Friday, October 30, 2009

The Kondrateiv Cycle was discovered by Soviet economist Nicholas Kondrateiv. He was tasked by Stalin to prove that the Marxist dialectic view of history was true and that capitalism would soon self-destruct. Instead he discovered that capitalism is essentially self-renewing. So Stalin put in in the gulag.

In Kondrateiv theory, capitalism goes through 4 cycles which are analogous to the seasons of the year. This cycle repeats every 70 years or so. We are now beginning the K-Wave winter, the cycle of deflation, depression, and destruction. This will last several years and lay the groundwork for the K-Wave spring, when renewal begins.

What follows is a pretty good article from a Kondrateiv perspective. I agree wholeheartedly with his view of gold. It was originally found here.

If you can preserve your capital, or even part of your capital, through the K-Wave winter, you will have excellent "seed corn" to plant in the K-Wave spring. That should be your goal. Don't worry about return ON your investment. Right now it's time to worry about return OF your investment.


P.S. If my Elliott Wave count is correct, next week should be ugly.



Ian Gordon
October 2009

Gold has withstood the test of time in terms of its density, malleability and lustre. The price of gold was first standardized in 1717 by Sir Isaac Newton, then Britain's Warden of the Royal Mint. In coinage and as backing for paper (fiat) money, gold's value has fluctuated with world crises and market forces. When no longer pegged at $35 (U.S.) per ounce after 1971, gold became a freely traded commodity. Gold is money! Gold represents wealth and for many reasons, this has never been truer than at the present time. Gold is currently trading at a price of $1,065 (U.S.) per ounce and LongWave Analytics is forecasting that gold bullion will climb to the $4,000 (U.S.) level per ounce and beyond over the next few years.
The entire world is now in an economic depression which always occurs at this point in the Longwave Cycle. The cycle is approximately 60 to 70 years - essentially a 'lifetime'. Thus, each point in the cycle is a new experience, something we have never lived before during our adulthood.

An understanding of the Longwave Cycle, however, enables us to identify where we are in the cycle. More importantly, this understanding allows us to recognize each season in the cycle and, critically, it allows us to determine the move from one season to the next. That determination enables us to make correct investment decisions. There are good and bad investment mediums appropriate to each of the seasons. Typically, investments that perform well in one season do poorly in the following season.

In the Longwave cycle there is always a deflationary depression and this occurs in the winter of the cycle. The onset of winter is signaled by the peak in stock prices which ends the biggest stock bull market of the cycle. During the Longwave winter, debt is purged, which causes huge stress and significant bankruptcies to creditors and debtors alike. In order to protect ourselves from the financial and economic onslaught that ensues, we buy precious metals, particularly gold and the gold equities of producers and explorers.

Gold is the only financial asset that is not someone else's liability, and all paper money is simply debt. When the economic and financial systems are collapsing, people turn to gold because it's the only financial asset that they can trust. They lose all trust in paper currencies; that is, fiat money and all assets valued in paper money (stocks, bonds and real estate) except precious metals companies, since the underlying assets of these companies are the metals themselves. Most people only equate a rising gold price to a rise in inflation, but the price of gold also appreciates during a deflationary depression because investors turn to gold as the ultimate money. People did that during the Great Depression of the 1930s and they are doing it now. However, the real panic buying of gold lies ahead, since the banking system faces renewed pressures as the debt bubble, particularly in America, continues to grow. In point of fact, during a deflationary depression, gold is the most liquid asset.



In addition to investors losing their faith in fiat currencies, there are other reasons why gold will perform well over the next several years and why investment risk in gold will be minimal during this time. So much of the world's gold supply has been mined within the last 50 years that the globe's richest deposits are fast being depleted in South Africa, Australia and the United States; new discoveries are becoming rare. The world's largest mining companies are now aggressively pursuing gold on a global basis. Giant Newmont Mining now operates open pit gold mines on five continents - from the rainforests of eastern Indonesia to the mountain ranges of Peru and to the lowlands of Ghana. The challenge for large producing gold companies like Newmont is the replacement of their annual gold production. Newmont produces approximately 7 million ounces per annum. To replace these ounces, it must effectively discover approximately 8 million ounces every year since production is never 100% of the gold mined. This is an impossible task. There have been very few discoveries of this size over the past several years. Furthermore, the timeline from discovery to production is approximately 10 years. This means that large gold producing companies ought to have a significant discovery in the pipeline every year. (We do like Agnico Eagle's growth profile.)

