Golden Christmas Bells are Ringing
By James J Puplava CFP, December 12, 2002
Today was truly a golden day. For the first time in five years, gold traded above the $330 mark to close at $332.10. As the 5-year chart of gold shows, it appears that gold may have formed a double bottom in 1999 and in 2001. Since its bottom in 2001, it has been a bumpy and volatile ride upward, strewn with many potholes in between. But those who have been in gold since its rise, this has been a time of great profits.
The graphs of the XAU and the HUI show gains not seen since the days of the Internet. The HUI is up 110 percent this year and is up 280 percent from its low on November 14, 2000. The hedged gold stocks within the XAU haven't done as well, but have sure beaten the socks off most tech stocks. The XAU is up 39 percent this year and is up 80 percent from its low of November 17, 2000. The hedged XAU is up more than the NASDAQ has lost.
These Charts Tell The BIG Story
This is the story Wall Street doesn't want investors to know about. The markets are transitioning from a bull market in paper to a bull market in "things."
It wasn't just gold and silver that were rising today, but the prices of most "things" were going up; while the price of paper was going down.
The dollar fell, most of the major stock indexes were down, and the 30-year bond fell.
It didn't matter
where you looked, whether you were looking at gold, silver, oil,
natural gas, heating oil, soybeans or cocoa, things were on the rise.
The CRB Index, as shown in this graph, hit a new yearly high
today to close at 233.64.
Too Many Holes in the Dike
Washington and Wall Street had their hands full today. As the daily graphs below illustrate, the dike was springing leaks everywhere. The major averages struggled and took investors on a wild roller coaster ride throughout the whole day.
The Dow and the S&P 500 ended the session on a negative note. The Nasdaq barely made it into positive territory. However, the moment one leak was plugged, another one sprung. The minute the stock market was fixed, the bond market began to crater. When bonds rallied, stocks began to plunge.
And throughout the day, gold rose like a phoenix and stayed there all day long; while the dollar headed to lower lows.
The graphs of the Dollar, the Dow Industrials, the S&P 500, and the 30-year bond show all of the leaks that had to be plugged.
The most dangerous leak was the price of gold. On this day at least, it couldn't be stopped. There were simply too many other problems springing up to keep gold down. Gold is a financial and political barometer. When it rises, it tells you there are problems in the financial system and in government. As I have written over the last few weeks, gold may be taking its queue from the policy change at the Fed. The Fed is hell-bent on avoiding deflation and will print, monetize and do everything in its power to avoid another 1930's and another Japan.
There is simply too much debt in the U.S. economy. Corporations have too much debt. Consumers are overstressed with debt and the government at all levels is hemorrhaging from budget deficits. In periods of deflation, debt burdens become more onerous. Debtors would prefer inflation so that debt burdens can be inflated away. With deflation it is just the opposite, so deflation has become the new war at the Fed.
They were never really in the inflation fighting business to begin with, since it is the Fed that creates inflation through the expansion of the money supply. As this graph of M3 shows, the money supply is growing now at an annual rate of over 20 percent.
The best way to illustrate this transition from paper to things, other than the charts shown in this WrapUp, is to look at the following table:
They Can't Hide The Truth Forever
If you are a Wall Street analyst, a stockbroker, or a financial reporter, how do you keep explaining falling financial assets and the rising value in things? For three years economists, analysts and journalists kept talking about a second-half recovery. It was only after the events of 9-11 that it was widely admitted that the U.S. economy was in a recession and we were in a bear market. How do you hide the fact that the HUI is up over 100 percent and Cisco, JDS Uniphase, AOL Time Warner, and Oracle are all down over 80 percent, and in many instances tech stocks and telecomms are down over 90 percent while many gold, silver and junior mining stocks are up 100-500 percent. It is a difficult job to spin because the news isn't getting any better. This is a battle that Wall Street and Washington will fight at all costs. Once confidence is lost in paper it doesn't return for a very long time. It could be decades or more as in the last paper bubble of the late 60's. I would like to suggest reading "The Next Big Thing" for those who want to see how these events change very slowly, but when they do, they become powerful trending forces.
