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Taylor on us Markets & Gold

The Paper (Financial) Markets

September 24, 2002

The U.S. & Global Economy

I think Stephen Roach summed up the concerns I have about the U.S. and global economy rather well this week when he talked once again about the "US-centric global economy." In other words, he is rightfully concerned about the dependence on U.S. growth to fuel the remainder of the world's economy at a time when for some very good reasons, Dr. Roach is worried about the ability of the U.S. economy to continue its growth.

Roach noted that "Slow growth is the antidote for America's post-bubble purging. A dip or two would accelerate the process -- presumably leading to a slowdown in domestic demand that would be required to boost saving, pay down debt, and facilitate a long-overdue current-account adjustment. A return to policy austerity -- both fiscal and monetary -- by US policy makers would be required to achieve such an outcome, in my view."

So what we have is a world economy that is torn apart by conflicting needs. On the one hand virtually every country in the world is dependent on U.S. growth to keep from sinking into a recession or worse. But to remedy the enormous excesses of the Clinton years will not only be enormously painful for the U.S. but the requisite slow growth policies are exactly opposite what Europe and Asia needs to keep them from falling over an economic cliff.

Politically, the correct policies in the U.S. to help return the global economy to some semblance of equilibrium represent political suicide for the Republicans. So it is hardly possible to expect President Bush to willingly hand over the reins to the Democrats who's extravagant economic partying and spinning of falsehoods during the 1990's have put us in the pickle we now find ourselves in. Yet, failure to allow our economy to correct via a recession will eventually lead to an even bigger disaster according to Roach who said the following:

"The more successful any anti-deflationary measures are, the more likely it is that a "revitalized" US economy will move further down the treacherous road of reduced saving, higher debt, and an import-led widening of an already massive current-account deficit. In that critical respect, the policy stimulus required to avoid deflation would only exacerbate America's lingering post-bubble excesses. Maybe the perils of deflation are so serious, that it's worth taking just such a risk. But there's nothing lasting about such a short-term fix, in my view. It merely postpones the day of reckoning but makes the ultimate endgame all the more treacherous. In today's climate, the tradeoff between avoiding deflation and the purging of post-bubble excesses seems just about intractable."

A Plunging Dollar is the only Answer

With politics playing such an important role, the ability of these politicians to do what they have to do to set the global system right again seems about as unlikely as the Palestinians and Israel enjoying a lasting peace. Roach sees only one way out, and that is to have the dollar decline significantly from current levels. Funny, but that is exactly what your editor along with Dr. John Whitney, mineral economist and CEO of Itronics have maintained for well over a year now. The dollar is way overvalued on a trade-related basis and not until it reaches some semblance of purchasing power parity, can some kind of normal equilibrium be once again achieved. In other words, the strong dollar policy of the Clinton Administration, which was based on a couple of big lies, (a phony gold price and the productivity myth) must be undone so that the dollar can once again reflect purchasing power parity.

Roach notes that on a trade-related basis, the dollar has declined only about 3% from its highs earlier this year. He maintains that it has to decline by at least another 15% to 20% to bring trade back into line. A weaker dollar would indeed help stimulate domestic demand in countries outside of the U.S. and it would help U.S. producers export more. It would also help offset some of the growing deflationary pressures on the U.S. dollar, not to mention the chronic trade and current accounts deficit which indeed are caused by the rigged gold/dollar markets.

But allowing the dollar to tank is not so easy. Bob Rubin and his friends on Wall Street who were behind the rigging of the gold and dollar markets in the 1990's hate the thought of a weak dollar because that is likely to lead to an even quicker meltdown of the financial markets in the U.S. And a sharp dollar decline could also be expected to lead to higher interest rates for the U.S. economy which is witnessing death by debt strangulation even at current low interest rates.

The Markets

One of the greatest market analysts today is the veteran Dow Theory expert, Richard Russell. As I said before, I try to read at least the following publications every day ranked in the following order of importance: The Bible, Richard Russell, the Financial Times and the Wall Street Journal, ranked in that order of importance.

Richard Russell has been talking about huge head and shoulder patterns of all the averages. He is talking about not just a little bear market, but something that may in fact rival or exceed that of the 1930's. Perhaps I'm putting words in his mouth. I don't mean to do that but he is clearly concerned. This past Friday he said, "I can just tell you that what I see on these charts are future disasters, unaccountable bearish events-events that will take a stocks down to levels that will amaze today's bullish army of investors."

Bullish Markets

  • U.S. Treasury Markets remained extremely bullish with interest rates now declining to the post 9/11 levels. From 30-year Treasury to 3 month T-bill, all the U.S. Treasuries are looking extremely bullish indicating that the market sees no inflation anywhere - despite Alan Greenspan running our nation's printing presses 24/7. This bull run in U.S. debt has resulted as investors look for a safe place to park their money while they await a turn around in stocks. We agree with Richard Russell that the bear market in stocks is still in its early stages so that investors have a long wait for a bottom in the stock market. The problem will take place when foreign money begins to flow out of the U.S. Interest rates are then likely to rise and your bond values - especially longer term bonds, will decrease significantly. From 3 month treasuries through 30 year T-Bond, bonds are bullish with spot prices above 20-day, 50-day and 200-day moving averages.
  • Gold closed the week at $322. Gold is the ultimate flight to safety, so when U.S. Treasuries finally go, people will invest in gold. At that time, gold will soar much over expectations as stock will plunge under expectations. This past week, Gold broke through a downtrend line dating back to June. As with U.S. Treasuries, this flight to safety asset is trading above its 20-day, 50-day and 200-day moving averages.
  • Gold Stocks also were strong this week as evidenced by an XAU index at 75.38 which put it solidly above its 200-day moving average. Silver also closed at $4.62 and as such also broke just slightly above its 200-day moving average.