In August 2009, a majority of European central banks entered into a new agreement to lower the ceiling on annual sales of gold bullion, from the current limit of 500 tonnes to 400 tonnes, over the next five years, beginning October 1st. Meanwhile the Swiss central bank announced that it has no plans to sell gold bullion in the foreseeable future. In addition, last month the Executive Board of the International Monetary Fund approved gold sales in a size strictly limited to 403.3 metric tons at a time, representing 1/8 of the Fund's total holdings. Managing Director Dominique Strauss-Kahn states that "these sales will be conducted in a responsible and transparent manner that avoids disruption of the gold market." These announced IMF sales have always been introduced as a means to hold down the price of gold. This charade has been ongoing since 1978 and has only temporarily capped the ongoing upward move in the gold price. Anyway, one must suspect that the IMF may not have the gold it purports to hold.

In recent days, we have witnessed the price of gold futures appreciate to the record high price of $1,065 (U.S.) per ounce. The primary engine of this current price surge is the steady, inexorable decline in the U.S. dollar. As stated in our Winter Warning of September 28th. - The American Greenback Will Be Cast into the Hazard, since March of this year the U.S. Dollar Index Future - Spot Price, which Intercontinental Exchange Inc. uses to track the American currency against the yen, euro, Swiss franc, British pound, Swedish kroner and Canadian dollar, has steadily fallen by nearly 15% to the 76 level. Investors are finally beginning to understand that the U.S. dollar is not the safe haven they perceived it was even a few years ago and concurrently, neither are U.S. Treasury notes and bonds. Given the American national debt and deficit problems, from both a fundamental and technical perspective, the U.S. greenback still has the potential for considerable downside. Ergo and by axiom, gold bullion has significant upside potential to $1,500 (U.S.) per ounce over the short to mid-term time horizon of 1 - 2 years and $4,000 (U.S.) per ounce over the longer term.

While the dollar continues to decline against all other major currencies, we must remind ourselves that these currencies, like the dollar, are fiat too; in most cases better managed than the dollar, but paper none the less. As such, they are not viable monetary alternatives to the dollar. Paper money is in an unparalleled crisis. Never in history has the entire world been subjected to fiat money. The experience of all fiat currencies is their ultimate demise.

Given gold's recent activity, predictably, other analysts and strategists in the investment community have bounded into the fray. "Gold demand is coming almost exclusively from the investment side" commented Eugen Weinberg, an analyst at Commerzbank. "Gold reaching an all-time high is attracting new investment. This momentum can take us to even $1,100 (U.S.) an ounce. As long as we don't see a sustainable rally in the U.S. dollar, I don't think gold's rise will stop." Nicholas Brooks, head of research and investment strategy at ETF Securities (Exchange Traded Funds), states "The surge in demand for gold does not appear to be short term in nature, since we have been seeing very rapid growth of investor holdings of gold through our ETCs (Exchange Traded Commodities) for over a year now."

Put Not Your Cart Before The Horse

During this recent surge in gold activity, there appear to be many investors getting aboard because they fear a return of the demon inflation. They perceive that many economies are on the road to recovery from the recent economic downturn and credit crunch, thus they are looking for an insurance policy as a hedge against an inflationary outbreak. As previously mentioned, gold can also appreciate in value within a deflationary economic environment. While inflation may rear its ugly head at some juncture well down the road, it is a deflationary outlook that Long Wave Analytics is embracing as the most realistic probability to unfold over the near to mid-term time horizon. Witness the Japanese deflationary experience which is still unfolding.

Understanding inflation and deflation is critical to making the right investment decisions. Strictly speaking, inflation is simply an increase in the supply of money and deflation is a decrease in the money supply. Most financial advisors are now calling for inflation to resume and even hyper-inflation to run rampant in the United States, because of the Federal Reserve's current effort to circumvent deflation by excessive money printing. We are of the opposite, and certainly the minority, view. We believe that central banks will be unable to forestall deflation and that when it arrives, it will be unprecedented in magnitude. This conclusion is based upon three factors:

Once the debt bubble is unwound, it is deflationary in nature because it is painful and results in bankruptcies on both side of the ledger. Actually, it takes money out of the system and during our Kondratieff winter, trillions of dollars of debt will be expunged. Total debt in the United States is now approximately $58 trillion. If we exclude government debt, which is approximately $15 trillion, this leaves $43 trillion of consumer, corporate and financial debt underpinning the U.S. economy. How much of that is destroyed is anyone's guess, but it is likely to total at least $22 trillion. This money is effectively destroyed.


Under these circumstances, banks won't lend money. Those banks that survive bankruptcies, and most won't, will conserve it. Consumers and corporations won't be able to borrow money, even if they so desire.


The velocity of money will essentially come to a standstill, since there will be none to spend. Money will be hoarded, either under the mattress, or in banks that consumers believe will survive the debt deflationary onslaught. During inflation, as in the 1970s, the velocity of money increases as people spend today, rather than pay higher prices tomorrow. In deflation, as in the 1930s, those few people with money curtail their spending in the knowledge that prices will be lower tomorrow, next month and next year. As the early 19th Century saying goes 'money like manure, does no good till it is spread'.


