first majestic silver

Taylor on us Markets & Gold

The Economy and Paper Markets

September 9, 2002

Absent Wall Street & Political Spin, We saw No Promising Signs

Your editor keeps CNBC muted most of the day except for an occasional guest worth listening to on Ron Insana's show or market commentary by Art Cashin. Not only do I turn these guys off because it distracts me from my work, but it is clear CNBC is little more than a propaganda mouth piece for Wall Street's tout of overvalued stocks. Since Bill Murphy fist spoke on CNBC back in 1998 at the launch of GATA, CNBC and other major media in the U.S. have refused to examine mountains of evidence produced and entered into a court of law in Boston. CNBC has refused to explore that extremely important gold market rigging topic, which combined with productivity babble from the most revered Fed Chairman since 1928, paved the way for the most outrageous stock market bubble in history. Can there be any doubt that providing investors with the information they need to make good investment decisions is the least of CNBC's concerns?

But now, after all the fantasies and self serving lies told first by our policy makers and secondarily by our corporate CEO's, we mere mortal Americans are left with a very cluttered aftermath of financial destruction. And seldom do we hear talk of productivity gains these days. Want to know why? Because the news is revealing the falsehood o the new paradigm upon which Greenspan justified debasing the U.S. dollar. Simply put, productivity growth is anemic at best. Last week, the latest news displayed productivity growth of 1.5% for the second quarter, which is far far below average growth in America. On the basis of that news and a worsening employment picture, we wonder where the bulls are justifying the view that rising profits can justify current equity prices which are still stretched way beyond the norm.

At the end of this week, the trailing P/E Ratio for the S&P as recorded on a GAAP basis for the S&P 500 still stood at an awfully high 37 times. That equates to an Earnings Yield of only 2.70% of which about 1.8% is comprised of dividends and the remaining 0.90% of retained earnings. This compares to a 10-Year U.S. Treasury rate of 4.01%.

Were I not concerned about the likelihood of a major decline in the dollar vis-à-vis other phony but less phony currencies, I would suggest simply parking money in Treasuries and wait for this horrendous bear market to do its thing to completion. Then when the "buy stocks" signal re-emerges as per Michael B. O'Higgins book, "Beating the Dow with Bonds we begin buying super cheap stocks. By cheap, we mean the kind of prices you pay for yields from stocks at the bottom of bear markets. Bear market bottoms are characterized by PE ratios for America's best companies at under 10 and dividend yields for those same companies in the 6% to 10% range not P/E ratios of 37 times like we have now and dividend yields of less than 2%.

What we see especially with respect to the dollar is a system wide risk for the global economy. The U.S. as the leading super power in the world is most responsible for spreading the big lie concerning what is in all truth a counterfeit money system. But virtually all other nations have followed the U.S. lead by agreeing to go along with IMF demands that no member countries may back their own currencies with gold. So after many years of having removed the discipline of gold, we have quite a global currency mess on our hands. In other words, we are facing major systemic risks to the global monetary system, which is precisely why to protect ourselves we must step outside of the phony paper money system and exchange our paper for real money, namely gold.

Given that we see significant systemic monetary risk in our existing financial system, we have over 40% of our portfolio in gold and gold related investments. Most of the rest of our exposure in shorting the U.S. equity markets through the Prudent Bear Fund and by virtually shorting the U.S. dollar via the Prudent Safe Harbor Fund. So far, our strategy is working fairly well, with our Model Portfolio at the end of this past week being up 47.12% vs. a 22.14% decline for the S&P 500.


Keeping the Dollar Strong & Americans in Debt

This past week, statistics pointed to weakness in the economy evidenced by a pull back in purchasing orders not only in manufacturing (we are used to that) but also in the service sector which is where America is supposed to excel. In fact, with readings at just about 50, both sectors are suggesting little if any growth for the economy. In other words, it does seem as if we may be teetering on the brink of another economic dip downward. But hey! Nothing is more important that preserving the wealth of the folks who finance our politicians in office, so Wall Street profits must be preserved. So we must keep the dollar strong, so Americans can keep importing goods and services from abroad so that the rest of the world avoids a cataclysmic economic decline.

