. But that is what our establishment is doing to average folks!

Gold is no mystery. It is real money! It was what people for thousands of years have trusted and chosen spontaneously as a medium of exchange. It was never forced on them like fiat money is being forced. Unlike paper fiat money gold cannot be created out of thin air and used to siphon wealth away from those who have earned it.

We do not believe it is an accident that Mr. Straszheim didn't factor into his analysis the mountains of evidence that the gold market has been strongly manipulated since with the start of the Mexican crisis (1994) so as to draw investors into paper dollars. And this kind of misinformation serves only to keep people in paper rather than allowing them to move their wealth into a vehicle that will allow them to retain their wealth. This is criminal behavior not unlike what we always heard went on in the Soviet Union years ago.

But as Mr. Sinclair noted above, the amount of time during which these lies will be credible is in rapid decline. Evidence of that is clearly seen in the charts which suggest in no uncertain terms stocks are headed for a crash while gold and commodities (at least for now) are looking very strong.

One cubic foot of gold weighs more than half a ton (1,306 pounds).
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