Between October 1929 and April 1933, despite the desperate efforts of the Federal Reserve to reflate the economy, money supply contracted by 28%. The argument today - supported by Ben Bernanke, the current Federal Reserve chairman - is that the Fed didn't do enough at that time. Speaking at a 90th birthday dinner for Milton Friedman (another proponent of the 'do nothing Fed' during the Great Depression,) Mr. Bernanke stated, "I'd like to say to Milton and Anna (Anna Schwartz, who co-authored with Milton Friedman, A Monetary History of the United States), regarding the Great Depression, you're right. We did it. We're very sorry, but thanks to you, we won't do it again." This interpretation is at best false and at worst dishonest. All strenuous efforts by the Federal Reserve to overcome deflation failed because the amount of money coming out of the economy, through bankruptcy and bank failure, overwhelmed the Federal Reserve's attempts to reflate.

In his book, America's Great Depression, Murray Rothbard uncovered the erroneous reasoning of those who subscribed to the Fed's inactivity at the time. "If the Federal Reserve had an inflationist attitude during the boom, it was just as ready to try and cure the depression by inflating further. It stepped in immediately, to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash (the final week of October, 1929) and in that brief period added almost $300 million (U.S.) to the reserves of the nation's banks. During that week, the Federal Reserve doubled its holdings of government securities, adding over $150 million (U.S.) to reserves and it discounted about $200 million (U.S.) more for member banks … As a result, the weekly reporting member banks expanded their deposits during the fateful last week of October by $1.8 billion (U.S.), a monetary expansion of nearly 10% in one week …" pp.191.

We are gold bulls and deflationist but most gold bulls are inflationist. How do we explain this dichotomy? During inflation, the price of gold rises along with all other 'things', such as out-of-print comic books, art, antiques, etc. Why? Because as we have just explained, during inflation the price of everything rises and people buy today because prices are cheaper than they will be tomorrow. In these times, gold is viewed primarily as a commodity, although it does still perform a minor monetary role versus the dollar, which is being debased through monetary inflation. In the inflationary summer there is absolutely no threat to the banking system because debt is not that high and there is no threat to the economy because money is plentiful and easy to access. So, when the threat of inflation passes, as in 1980, the prices of gold, commodities, comic books and antiques fall.

However, deflation is another kettle of fish, since it comes about through the destruction of the financial system and the economy, because of the bursting of the debt bubble. When that occurs as in 1873, 1929, and now, there is fear and panic. In all panics, there exists an instinctive will in all of us to survive and succour loved ones. We instinctively turn to the people and things we trust. When it comes to money, people always go to gold. It was thus during John Law's Mississippi scheme in 1720, when following the crash, the run to gold by French investors was enormous; so much so that the government tried to outlaw the ownership of gold on pain of death. Eventually, the French government's rule on paper money was quashed in favour of gold. Similarly, during the French Revolution, when the revolutionary government introduced the paper Assignat, French farmers refused payment in paper money for their produce. Like always, the paper money system collapsed and gold replaced it.

The same is true of the American Confederate dollar. The over zealous printing of paper money always leads to monetary inflation, which is then followed by monetary deflation and a demand for gold as real money. This was true of the early 1930s when the great credit expansion of the 1920s collapsed, bringing down the entire U.S. banking system with it. As American banks failed, the race to own gold grew exponentially. The trust in paper money, which was responsible for financing the proliferation of debt in the 1920s, was shattered. As the U.S. economy and stock market collapsed, the flight from paper to gold gathered momentum. Indeed, by the time that President Hoover was about to leave office, his Treasury Secretary told him that the U.S. was running out of gold to support the dollar. One of the first things that his successor, President Roosevelt did upon arriving at the White house in March, 1933, was to denounce the gold hoarders and confiscate their gold, in order to replenish the U.S. Treasury.

This only fuelled the alternative method to own gold, which was via the ownership of gold mining shares. All that was left of money fled to invest in gold equities. Capital flowed to gold producers and exploration companies throughout North America and South Africa. In Canada, the Abitibi greenstone belt, Red Lake, and central British Columbia became the main areas of focus for exploration and many mines in these locales were financed into production. We've come full circle. These same areas are garnering dollars for exploration and many significant discoveries have been made. New discoveries will accelerate, since money flows almost exclusively to gold during these deflationary times. In the United States, gold exploration is centered in Nevada and to a lesser extent in Alaska. Moreover, throughout the U.S., so much money flowed to gold during the 1930s that, according to the U.S. Bureau of Mines, by 1940 there were 9,000 operating gold mines in America.

