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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

GOLD At $1000

Commodities / Gold & Silver 2009 Feb 24, 2009 - 10:37 PM GMT

By: Submissions

Commodities Best Financial Markets Analysis ArticleHoward S. Katz writes: Here is the great, grand cycle bull market in gold which started in 2001 and has, thus far, multiplied its price by a factor of 4. (The grand cycle bull market in gold of the 1970s multiplied its price by a factor of 25 before it was over.) It is a simple chart, but it has many important lessons (which few understand). On the central economic question of our time — is there going to be currency depreciation or currency appreciation - this chart speaks volumes.

The establishment is telling us that the price decline which started last spring (in most commodities) is the beginning of a giant price decline (what they call deflation). Even these people will concede that gold is a good measure of general prices and is inverse to the value of the dollar. But here is gold, within kissing distance of its all-time high. How can anyone look at this chart and talk of a large-scale decline in prices (appreciation of the currency) in our day and age?

I do see that gold had a decline from July to October 2008. But any normal grand cycle bull market is interrupted by declines. These are normal consolidations and pave the way for further advance.) And I now see that that decline has been made up, and we are attacking the old highs. (By the way, a grand cycle trend is the largest scale of trend, usually 10-20 years. The last grand cycle bull move in gold was from 1970 to 1980.)

What happened in the middle part of 2008 was that the media of the country, following the lead of the New York Times , declared a financial crisis, which was soon interpreted as being a giant bearish period in all goods. (They often called it a severe recession or depression.) But in truth it was a speculative move. Prices went down because speculators read that there was a financial crisis and decided to sell. There was no fundamental reason for them to sell.

Anybody who plays the markets has to realize that it is not a good idea to follow the New York Times . In 1982, at the time of the greatest stock market buying opportunity of the 20th century, the Times was promoting a gentlemen it called “Dr. Doom” (aka Henry Kaufman). Dr. Doom was telling people to run away from the stock market, and as a result many people of that day sold their stocks - right at the grand cycle bottom -and put their money in T-Bills. They missed the greatest bull market of the century.

Now such a mistake would discredit any analyst, but the Times was quick to compound it. In 1985, with the DJI at 1300, they started flirting with the idea that stocks were on the verge of another 1929. They scared the dickens out of people. But that was another great (albeit shorter term) buying opportunity. Two years later the DJI was at 2700. Then we did have another 1929-style crash (Aug. - Oct. 1987), of which the Times did not breathe a word of warning.

This goes on and on. In 1990, they promoted the ideas of Ravi Batra about The Great Depression of 1990 . I must have missed that one. Every time I review the data it completely escapes me. Poor Mr. Batra, he just faded away and has not been heard of since.

Then in 1999 the Times switched sides. From being excessively bearish they became excessively bullish. They published a book entitled Dow 36,000 by Glassman and Hassett (itself a take-off on Robert Prechter's forecast of the early '80s that the DJI would rise to the - then astounding - level of 3500). Everyone laughed at Prechter and then refused to give him credit when he was right. But nobody laughed at Glassman and Hassett. They were actually dumb enough to put a date on their forecast and said that we would see DJI 36,000 by 2002-04. In October 2002, the DJI was 7200. With the aid of the Times (and the Wall Street Journal ), Glassman and Hassett turned millions of people bullish in early 2000. These people bought stocks just in time for the worst bear market since 1973-74. Many of them bought NASDAQ stocks, such as the dot.coms and saw their money disappear down the drain.

And you know what? The Times believed its own propaganda. It invested $2.7 billion to buy its own stock at that time, in the neighborhood of 40. The Times stock closed on Friday at 4.07. According to my calculations this amounts to a loss of $2.4 trillion. Perhaps this explains why the company is borrowing money from Carlos Slim at 14% interest.

With this incredible record for being wrong, I have one question to ask the people of America. WHY DOES ANYONE PAY ANY ATTENTION TO THE NEW YORK TIMES ?

And yet they do, and that is the explanation for the intermediate sell-offs which occurred in most commodities and in stocks in 2008. The Times came out in mid-September and declared a “Financial Crisis.” Instead of the rest of the nation laughing, the rest of the country's media fell for this, hook, line and sinker. All the print media began to shout “Financial Crisis.” Then TV and radio joined in: “Financial Crisis, Financial Crisis, Financial Crisis.” Soon the (great majority of the) people of America believed.

Like many social phenomena this had a self-confirming aspect. Retail store advertising managers read in the media that we were in a financial crisis; so they reduced their advertising pages. As the Times' advertising revenue declined, its stock collapsed. Without advertising to back it up, retail sales around the nation declined. Mid-level corporate managers, reading of the financial crisis, laid off their workers, and unemployment rose. Today the media points to the decline in retail sales and the rise in unemployment as proof of their “recession” thesis. They do not know that these are reflections of their own bearish opinions.