Herds Move Slowly
|Value Line Arith.||-15.13%|
Trends in the market are never permanent. The bull market of the last two decades has now turned into a bear market that is in its early phase, just as the new bull market in "things" is just emerging. Like all new trends, when they emerge they are seldom believed and are discredited by the status quo. The vast majority of investors are still chasing the last bull market. The recent run up in the SOX during mid-October and November, and the recent run up of select Internet stocks, are good examples of this trend. People change their views very slowly and reluctantly. However, when they do, they move en masse as they did between 1995-2000. Most investors missed the first two-thirds of the bull market. The vast majority of money that came into stock mutual funds came into the market after 1995. It was no different than the last bull market in things. The big run up in energy stocks, gold, silver, and most commodities did not occur until the mid and late 70's. Most investors bought gold and silver after 1977 just as they bought tech stocks during and after 1997. As I mentioned, the herd changes its mind reluctantly and slowly. When the herd moves, they give us the final and most explosive third of a bull market.
This brings me back to gold and silver, oil and natural gas, and other commodities. They are all in their first stage of a new bull market. This has yet to be recognized by the masses or those on Wall Street. Very few Wall Street firms even have commodity trading departments. Most of them were sold, closed down or abandoned years ago, so they aren't prepared for the new bull market in commodities. Despite the recent run up in precious metals, energy and grains this year, this is just the beginning. These markets, I believe, will continue to rise for the remainder of this decade. However, a word of caution--they won't go straight up. Refer to the graphs of gold and the HUI above. You will see that the trend line is up. There will be more corrections ahead. Gold may move strongly here in the short-run if they don't try to knock it down tomorrow. For those who are new to this market, establish your positions slowly and over time. Try to learn and understand the fundamentals of what is driving it. That way you won't panic when the corrections come around. You might want to follow the Sinclair rule of taking profits in one third of your position when the metals and commodities rally and buying back when the markets correct which they will do continually. This allows you to build working capital and at the same time remain firmly invested in the new trend.
As to this new trend, it is reported that monthly sales of American Gold Eagles have averaged 38,200 ounces a month. This is more than triple the average of 11,920 during the first half of the year. If you are buying physical, take delivery and possession. You may not be able to buy it later on when the herd wakes up to what is happening to paper. There simply isn't enough gold and silver in the COMEX to handle investment demand. In the case of gold there is always central bank sales. But they have already departed with an estimated one-half or one-third of their reserves. They would look pretty stupid selling or dumping the rest of their reserves in order to keep prices contained. There is growing concern over the state of the U.S. economy and especially the financial markets given the level of debt in the system. That is why you need to have a position in order to profit from it. And if you are buying physical, you need to take delivery because there is a day coming when you may not be able to take delivery. A good example is what happened to Japanese investors in platinum and palladium.
Today's casino action was another roller coaster ride for investors. Major indexes bounced all over the place between big losses and minor gains. Only the NASDAQ managed to pull out of its tailspin. Rising unemployment claims and oil prices would suggest big problems lie ahead for the economy. Economic expectations, along with profit estimates, are starting to come down for next year. Interest rates have to remain low for debt-based consumption to be maintained. As long as the consumer can keep borrowing money the economy will be kept out of recession. However, the minute interest rates rise, it is all over for the consumer and the economy. That is why the Fed will monetize debt-- government, corporate or financial -- if necessary.
The markets fell early this morning after the government reported that first-time unemployment claims rose to an eight-month high. A higher retail sales report helped to stem the damage. But the retail report should be read more closely for there are potential problems contained within in it. Consumers are spending money very selectively. Furniture sales and home electronic sales were the key strong areas. In the case of furniture, sales have been helped by the housing boom and sales incentives such as no money down, no sales taxes, and no payments for two years. The rest of the retail report looked weak. There were also more accounting scandals and earnings warnings that were reported today. They have become so commonplace that they are no longer news, despite the fact that they keep cropping up.
The real winners today were oil and gold stocks as the price of those commodities rallied strongly. Volume hit 1.23 billion on the NYSE and 1.41 billion on the Nasdaq. The VIX fell .59 to 30.81 and the VXN fell .57 to 51.05.
European stocks fell as a reduction in the European Central Bank's growth estimate for the region suggested that some profit forecasts also may be cut. Carmakers including Bayerische Motoren Werke AG dropped as a report showed sales slid last month. The Dow Jones Stoxx 50 Index shed 1.6 percent to 2484.22, erasing its gain over the prior two sessions and narrowing its rebound from September's five-year low to 9.2 percent.
Japan's Nikkei 225 Stock Average fell in the slowest trading day in four months. TDK Corp. and other computer-related exporters dropped after a stronger yen threatened to reduce the value of their overseas sales. The Nikkei lost 18.97, or 0.2 percent, to 8708.69. The Topix index fell 0.1 percent to 851.32. The index swung 19 times between gains and losses within 5 points, the narrowest trading range since Aug. 14.
© 2002 James Puplava