We are now in the Kondratieff winter deflationary depression and in this time frame, gold will become the money of trust. Fiat or paper money will become totally discredited. We believe Antal Feteke, who recently penned an article entitled "The Supply of Oxen at the IMF," posted at www.lemetropolecafe.com, where he wrote, "Only the gold basis will tell you whether you can reasonably expect physical gold to be available tomorrow and the day after. Or, whether it is more likely that one day soon, we wake up to find that 'gold is no longer for sale at any price.' Gold mines will hang out the notice: 'Holders of dollars need not apply'. This is going to be the exact replica of what happened to holders of assignats, mandates, Reichmarks and more recently, Zimbabwe dollars."

The coming scarcity of physical gold will lead to much higher gold prices, and like the 1930s following President Roosevelt's confiscation of gold, investment in gold companies will become the principal means to obtain an ownership in the physical metal itself.





Written By: Ian Gordon & Christopher Funston
www.longwavegroup.com/home.html

Wednesday, October 28, 2009

Proceeding As Expected

Things seem to be unfolding as predicted
The dollar has finished five waves down in both small and larger degree, and the expected rally is underway. If you are a foreign reader who is traveling to the U.S. soon, it would be better to buy your dollars now and sit on them. They will be more expensive soon. How much more depends on your own currency's relationship to the dollar.

Gold has corrected some $40 from its highs and has further to go. Gold should be beaten down for several months now. It will almost surely break below the $1000 mark. It's a buying opportunity, IMHO. We should see gold at $1500+ by this time next year.

My gut tells me the markets have topped. My model says we could still see 10,500 Dow.

This week marks the 80th anniversary of the 1929 Wall Street Crash. The last few days have been marked by some persistent selling in the stock markets. As I look at the futures this morning (it's 5 a.m. now) they're off sharply. Wouldn't it be ironic to have the Crash of '09 on or about the anniversary of the Crash of '29?

As the markets decline, the economy further slows, and fear begins increasing, I will begin to write less on technical analysis and more on the practical side of dealing with things. I've done what I've done on purpose. When the optimism side of the equation rises (as it does periodically and predictably, thus leading to bear market rallies) fewer people pay attention to posts on frugality and simplicity and living with inward peace and trust in the Lord.

Rather than fall silent and melt into obscurity for a period of time, as many bearish bloggers do, I choose to use these periods of optimism to lay my method and its fruits before my readers and try to predict as best I can what will happen. I certainly am not inerrant, and I'm more than willing to admit where I am wrong, but I think I've got a pretty good handle on things. Good enough at least to give a kind of broad advice that might be helpful to you. Hopefully this will increase your confidence in my advice when you might really need it.

Just to recap, my advice has always been the same:

1. Get out of debt. This is a deflation and debt kills you in a deflation. Hyperinflation may well be coming, but it is not on the horizon anytime soon. I think at least a decade.

2. Save money. If you are a two income family, cut things until you can live on one income and save the other. You will be thankful in the long run. I know this can be done. My wife and I did it. We lived on my smaller salary and used her salary to pay down debt. When it was time for us to move to Sturgis to take a church, we were able to take a 60%+ cut in pay (plus having go from having company provided health insurance to having to buy our own on the open market.) It was hard psychologically, but we did it, and made it just fine.

3. Discipline yourself to live beneath your means, frugally and simply. Learn how to fix things. Buy plain, sturdy, and cheap items. "Use it up. Wear it out. Make it do, or do without."

4. Buy some gold and silver. I think I wouldn't buy now. I think I'd wait a few months for the price to go down more.

5. Trust God. Learn to lean on him. He can and will supply all of the needs of the Christian when the Christian "seeks first his Kingdom and his Righteousness." Get involved in a Bible believing church and work at forming a community of mutual care and concern there. It's God's will for us that we love each other and bless each other.

Monday, October 26, 2009

UNG Retesting

UNG, the natural gas exchange traded fund, is retesting its recent lows. It's off 4%+ today. This is not unexpected, and I don't particularly care if it violates its lows. It's still either bottomed or is in the process of forming a bottom.

It's a second chance to pick it up at a discount.

The markets are looking very toppy. I think the decline begins soon, or is already underway.

Sunday, October 25, 2009

Watch It!

I watched this about 11 years ago, the last time it was shown on PBS. I vividly remember watching a interview with a man in this series. He said, "Young people need to understand what happened and how to cope, because it could happen again."

It's coming up again, and it's well worth watching. Check your local broadcast schedules.

http://www.pbs.org/wgbh/americanexperience/

Thursday, October 22, 2009

Another Email from a Reader

I got an email today asking me to explain how I arrived at my Dow 10,500 target. What follows is my explanation.

It's somewhat a well-informed guess/gut feeling.

Normal retracement is often a percentage that's based on a fibonacci ratio. 61.8% is the most common one, but 50% often shows up as well. So does 75%.

The Dow, the S&P, and the Nasdaq all move together (i.e. have very similar wave structure) but the magnitude is often different. The Nas usually is the most volatile and has the greatest percentage moves both up and down, followed by the S&P, then the Dow. The Nasdaq is sitting at approx 60.2% retracement, the S&P is at about 47%, and the Dow is at about 46%. There's also a basic guideline that the move often retraces to the middle of the previous wave IV. On the Dow that would be the 10,350-ish level.

