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Taylor's Sage Market Views

June 25, 2001

STOCKS REMAIN HUGELY OVERVALUED

"The venerable S&P 500, the biggest and best 500 companies in the United States, had a market capitalization weighted average (MCWA) P/E ratio of 39.0 on May 31. This is a staggeringly high number, indicating extreme overvaluation. Everything else being equal and assuming no growth, it would take 39 YEARS for investors who bought the whole S&P 500 index today to break even. A sobering thought, even for the "long-term investors" Wall Street perpetually courts."

It is the prospects for a much greater decline for stocks and the dollar that we continue to recommend our portfolio remain exactly as it is with the following allocations: 25% in the Prudent Bear fund as a short against the market; 25% in the Prudent Safe Harbor fund as a short against the dollar; 20% in senior gold mining stocks and advanced stage junior mining companies, 2% in gold and silver bullion, 10% in a very select group of technology that can use their select technologies to compete effectively in the production of ESSENTIAL goods and services and 18% in a group of select energy stocks.

KONDRATIEFF WINTER HEADLINES FOR WEEK ENDING 6/23/01

Ominous clouds appear to be gathering over the horizon that confirms that a handful of analysts like Ravi Batra, Ian Gordon, David Tice, Frank Veneroso, Marshall Auerback, Frank Shostak, Doug Noland, Charles Peabody, Mark Faber, and yours truly have been right in predicting that the U.S. economy and its equity markets as well as global markets are in for a major decline. Most if not all of these folks have opined that what we now face is the worst economic times since the Great Depression. Some believe that given the excesses of money and credit which are far in excess to that of the 1920's mean that the ultimate decline will be even greater than that of the 1930's. Others like Dr. Larry Parks (www.fame.org) believe that our democratic republican form of government itself is not likely to exist the turmoil we are about to face.

I wished I could find some evidence this pessimistic view of current trends were off the mark. Unfortunately, the number of news events that in one way or another seem to underpin the thesis of an impending depression or "Kondratieff winter" appears to be increasing. This morning a review of the Wall Street Journal and Financial Times from Wednesday through the end of the week produced the following headlines.

"Wall Street Journal"

"China Hits Japan Goods With 100% Tariffs" (page A-13, 6/22)

"Euro Zone Shows More Signs of Weakness" (page A-13, 6/22)

"Insurers' Financial Troubles Reverberate in California" (page A-2, 6/22)

"Trade Gap Narrowed in April Due to Slowdown" (page A-2, 6/22)

"Crude Oil, Gas Prices Fall as Data Show Rising Inventories of Petroleum Products" (Page C-15, 6/21)

"Strong Dollar Has Companies in Protest March" (page C-1, 6/21)

"Newspaper Help-Wanted Ads Plummet" (page A-2, 6/20)

The "Financial Times"

"US Economy Shows Signs of Stability and Sluggish Growth" (page 1, 6/21)

"Japan's Trade Surplus Plunges as Imports Rise" (page 6, 6/21)

"Seoul to Bail out Hyundai Tourism Project" (page 6, 6/21)

"Tokyo Plan to Warn of Fiscal Austerity Ahead" (page 6, 6/21)

"California Woes Spark DC Fireworks" (page 7, 6/21)

"Top Democrat Warns Bus on Fast-Track" (page 7, 6/21)

"Greenspan Warns on Health of Banking" (page 7, 6/21)

"Gloom Returns to Base-Metal Markets" (page 26, 6/21)

"Senator Attacks EU over GE Deal" (page 1, 6/22)

"Drop in US Trade Highlights Threat of Global Slowdown"

"Japan Warned to Expect Social Pain and Low Economic Growth" (page 14)

"WTO Ruling Raises Trade Tensions" (page 1, 6/23)

"German May Be Heading for Recession" (page 1, 6/23)

"Tokyo Urges China to Retract Import Tariffs" (page 4, 6/23)

"US Starts Steel Imports Inquiry" (page 4, 6/23)

"Going Backwards" (page 6, 6/23)

"Why Europe has Caught America's Cold" (page XXII, 6/23)

Of all the articles noted above, the ones dealing with trade and the strong dollar are in my view the most ominous. The dollar has been pushed far in excess of its true intrinsic value as a result of the trashing of gold via central bank and Clinton Administration manipulation, falsifying productivity numbers in the U.S. combined with the superpower status of the U.S. The dollar's surge has been a one way street, and the security of the global financial system depends on it remaining strong. But now the very basic cornerstones of industrial strength, namely manufacturing is being squeezed out of existence in America. This can go on only so long. If the bankers persist in their rip off game of printing more and more phony pieces of paper with dollar signs on them, it will only be a matter of time before the U.S. rots from inside out. On the other hand, a demise of the dollar would begin to trigger a snowballing decline of an over leveraged world financial system.

Which will it be? Time will tell. Which ever it is, the truth about the dollar, which has no intrinsic value will become known. The dollar's worth and as a liability money, is totally dependent on the ability of others to pay for it to retain its value. Gold on the other hand, retains its intrinsic value which is derived from the labor and capital required to mine and produce it. When the politicians, bankers and captains of industry are no longer able to CON the public into believing paper is valuable, simply because they declare it to be so, those trillions upon trillions of dollar will suddenly be dumped for real money. With mountains of paper having been printed I continue to believe that when the ultimate meltdown occurs, gold will be priced not in hundreds of dollars but in thousands of dollars per ounce. Of course that assumes that we will be free to buy and sell gold. I acknowledge it is entirely possible that will not be allowed to happen because Roosevelt II could finish the move toward dictatorship that FDR started. I hope and pray it is not so, but we cannot dismiss that possibility and plan accordingly, resigning ourselves to the fact that our ultimate well-being is in the hands of a loving God.

FED EASING POLICY IS EXACTLY THE WRONG MEDICINE

This past week a great speech made by Antal E Fekete on May 2, 2001 was published at www.lemetropole and www.FAME.org. by Dr. Fekete, a professor of economics in Canada. Dr. Fekete points out that during a period of deflation such as we are in now, the attempt to try to "print" our way out of trouble is counterproductive because it encourages even less consumption. Dr. Fekete's work and how it applies to our current position in the Kondratieff winter will be discussed further in my July issue which is scheduled to go to press during the second week of July.

GOLD

My friend Randy from B.C. sent the following email to me this past week.

"Hi Jay,

"Trust all is well. I have a question and was hoping you might have time to address it. If indeed a gold syndicate exists, composed of George Soros, Middle East interests and the Chinese et al. could they simply bid $276 on all futures contracts forcing the shorts to cover and thereby breach the fortress? It appears war is being waged in the $272-$274 range, is it not a simple case of bidding higher?

"As always, appreciate your insights. God bless. Randy."

MY RESPONSE -

Dear Randy,

I think the kind of buyers we are talking about are highly sophisticated. They have learned that they can accumulate a great amount of gold in the $272-$274 range as the short sellers continue to pound the market according to Bill Murphy. At the same time, I believe those same buyers know very well that Frank Veneroso's gold lease numbers are right and that gold should be trading upward toward $600 rather than where it is today. So as long as Goldman Sachs, Morgan Chase, Deutsche Bank and the remainder of the Cartel are willing to keep feeding them gold at these low prices, they will take it all day long. Actually, on Friday, gold traded for a good part of the day in the $274-$275 range before getting slammed by the cartel late in the day, as the buyers went home early for the weekend.


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