Tuesday, May 16, 2006


What Next For The Commodity Bull?

Reuters has the trading numbers. "Gold bounced from one-week lows in Europe on Tuesday after support around $675.00 an ounce held and as a weaker dollar encouraged buyers back in to a market battered by Monday's heavy price fall, traders said. 'The $675/680 area was important..and as the dollar weakened, gold went higher,' one said."

"Spot gold hit an early low of $674.00 an ounce, then rebounded smartly to $689.90/690.90 late in New York, up from $682.60/683.60 late Monday in New York. 'We believe that this correction, which we had repeatedly warned was inevitable if unforecastable in both timing and extent, will be a temporary phenomenon,' broker UBS said in a report."

"But some players were not convinced gold selling was over. 'People have been quick to say, 'Oh, I'm glad to have that behind us and be back to this commodity bull roaring forward.' But I'm not ready to buy off on that completely. Given the steepness of the decline, the market needed to take a pause, whether a pause and we're at the end, or a pause before further declines,' said COMMERZBANK Vice President Paul McLeod."

"In other precious metals, platinum stood at $1,295/1,303 an ounce from $1,270/1,278 late in New York overnight and off last week's record high of $1,334. Palladium was at $369/374 from $363/369 in New York on Monday, when it touched its lowest in nearly three weeks at $352 on fund selling."

"Silver fell to its lowest in nearly three weeks to $12.80 before rebounding to $13.59/13.69 an ounce in New York. The metal was quoted at $13.29/13.30 on Monday in New York, compared with a 25-year peak of $15.17 last week."

"The Canadian dollar rebounded versus the U.S. currency on Tuesday as commodity prices recovered some lost ground, while the greenback was pinched by economic data. The currency finished at C$1.1079 to the U.S. dollar, or 90.26 U.S. cents, up from C$1.1136 to the U.S. dollar, or 89.80 U.S. cents, at Monday's close."

"Canadian rates are also seen near the end of their recent run of increases, but a quarter percentage-point hike is expected next week, which should help underpin the Canadian dollar against a U.S. dollar that has been falling hard and is expected to continue."

"'We're still looking to be short U.S. dollars against Canada. We're looking for commodity currencies to outperform over time, and the Bank of Canada is still maintaining a flexible yet hawkish attitude toward monetary policy,' said Jack Spitz, director of foreign exchange at National Bank of Canada."

"Suspicions that the U.S. economy is softening have prompted economists to price out future U.S. rate hikes. With U.S. treasuries outperforming, U.S.-Canada yield spreads narrowed, a shift from previous sessions. The 30-year bond climbed 75 Canadian cents to C$120.60 to yield 4.435 percent. In the United States, the 30-year treasury yielded 5.215 percent."

And Bloomberg has this on Asia. "For Asia, a rising yen would arguably be more important than a stronger yuan. While China gets all the headlines, its economy is dwarfed by Japan's $4.6 trillion one. The yen is Asia's only major international currency, and Tokyo is home to the region's largest markets."

"A stronger yen could empower other Asian governments to scrap their weak-currency policies. It also might make China more comfortable with a rising yuan."

"What's often missed in Asia is that a strong currency is a sign of confidence. It helps pull in overseas capital, boosting stocks and holding down bond yields. Firmer currencies also would help Asia kick its addiction to exports."

"Things aren't that simple for China, of course. Allowing the yuan to strengthen sharply could make it harder to create the hundreds of millions of jobs needed to maintain social stability. Yet China is moving in that direction, something evidenced by the yuan's rise this week."

"Tolerance for a stronger yuan isn't about appeasing critics in the U.S., it's about getting control of an economy that's growing faster this year than many economists expected."

"Money-supply trends say it all. China's M2, which includes cash and all deposits, in April grew almost 19 percent from a year earlier. It's not just that growth rate that's alarming, but also the slight acceleration from March. China's central bank raised short-term interest rates last month, yet it needs to get more serious about restraining lending."

There are rumors about soft commodities taking over the hard commodity gains. Although I like my PM/energy now.