Put it all together, the Nasdaq is almost at it's .618 retracement, and is liable to exceed it. My guess is it will hit 75% retracement max. The S&P is only slightly outperforming the Dow, but if the Nas hits 75% it would be reasonable for it to hit 61.8%. That leaves the Dow as the laggard. 50% retracement would be in the 10,300 range. I decided to give myself an extra couple of hundred points to the upside..

Of course, these are guidelines. A Wave II can retrace 100%. But I see mass sentiment shifting towards the pessimism, so I don't think the "animal spirits" are there for too much more than what we've got. The only thing that might skew that is if we drift sideways or upwards into the holiday season. Sentiment always shifts to the positive then (i.e. the Santa Claus Rally) and that could give us enough ooomph to vault higher than my guestimate.

Under normal circumstances, I would think that pessimism was too high to lift the markets much more, but I think there is a greater pessimism acting as an opposing force. I think some of the money piling into the market reflects inflationary or even hyperinflationary concerns. Look at a stock chart of Zimbabwe or Weimar Germany. Their markets went through the roof in nominal terms, due to the depreciation of the currency. If we had a high inflation or hyperinflationary environment, our stock markets would skyrocket, too.

However, I don't think those concerns are valid. I think we're in a deflationary environment. Too much debt for people to want to take on more debt, too much stuff laying around that needs to be bought, not enough money to buy it. That's massively deflationary.

The attitude towards the dollar is overwhelmingly bearish. (Prechter notes that sentiment is often more extreme at the bottom of a wave II than it was at the previous start of wave I. This is true now for the dollar. Sentiment is more bearish now at 74 and change than it was in March of 2008 when it was at 71 and change.) Couple that with my dollar wave count, and it leads leads me to expect a sharp dollar reversal to the upside very soon.

That will relieve inflationary fears and stoke deflationary ones, which will lead to an abandonment of the stock market and a further piling in to the bond market. That's when we'll get our selloff, imho.

The only wildcard in my mind is gold. Clearly some of the rise in gold is due to inflationary expectations. Historically the relationship between gold and the dollar is not clear cut at all. I think it's gold's time, regardless of what the dollar does. That's my broader view. However, the rise in the dollar will have some effect on gold and silver. Enough weak hands have piled into gold that it's time for a nasty correction to shake them out.

Sunday, October 18, 2009

Interesting Chart

I got an email today from a Reformed guy in Wyoming named Paul Haller. He is a trader and runs a subscription-based Technical Analysis website. He showed me a pretty interesting chart that he'd drawn up.

Technical Analysis (TA) is a set of tools used to analyze charts of markets or individual stocks or commodities. For years it was dismissed as voodoo or the equivalent of astrology by the mainstream, but it is proving to have some predictive value and explanatory power. For instance, Marketplace, a program produced by American Public Media, had a story on within the last 6 months about academic enquiries into TA. They talked about the surprising validity they found when they subjected TA to scrutiny. TA works. It's not infallible, and some aspects of it are judgement calls, but TA works. Elliott Wave, which I follow with interest, is a species of TA.

Trendlines are an important TA tool to help judge entry and exit points. For instance, some of you might remember a TV commercial for a company called Channeling Stocks.com. They made recommendations based on drawing two basic parallel trendlines to make what is called a trend channel. You bought at the bottom of the trend channel and sold at the top. Theoretically, you make money no matter if stocks are going up or down. It works until the stock breaks out of the trend channel to the downside. Caveat emptor.

Well, look at all the trendlines on this chart:



I frankly have never seen a trendline chart like this. I can't quite digest all that this means yet. I haven't had time to study it very carefully.

But I will say that I don't think it's good. Time to get out my Edwards & Magee and start reading.

Caveat emptor. Better to stay out of the markets for now.

Friday, October 16, 2009

A Reader's Question

A faithful reader wrote to ask me to explain how it is that we've got a metaphorical gun to the head of the Chinese where our currency is concerned, and why I expect that the dollar will actually rally from here:

When you finance your home with the bank and don't pay, the bank takes your home. The US is rich in oil and natural gas reserves, to name a few. We haven't even begun to mine our gold, silver and other resources...including coal. If the Chinese have financed us and we're unable to pay, what keeps us from exchanging our resources for our debt? Why would they keep lending when they're certain we can't pay? Unless we can?

Well, the analogy is true, but it's not complete. They can't repo the U.S. the way that a bank could repo a house. The system is a closed loop, with everything interrelated. If you change one thing, it effects everything else, including things that those who desire the initial change might not want affected.

