Taylor on Wall Street & Gold

July 9, 2001

Tough Stock Market Will Get Tougher Still

Equity prices were hit hard last week, but they remain hugely overvalued. Leading to the big declines last week were report after report of negative earnings, especially in the technology sector. Also stunning the market was a much bigger than expected unemployment claim number which indicates things are not turning around in the economy when the global economy needs the U.S. to continue being the engine that keeps the world economy from falling off a cliff.

With regard to earnings reports, it was the severity of declines, which in many instances were far worse than the analysts had anticipated, that really floored the markets. In many instances the analysts estimates were extremely optimistic compared to the actual numbers. We may look for more of the same next week. If so, look out below!

The action last week was, I believe just a minor taste of what is yet to come for the stock market. Why so? Because even with the trashing of stocks last week, the S&P 500 is selling at an astounding 26 times earnings. As Richard Russell recently pointed out, when stocks sell at a mere 22 times earnings, based on history you can expect to earn an average of only 5%. Wait to see how many Americans head for the equity exists when sub 5% returns become a reality, especially given the major declines suffered by inexperienced investors over the past couple of years.

Mounting Signs Of Deflation

Richard Russell has been latching on to the deflation theme and I think he is exactly "spot on" with this theme. He noted last week that the bond markets are certainly not spotting any serious inflation problems because the differential between the 10-year T-note and the TIPS (inflation adjusted T-note) is down to 1.90 meaning that the bond market is not worried about inflation.

Richard does not buy into the gold manipulation story as I do so he also erroneously views gold's weakness last week as another sign of deflation. Someone should tell Richard sometime, that it is during the Kondratieff winter (severe deflation and depression) that gold investments perform best of all.

But Richard hits the nail squarely on its head when he warns of overproduction and that this is only going to get worse with the unleashing of China and India. He also notes that Japan is too a leading producer of things and now with Japan again in an economic downturn and with a new leader now ready to bite the bullet that should have been bitten ten years ago, look out. We could be ready for a major decline and trade wars in the Far east which could really accelerate things to the downside not only in that part of the world but also in this hemisphere. Richard Russell then pointed to a column written by Mort Zuckerman in U.S. News & World Reports. Here is what Zuckerman said,

"The consumer is now in hock. He's carrying too much debt. Consumer spending has been contracting all this year, down to a rate of 4% in the first quarter and to a rate of 1.5% in the second quarter - and the decline is accelerating.

"The reasons for consumer behavior are plain: the wealth effect of the stock market drop and weakened job market. Unemployment has risen to 4.5% and more than 400,000 people have filed claims for unemployment benefits, a number typically associated with a recession. The consumer is also constrained by a rising debt burden, which now approximates 22% of disposable income. Average credit card debt per household, in the 1990's grew by 150% from approximately $3,000 to $7,000.

Zuckerman than reportedly concluded his piece by saying, "If there's a surprise waiting for us in the second half of this year, chances are it won't be a recovery of growth but, rather, a disappointment that the combination of Fed easing and Tax cuts have failed to jump-start the economy. Why" because of the triple whammy of weak consumer spending, declining capital spending, and tumbling exports."

James Sinclair "Climbing A Wall Of Worry"

James Sinclair - Gold Producer Short Sellers Will be Hung out to Dry by the Gold Bullion Bankers

The following remarks by famed gold trader Jim Sinclair were published on June 26th at www.lemetropolecafe. Jim knows the gold market as well as almost anyone alive so I think his following comments provide great insight for all of us.

"Gold is breaking out to the upside amidst the proverbial "wall of worry" and with most market participants clueless as to what gold is all about.

"A flurry of buying emanating from the cash market set off some excitement on Comex as the Goldman Sachs Dwarfs were routed when their hold the $275 line at all costs was overrun. Only "shoot themselves in the foot" producer selling by the likes of Placer Dome stopped an accelerating rally.

"The grandest commodity moves of all come when the specs are long and the commercials are short. The reasons are fairly simple. Producers (commercials) that continue to hedge in this environment think like rats in an electric shock maze. They are conditioned, are too close to the market and think in the past. Some producers are pulling sell forward triggers as if they have just bounced off a shock wall - they are just reacting, not thinking. It was what they have done for years, so they keep doing it, not taking the time to analyze what is happening around them. They have been conditioned by The Gold Cartel to do just that. As a result, many producers will be the last to realize that a giant gold bull market is in play and that the 21-year gold bear market is over.

"The devious bullion dealers in the cabal will cover their own shorts first, and try and get long before they inform the gullible producers what the new game is. They need as much producer selling as possible for their own covering.

"One day does not make a market, but you will not find a more constructive chart than this one"

Why did Barrick Buy Homestake?

So what was the acquisition of Homestake by Barrick all about? With Homestake holding very small gold hedge position compared to that of Barrick which is insanely hedged out on some of its future production as far out as ten years, the acquistion raises some very interesting questions. Does Barrick want to use Homestake's future non hedged gold production as a means to help it meet its hedged obligations because it is concerned about rising gold prices and an otherwise inability to meet those obligations? Or is it getting ready to hedge Homestake's future production in a continuation of the vicious anti-gold industry practice it has engaged in on behalf of the Hannibal Lectors of the gold bullion banking industry?

Was Barrick encouraged by the bullion banks to take over Homestake so that the bullion banks could begin to get themselves in a long position in gold first, before the price of gold begins to skyrocket? Time will tell, but the sinister side of me thinks Sinclair is right, that Barrick is "like a rat in an electric shock maze." And Hannibal Lector (Goldman Sachs & the other Gold Cartel banks) may like to see Barrick short gold still further so it can take the long side of those transactions, thus protecting its position against the inevitable squeeze in the gold markets where supply has been inadequate to meet demand year after year after year. What ever the case, we live in interesting times. Things should get very exciting in the gold industry in the not too distant future.

Gold is widespread in low concentrations in all igneous rocks.

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