Trouble is, Americans have been buying their heads off, not because they have wealth but because they are encouraged by policymakers to live beyond their means. This is in defiance with a basic economics 101 fact of life, namely that if you live beyond your means today, you shall have to pay for it in the future. Unfortunately for Americans, the future is now or just about now, which is why Greenspan's constant pedal to the medal action isn't making the U.S. economy travel any faster nor is it leading to improving corporate profits.

Not only the strong dollar but continuous excess supplies left over from excessive money creation in the 1990's compared with huge increases in global supplies from populated countries, most notably China is keeping profit margins very low for almost any sort non-service U.S. company you care to mention. And so with profits under pressure, we should not be surprised that jobless claims, as reported last week, climbed back up above 400,000. In addition there were some major layoff announcements last week with job-cut announcements in August rising 46% for a total of 118,067. This all adds up to a dim profits picture against a backdrop of hugely overvalued equities.


Bearish Markets

  • The U.S. Dollar - The U.S. dollar index has stabilized in the 105 to 108 range since it bottomed in mid July. It is down from around 120 in the January-February time frame. But technically, the dollar continues to look week with its close on Friday slightly below its 20-day moving average of 106.85, its 50-day moving average of 107.53 and its 200-day moving average of 111.69. A growing economy is what is needed to foreigners confident in their dollar investments. Absent that, given the huge amount of foreign money in the U.S., the dollar could be in for a major decline which as noted above would adversely impact the bond markets, interest rates and yes eventually the housing market.
  • The Dow Jones Industrial Average closed at 8427.20 which compares unfavorably with its 20-day moving average of 8615.36, its 50-day moving average of 8783.77 and its 200-day moving average of 9463.06. At the end of this week, the Dow was poised just slightly above a downtrend line extending back to the May-June time frame. A break below that support line would suggest a test of the July-August lows which had already taken out the September 2001 lows. This is a very bearish market which even an establishment guru like Bill Gross sees going to 5000.
  • The S&P 500 - closed at 893.92 on Friday. As such, it compared unfavorably with its 20-day moving average of 909.87, its 50-day moving average of 927.72 and its 200-day moving average of 1033.51.

The New York Composite - Friday's close of 484.84 is below the 20-day moving average of 491.20, the 50-day moving average of 499.39 and the 200-day moving average of 544.51.



As noted above, gold continues in a bullish mode and closed this week near a breakout point. When that breakout will take place is anyone's guess. It could come any time but I do believe we will see a mighty rise in the price of gold when the U.S. dollar begins to drop dramatically. From a chart perspective the dollar does look vulnerable.

The performances of gold and the dollar really boil down to the issue of confidence or lack thereof in the dollar. And as I noted above, what is needed for the dollar to stay strong is for corporate earnings to remain strong so that employment and the capital goods sector can grow. As a leading indicator, a decline in equity values that I believe is likely to come before the end of this year, could set off a panic in the dollar and a flight to quality into the only legitimate money, which is of course gold and perhaps silver.

Noting that the market just recently had its first 90% down day in 2002, Richard Russell said the following last week: "I think where we are now is on a track for the wide-open panic phase of this bear market. Note, I did not say a panic moment or a panic day, I said a panic phase. The panic phase could take a week or a few weeks or a few months.

"Before the panic has ended, stocks will be knocked to their knees, consumers will be in shock, the housing bubble will have burst as will the auto-buying bubble, the July 23 lows will be history and the "A" wave of this bear market will finally have come to an end.

"When the panic phase ends, investors and speculators will be in shock, and the stock market will appear to be shattered - torn apart, literally in pieces.

"That will give us the most "sold-out" market in years. This sold out market will set the base for the corrective (upside) wave "B" of this bear market. The "B" wave should be an upside whopper, and it should carry well into next year. After this corrective "B" leg will come the final "C" leg - but I'll talk about that when the time comes."

If Russell is right in his view of the stock market - and I think he is - is there any doubt that the dollar will come under enormous pressure on the downside? Is there any doubt in this kind of an environment, that gold will rise dramatically on the upside as investors around the world transfer enormous quantities of fait money into gold, which has and will always retain solid intrinsic value even in the midst of an economic neutron bomb explosion?