Fundamentally, if the Chinese want to sell things over here, they have to sell them in exchange for dollars, because that is our national currency and it's illegal here to sell anything in any other currency here. So they take our dollars. What can they do with them?

1. They can trade them on the open market for their currency, the yuan (i.e. buy yuan from people who have sold things to them and have yuan that they'd rather convert into something else) but as they go and buy yuan, then there is a pernicious effect. The more they buy, the smaller the available supply of free yuan. That has the effect of increasing the "price" of the remaining yuan, so their currency rises in value. This they do not want to happen. If the yuan appreciates, then their export goods get more expensive and their exports drop. That also causes the free supply of dollars on the open market to grow, meaning each one is worth less and less. So the dollars they've still got in their pockets become worth less and less. This also affects them in the same way as an increase in the value of the yuan. Their goods become more expensive over here and their exports drop. Their expedient has been to peg the yuan to the dollar and maintain a relatively fixed exchange rate which works in their favor as exporters. We've been demanding for years that they let the yuan "float" (i.e. appreciate to a level set by the market) which will protect our industries from competition a little more. This they have refused to do because it will also decrease their exports. Decreased exports mean slow business in Chinese factories, which means layoffs, which means social unrest. The Chinese government is terrified of social unrest.

2. They can trade them on the open market for yen or euros, or some other currency, but everyone else has the same problem that the Chinese do. They don't want their currencies to become more expensive relative to the dollar, so they would take countermeasures, both monetary and political, to stop this from happening.

3. They can buy commodities they might need later and stockpile them, since the dollar is the international reserve currency, everything is sold in dollars. They have done this. This is why gold, silver, oil, copper, coal, natural gas, iron, rubber, tin, soybeans, wheat, etc have gone up over the past few years. But there's only so much of this stuff you want to buy and store, and some of it is only good for so long. This also causes the remaining supplies of raw materials to go up in price, which harms business and in turn threatens Chinese social stability.

4. They can buy things within the U.S.... assets or companies. They've done this. IBM is now Lenovo, a Chinese company. One of the major oil companies was bought by Petrochina. They've also bought one of the appliance manufacturers... I can't remember which one. This raises all sorts of domestic political trouble, though. We don't like things like mines and oil companies owned by the government of a potential enemy and someone we will probably be at war with in the next 50 years.

5. They can buy assets or companies in other countries, and they've done this. Oil fields and agricultural production facilities and other natural resources have been bought by the Chinese. One of the largest deposits of lithium in the world was bought by the Chinese. It rests in some South American country that I can't remember... Ecuador, or Bolivia I think. But there's still the problem of changing those dollars for whatever local currency, and still the problem of too many dollars flooding the market. These countries usually have pretty fragile currencies as well, and if their currencies appreciate, it's bad for them as exporters. So that will factor into any decision they make about what they will let the Chinese buy within their borders.

6. They can buy U.S. treasury bonds. This is mostly what they've been doing. When lots of money is chasing after a bond, it causes the effective interest rate to drop. The demand for the bond is such that the bidders are willing to take a smaller and smaller interest rate in exchange for their money. That keeps our interest rates low because much of our credit system is tied to treasury bonds. This enables us to borrow and spend beyond our means. The U.S. government would have to default on its sovereign debt (which is not likely) in order for the Chinese to actually be ripped off. We're still the strongest government with the strongest military in the world. Our government still has vast revenue collection abilities and America still has a lot of money to collect (i.e. new and higher taxes.) But if we quietly and consistently depreciate the dollar, then their puny 1% interest rate actually causes them to lose purchasing power. They'll still get $101 for every $100 they lent us, but that $101 will only buy $90 worth of stuff compared to what it would have bought earlier.

It's a closed system, and the only escape hatch is to pour that money into something that nobody really needs to survive... something that it doesn't matter if the price goes to the moon. Gold is the only safe outlet. Apart from some electronics, jewelry, and some space exploration needs, it's really not necessary to our survival. Silver has less of those properties, but it is still a pretty good outlet, too.

All of this is predicated on an inflationary outcome to the money printing the U.S. is doing. So far that has not been the case. Most people assume it will happen. I say it won't. That makes me a deflationist.

However, that doesn't mean that the Chinese won't try to pour at least some of their dollars into gold. That's part of the reason I'm one of the few deflationists who is also a gold bug.

Makes your head spin, doesn't it?

Tuesday, October 13, 2009

The Dollar, Gold, and the Markets Pt. 2

Just a quick note today.

1. The dollar has almost completed five waves down. Look for it to rally soon. All the bearishness in the dollar is actually a bullish sign. It's nowhere near its recent lows (71 and change in May/June 2008) but bearish sentiment is higher now than it was then. This is bullish for the dollar. A strong dollar is a key component of the deflationary case. So far, so good.