Bearish Markets

  • Stocks - With the exception of gold stocks, equities in general are looking very weak. All the major indexes are trading below their 20-day, 50-day and 200-day moving averages. The Dow is threatening to decline below a downtrend line that is part of an ascending wedge formation. The S&P 500 has broken decidedly below a short term up-trend line. The NYSE Composite is poised right on the edge of a downtrend line dating back to May.
  • The dollar has moved a hair higher than its 20-day moving average but remains slightly below its 50-day and considerably below the all-important long term direction indicator, the 200-day moving average. We know that there is considerable intervention in the dollar. For example it was recently reported that the Japanese have spent a record amount to buy dollars and sell yen so as to keep the dollar strong and the yen weak. In that way, the Japanese can continue to sell Americans cheap cars while putting Americans out of work. But all this really does is enhance the global imbalances that Stephen Roach is so concerned about, namely "US-centric global economy." However, long governments can distort the rule of markets for political gain, there comes a time when they will not longer be able to prevail against the awesome forces of natures markets. It would seem that day may be fast approaching. Indeed this past week, unheard of occurrence took place when the Japanese were unable to sell all their government bonds! Does this along with a constantly rising purchase of gold by Japanese citizens in lieu of bank deposits indicate that end may be near? Might we be near a total meltdown in confidence in the currency of the world's second largest economy?

As noted above, gold is indeed looking very bullish. And soon enough, I believe it is going to break wide open because of the market cheating and rigging on the part of the Exchange Stabalization Fund, the Fed and co-operating entities such as the BIS and the bank of England. I would encourage you to listen to the views of James Sinclair in an interview at: James Sinclair made a fortune during the 1970's as a gold trader and he now heads Tan Range Exploration Corporation. He along with world renown gold bug and newsletter writer Harry Schultz have kept up with the work of GATA and had become important soldiers in the GATA army.

$330 Gold Within Striking Distance

According to Bill Murphy, he thinks that the all-important $330 level for gold is very near. And according to James Sinclair, at $354 gold, some of the heavily hedged mining companies like Anglo Gold, Barrick and Newmont may be in real trouble. Here is some of what Bill said at the close of business this past Thursday:

"A quiet, but very firm U.S. gold session. Early morning U.S. time, gold bolted higher, gaining $3.50 at one point. Just like yesterday, a new seller emerged to cap the rally. It came from a broker known to do bank business, but one who has not been that active lately except for the past couple of days. I can only surmise it is JP Morgan Chase disguising its selling. I say that because the COMEX and bullion dealer world is a swirl of talk about the coming JPM gold derivative debacle.

"Midas has reported talk about Morgan before, but the talk is different at the moment. The trading sharks not only believe the story now, but are also prepared to act on it by taking on Morgan and the rest of The Gold Cartel. This is terrible news for Morgan and GREAT news for us. As said here often, Dracula-like Morgan and the rest of the cabal cannot stand for the light of day to shine upon their gold activity. They cannot deal with the investment world knowing the truth about their price-fixing and the massive size of their gold short positions.

"As a result of all this talk, the last thing JPM wants is for the trading crowd seeing them selling even more gold.

"It would appear that not only is The Gold Cartel desperately trying to keep gold from exploding through $330, but the PPT is also doing what it can to prevent derivative giant JPM from complete collapse. Somebody was all over Morgan today (09/20/02), propping the share price up all day long after the early going.

"The banking index eroded steadily, closing on it lows of the day at 686, down 28. Morgan, on the other hand, traded $19.50 near the opening, but rallied the rest of the day to close at $19. 87, down 57 cents. The price propping could not have been more blatant, or more obvious as the DOW was crushed, closing at 7942, down 230 while the DOG fell 36 points to 1216. The NASDOG is only 10 points away from 5-year lows, which means investors in for the long-term are being annihilated.

"The Working Group on Financial Markets knows what is at stake with Morgan. If Morgan's gold/interest rate derivative positions blow up, the U.S. financial system could blow up. Normally, one would be thinking of a Morgan merger with another bank, but what bank out there could deal with their spectacular $24 trillion derivative positions? What bank could take on their gold short position with its $45 billion in gold derivatives?

"Morgan owes various central banks a staggering amount of gold. Problem is the current yearly supply/demand deficit is running at 1400/1700 tonnes, yearly mine supply is only 2500 tonnes and going down, and the bullion banks already owe central banks around 14 to 15 thousand tonnes of gold. Morgan is trapped. They cannot cover their gold shorts without gold rising several hundreds dollars per ounce."

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