In a very real sense then, THIS IS A NATION SCARED OF ITS OWN SHADOW. How sad it is.

The One-handed Economist is not afraid of the New York Times . We know that, when the majority makes bad speculative decisions and pushes goods away from their true values, it opens an opportunity for good speculators to make good decisions thus buying low and selling high. For example, I started keeping a model conservative portfolio right around the turn of the century. $100,000 invested in that portfolio on Jan. 1, 2000 is now worth $157,000. By contrast, the average U.S. mutual fund, over the same period, has turned $100,000 into a bit over $66,000. Figuring from the Oct. 2007 high in stocks an average mutual fund has lost almost 50%. I did take a loss during the October sell-off, but I rebounded sharply and am today down less than 15%.

And that is the beauty of today's markets. The whole country is crazy. They are putting valuations on goods which make no sense. In July 2008, they were valuing crude oil above $140/bbl. Today they are valuing it at under $40/bbl. I will tell you quite frankly that the fundamental supply-demand equation for crude oil has not changed so radically in so short a time. What has changed is speculative opinion.

The U.S. money supply has increased by 14.8% over the past 9 months, equivalent to 19.7% per year. The worst year for money increase (up to now) since WWII has been 17% (1986). The Federal Reserve is saying in its regular statements that it will continue to create money and talks as though some (higher) rate of price increase was more compatible with economic growth. (Over the first century-and-a-half of American history, the U.S. had the greatest economic growth of any nation in the world at any time in history without any price increases at all. But Ben Bernanke has not studied American economic history.)

I defy Paul Volcker, Ben Bernanke, the Wall Street Journal editorial page staff, the entire New York Times economics department and all of the other assorted “deflationists” who are raising such a storm these days to find me one case in American history (or any other nation) where significant price declines occurred in the face of a massive increase in the money supply such as is now taking place.

I use two tools to analyze the current markets; Austrian theory economics and the commodity pendulum. Austrian economics defines interest as the price we pay for time. Back in the Middle Ages, ignorant people used to say that interest should not be charged on a loan. If you lend a man $20,000, he pays you back $20,000. That is it.

But the Austrians pointed out that people have a time preference, meaning that they preferred present goods to future goods. Imagine that you were going to receive a car. Would you rather get it immediately, or would you prefer waiting a year? I think you can see that most people would prefer the car immediately. The present good is more valuable to them than the future good.

OK, the Austrians asked, by how much is the present good more valuable? Their answer was to look and see how much interest the lender charged and the borrower agreed to pay. If the rate charged and agreed upon was 6% and if this was normal in that society, then the time preference in that society was 6%. Thus the rate of interest is determined by the free market via negotiation between lender and borrower.

Or, at least it used to be. Starting in 1914 the rate of interest has been determined by the Government on the basis of manipulation by the central bank. However, the Austrian economists understood that manipulation of the free market price by the government could only be harmful to the economy. When they studied the nature of this harm, they found that central bank manipulation of the rate of interest was the chief cause of the business cycle. Stock prices, in particular, are bulled higher by central bank easing, and they are put lower by central bank tightening. The housing bubble and the 2002-07 stock bull market were both caused by the Greenspan easing of 2000 to 2004. (Did you ever notice how Greenspan gets a pass when anyone is discussing the housing bubble and consequent crisis? He was the main cause, and the bankers making the NINJA loans, bad as they were, were only responding to the incentives he imposed on them. The little crook goes to jail. The big crook sits on a throne.)

The commodity pendulum started in the 1960s, shortly after the Kennedy tax cut of 1963. Kennedy printed money. Consumer prices rose, but commodity prices remained flat. Finally, by 1971 commodity prices were way undervalued in real terms. That was the first “downswing” in the commodity pendulum. Then from 1971-1980 commodities responded to their undervalued condition and to the continued printing of money by (more than) tripling in price. That was the first upswing in the commodity pendulum. From 1980-1999 was the second downswing in the commodity pendulum, and right now we are in the second upswing. Therefore, the model for our current economy is the 1970s - the period of double digit annual increases in price. If they could only understand this simple concept, then a great many analysts would not currently be making fools of themselves forecasting that prices are going to go down.

By Howard S. Katz
You are going to need the benefit of good thinking on your economic decisions because there will be no break for the poor in the society of the future. Obama slipped into the stimulus bill a new government bureau: the National Coordinator of Health Information Technology, and gave it the power to murder people expensive to treat. This follows the precedent of Hitler and the Germans in the 1930s. Save money by killing those expensive to treat. I discuss this in my blogs (last week and this) on (no charge). Subscriptions to the One-handed Economist are $300/year. We have been scoring heavily with our gold stocks and invite you to see what the future holds.

© 2009 Copyright Howard S. Katz - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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