2. Gold and the dollar have NOT been moving in opposite directions for years, as the financial media seems to assume. Just get a chart of each one that goes back 30 years and compare one chart to the other. There is a very weak correlation. However, there is some correlation. Since the mythical dollar/gold inverse relationship is fixed in gold investors' minds right now, and because gold has also come close to completing 5 small waves up, expect gold to correct in price. Any corrections should be viewed as buying opportunities, IMHO.

3. The markets are struggling upward towards my 10,500 DOW target, but are losing breadth and conviction. They may not make it, peaking out just above the psychologically important 10,000 mark. Just a reminder, the bear market is NOT OVER. This correction from March to now is just a very predictable (and not even all that powerful) bear market rally. The markets spent a full 50% of their time in rally mode from Oct 1929 to their final bottom in August of 1932. These are bull-trap rallies. Unless you're a Player (and I doubt many Players read this blog) the stock markets are to be avoided right now. Keep your money in a treasury-only backed mutual fund in anticipation for the day when a few thousand dollars invested properly can make you a millionaire 20 years down the road.

4. My UNG recommendation continues to grind slowly higher. I still think it's a buy and short term hold (6-12 months).

Tuesday, October 6, 2009

Gold, the Dollar, and the Markets

We were greeted this morning to an article in the British Press about a secret agreement between the Arab states and China and Russia to move out of the dollar in 9 years, and begin selling oil in some other currency or basket of currencies. Gold promptly rocketed up and has been as high as $1044. Since this would be inflationary, the markets rose in a sympathy reaction.

If the Dow rises above 9850, or the S&P above 1070, then the scenario that I spoke of in the last post is in play... one more multi-week move up to probably around the 10,500 level and that will be the end of this bear market correction that's been in effect since March 6 of this year. If they fail to break that resistance then we'll turn and head down from here.

I do not think that the abandonment of the dollar as the reserve currency will happen as the Russians, Chinese, and Arabs have planned. I think this morning's reaction is designed to remind them that they are all sitting on huge piles of dollars that will diminish rapidly in value should the dollar be abandoned as the world's reserve currency. As someone once said, when you owe the bank a thousand dollars and you can't pay, you have a problem. When you owe the bank a billion dollars and you can't pay, the bank has a problem. These countries have been, in effect, the "bank" for the U.S. for years. We have a gun to their head. They cannot sell very many of their dollars without simultaneously driving the value of their remaining dollars down. The Chinese have tried. They're buying everything they think they'll need and stockpiling it in an effort to get rid of their dollars, but the pile of dollars is so large, even that doesn't really make a dent. It also tends to drive the prices of those things they are buying into the stratosphere, which depresses business even further. They're stuck. It's not nice. It's not very neighborly, but international politics is a ruthless game. This is why this was recently said:

Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York that China would continue to buy Treasuries in spite of its misgivings about US finances.

“Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”


The only out is gold, which the Chinese government is buying at a consistent but measured pace. They have also switched a longstanding position concerning their population. It used to be illegal for individuals to hold gold in China. Now not only is it legal, the government is encouraging its citizens to buy gold and hold it. However, if everyone on the planet decided that they wanted to buy an ounce of gold, then there is not enough gold on the planet to satisfy that demand.

The world economy is in a death spiral. Everyone is intricately connected with everyone else, and everyone is especially connected with us and our dollars. They're desperate to cut ties, but they can't. At least not so far.

Added at 8:06 pm mtn standard time:
Gold closed well above its old intraday high, closing at almost $1040 in both London and New York. The gold bull is intact and confirmed. Any pullbacks from here (and there may be sharp ones) should be seen as buying opportunities. Next stop $1350-$1500. Silver should rise in sympathy and with even greater gains percentage wise than gold.

Saturday, October 3, 2009

Reality Check

A constellation of events is taking shape and bringing clarity to the big picture.

1. The unemployment rate is now officially 9.8%, but in reality the government has so many "hedonic adjustments" to the statistical models that it's meaningless. Real unemployment is admitted to be 17%

According to ShadowStats.com, the actual unemployment rate, if it were measured the way it truly ought to be, is about 22%.



We reached 25% unemployment during the depths of the Depression of the 1930's using more honest measures and statistical models like the ones used at shadowstats.com. We're almost there now, and we haven't even really begun the Second Great Depression in earnest.

I warned my readers months ago here and here that a surge in optimism was coming, and that the surge in the stock markets was a harbinger of it. I warned you that it was temporary, and not to get suckered into it. The spike in mass optimism had its usual effect. This was a time to sell things and not to buy them. People went back to their freespending ways as much as they could as soon as they felt better. Peter Schiff writes:

"There is no question that the sense of panic has temporarily subsided. In recent interviews, Treasury Secretary Geithner has been almost giddy in his descriptions of the recovery - all the while crediting his own policies for averting disaster. Americans are once again taking the government's bait by spending money they don't have to buy things they can't afford. Evidence of this trend was contained in data released earlier this week which showed that even while income growth was largely stagnant, U.S. consumers showed the biggest month-over-month increase in personal spending in ten years! With the same report showing a 25% drop in the savings rate, the source of the spending money is clear. But depleting savings and increasing borrowing does not a recovery make."