Everyone always wants to know how soon will these events take shape. I would not be surprised if we see some major moves to the downside for stocks this fall, and that the dollar and then finally in the U.S. Treasury markets will follow downward as foreign money leaves the U.S. As flight to quality means leaving a very sick monetary system, and exit out of this sick paper money system into gold should cause a major rise in the yellow metal. Since no currency in the world is any longer backed by gold, where else but gold (and possibly silver) will money flow?

Indeed news this past week suggests some of the other countries around the world see trouble ahead as the U.S. economy and that as a result, they are trading dollars in for gold. According to a Dow Jones report coming from Singapore, Asian central bans plan to buy more gold as their economies expand post-Asian crisis and their foreign exchange reserves are rapidly building up. The huge trade deficits that are benefiting Asia are resulting in huge dollar holdings. Even if they keep the same percentage in dollars and gold, the rapidly rising deficits mean a huge increase in demand for gold by these central banks who in fact know how important gold is to monetary stability.

Asian central banks' gold holdings in absolute amount will increase even as Asian central banks maintain a fixed percentage of gold in reserves according to Tan Khee Giap, an associate professor with Singapore's Nanyang Technological University. In other words, as Asia becomes more wealthy vis-à-vis the west, it will be increasing its gold reserves. That is consistent with the observation James Turk has made in the past, namely that gold follows wealth around the globe. So the flight from gold from the U.S. Treasury, which is much greater than the U.S. is admitting is a sign that the U.S. and other western banks are in economic decline.

So now, here is another reason why the ability of our policy makers to engage the American public in a world of make believe by rigging the gold price through its sale/lease/swap on to the markets will ultimately fail. In fact it is also possible that the U.S. Treasury may in fact be running out of gold. Remember that when they lease it they lie to us by pretending gold remains in the U.S vaults. And when the swap it with say the German government, they also lie by pretending it is still owned by the U.S.


The 5 Keys to a Long Term Bull Market in Gold

  1. The US Current Account must be in a deficit position and growing. Yes, this is a present condition and shows no fundamental signs of reversing for a significant time. This is the account that measures the amount of US dollars in the hands of non-US entities. It is usually invested primarily in US Federal Debt instruments.
  2. An intact negative trend in the US Dollar overall must exist. It should have the characteristics of a bear market. This is in fact true for the US Dollar today. We have a classic long-term top called a Head & Shoulders formation, which was subsequently confirmed by price and volume action. Even dollar bulls now are looking only for the dollar to stabilize at lower levels. This criterion is in place for a long-term bull market in gold.
  3. The general commodity market is showing in many ways, both fundamentally and technically, that it is in a base formation from which one can expect higher prices. We shall discuss the technical characteristics further to sustain that this ingredient has begun to support gold long term.
  4. Trust in paper assets must be waning for gold to assume an investment role internationally. We see the recent decision against Andersen, the comments on GE & IBM accounting practices and Enron as examples of causative items, which have turned investors away from the absolute belief, in existence from 1980 until now, that paper assets were storehouses of value. We believe this ingredient is in favor of gold's long-term bull market.
  5. The momentum in the appreciation of the bond market must be decelerating. We see this ingredient as becoming positive now to a long-term bull market in gold.

These five items as they gain in strength will further accelerate the underpinnings of a long-term market in gold. It was the forming of these constituents of a long-term bull market in gold that has given rise to the move of gold from $260 to $330.

Therefore the Gold Cartel is in Harms Way. A bankruptcy of the derivative dealers who represent, in part, 72 Trillion Dollars of derivative positions (called by Buffett - "Sewage") of the highest mountain of debt ever created on Earth is the reason why gold could go to $1450 -- $1700/oz.

When gold reached $887.50 in March of 1980, $900 was the price that would have balanced the balance sheet of the USA defined as the comparison between Federal asset gold and external debt obligations. If a derivative failure was to happen in the next 5 years it would, depending on when it happened, produce a number between $1450 and $1700 on gold to balance the balance sheet of the US as described above.

USA has the world’s largest holdings of gold: 8,134 - representing 77% of its Total Foreign Reserves.
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