I hope you made hay while the sun was shining and gathered your proverbial crops into the barns. It's about to start raining again. Then it will turn to snow. Then a blizzard.

The stock markets are setting up in some patterns which are errily similar to the post crash bounce and bust of 1930. I would not be surprised to see a freefall crash within this month, especially if we violate the March 2009 lows. If we follow that model, then we are looking, ultimately, at a 90% drop in the markets. That's somewhere around Dow 1400 and S&P 160. No, that is not a typo. If you think that is extreme, stop and consider, it has happened before. It happened in my grandparents' living memory. It has happened in countries all over the world that aren't much different than our own. It's rare. But it happens.

If you have money then, even a few thousand dollars, and the courage to go against your strongest feelings and plow it into the markets when the sense of despair is so palpable that nobody is recommending the stock markets anymore, you can take a few thousand dollars and become a millionaire in 20 or 30 years. It will be a once in a century opportunity. But it will not be easy. First you have to hold on to what you have, then you have to buy the right things at the bottom.

Bottom line, this is a depression, not a recession. The causes of this mess are totally different than the causes of a recession. This is a system-wide failure and reboot. It will not be over in a few months. It will probably take a decade. There will be rallies (and very sharp rallies) along the way. The Dow spent 50% of its time in rally mode from October of 1929 to November of 1932 when the markets finally bottomed for good. These rallies are known as "bull traps." If you are a smart and nimble trader, you can make money in these rallies, but you can get completely wiped out, too. Better to squirrel your cash away in a safe place in anticipation of the opportunities that arise after the hurricane has passed. Personally, I'm not sure I'm that smart. I know I'm not that nimble.

My advice still is my advice:

1. Get out of debt. Secure your income as best as you can. Live beneath your means and save money.

2. Buy used where possible, and buy only what you need, and when you buy, buy for usefulness and sturdiness rather than cheapness or bling-bling. Better a $10 handsaw that will last for decades than a cheap remanufactured chainsaw that will blow up in a couple of years at best. Better sturdy jeans and tough, comfortable shoes and flannel shirts than foo-foo and fashionista purchases which will be out of style in two years. Better a used Chevy or Ford than a new Mercedes or Lexus. Better a sturdy bicycle than a new dirtbike or snowmobile that you use three or four times a year.

3. Learn to fix things rather than throw them away. Cancel your cable. Use your local library.

4. Take care of your body. So many bankruptcies happen because of huge medical bills. So many of our illnesses could be prevented or mitigated with a good diet, a little exercise, the dropping of bad habits, and a good night's sleep each night.

5. Trust in God who always provides. Keep tithing. It will break the spirit of idolatry that often comes over those who wish to be frugal. It will turn your frugality into greed and fear if you don't keep it in check.

6. Families must help each other out and learn to take pleasure in each other rather than seeing each other as a burden. The ridiculous trend of a giant house inhabited by four people who all go off into their private spaces every night, and only text and IM and email each other when communication is required, is over. Hell is not other people. Your family can be your greatest joy if you learn to own your own mess and be tolerant of everyone else's.

7. Buy a little gold and a little silver. It's God's money, after all, and I have the distinct impression that when your paper and electronic dollars finally revert to their intrinsic value (zero) these God-ordained media of exchange will still be going strong.

8. Get deeply involved in a good, Bible-teaching church. Create a Christian community of mutual care there. In the church I pastor, we have all the skills necessary to take care of each other, from canning and gardening to medical care to dentistry to auto repair and construction. We love each other. We serve each other. We bless each other with our spiritual gifts.

Thursday, October 1, 2009

I Rarely Do This

Consider as one of your few longs, buying UNG, an exchange traded fund (ETF) that plays the natural gas market.

I generally don't like giving specific advice. But sometimes it's worth doing. This is a low risk setup.

Consider buying into the natural gas market via an Exchange Traded Fund (ETF) that goes by the symbol UNG.

It dropped 86% to its low a few weeks ago. It's due to go back down and retest its lows. The market is close to panic and despair. They've run out of storage space for natural gas and are contemplating dumping it on the market, further suppressing its price, making everyone pessimistic about the future. However, it has really fallen off a cliff in the last year or so, and the seasonals are very positive (i.e. winter is coming and people will be burning more natural gas.)

I don't think I'd buy and hold it for the rest of my life, but there's money to be made here.

Once again, do your own due diligence. You are responsible for yourself. Don't put all your eggs in any one basket.

I own it, having put about 20% of my eggs in this particular basket. I bought at $9 and change a few weeks ago, right about at what is (so far) the low.