The US is predicted to have three major hurricanes by AccuWeather. If this doesn't bring oil to new highs again, then I'll be surprised.

Any action with Iran should cause a stronger effect.

Metals would also follow.

The next four weeks might be boring and commodities could lose some support. If they do, I'll have to pick some more up.
Gold 24 hour spot is up $19 an oz. in the LAST HOUR 1/2. Lots of buying in Hong Kong the second the market opened up there. Currently $702.

The 21st Century Gold Rush
How High Can Gold and Silver Stocks Go?
Higher Than You Might Think!!
by Edward Gofsky
December 9, 2003

The lineups to buy gold resembled movie theatre queues waiting to see Apocalypse Now. Gold prices, a barometer of political and economic fears as well as simple greed, began the 1980s by reaching a record $760 an ounce in Canada -- right through the top of old scales of value. The poor man’s precious metal, silver, reached $56 and continued to rise faster than gold.

Waiting for hours with money in pocket or purse from savings bonds and savings accounts, they stood in their jeans, ski jackets, bulky sweaters, construction boots and business suits. Some carried knapsacks. They ranged in age from 20’s to middle age. All believed that, sooner or later, purchasing gold and silver would pay off.

All but one were buyers. The solitary seller was cashing in a gift of silver.

“I don’t understand the stock market. Gold is on the front page and is easy to follow,” said a young woman.

The analysts and economists cite a litany of woes to explain the new gold rush. But to gold and silver buyers, last week and this, the most important factor is that prices are moving and they were afraid of being left behind, empty handed.

Gold sold in Canada for $268 when 1979 began. Amazed in the sudden surge above $700, gold devotees begin to think $1,000 possible soon. The rocketing prices startle the experts and frighten even the analysts who forecast a precious metals boom. The action is so wild that the market experts have stopped forecasting prices.

The gold explosion is the result of many causes and may have many effects. Inside, The Financial Post reports on the outlook for gold and silver.

            Industrial users worried about prices, p.4.

            Why silver soared faster than gold, p.4.

            Canadian traders say silver’s popular, p.4.

            Secrecy and ritual in London fixing, p.5.

            Comment on the political options, p.6.

            Shares in gold stocks look even better, p.17.

            Ottawa won’t announce timing of gold sale, p.18.
            The Financial Post – January 1980

This front page story was from the top of the gold and silver market in January 1980 when gold hit $800 and silver was $50+. As you might guess, we are years away from any newspaper articles of this magnitude. But I do predict that by the end of this decade, there will be news stories published around the world similar to this 1980 front page story.

If you want to know my price prediction for gold based on solid historical research, you can read my last essay “The 5th Wave Advance in Gold” to understand my argument for the coming explosion in gold. (I’m also very bullish on silver). In this essay I will focus on gold and silver stocks to see where they might be going in the next 3-5 years. In the last few months I have started out on a unique quest…to go back in time to the 1970s and to see what happened to gold and silver stocks when gold hit $500 then $600 then $700 all they way to the $850+ price and $50 silver.

I started my research by going to my local library to look at old newspapers from the 1970s and wow did I find some amazing things!! My library had The Financial Post newspapers on microfilm all the way back to 1972 which was the very beginning of the last gold and silver bull market. I quickly went to work spending hours poring over the old papers looking for articles and stories on gold and silver to see if there were any similarities between now and the 1970s. There were a few articles about gold from 1972 to 1975, but the really big stories didn’t really get published until around 1978-79 and especially in January of 1980 with the final blow off top in both gold and silver.

What I really wanted to uncover from the old financial papers were old stock tables so I could see how high most gold and silver stocks got to in January of 1980 and from what level a few years earlier. What I found was absolutely shocking. In 1975 most or all of the gold and silver stocks were trading under $2. Most were penny stocks under $.50. Even with gold up 400% from the 1972 low of $60 to the 1975 top of $200, most gold and silver shares did little to make anyone notice--especially the mass public who had no idea what was going on. It was not until gold bottomed out in late 1976 at $100 and into 1977 that gold and silver stocks started their historic bull market. It would end where some of the prices for gold and silver stocks were unthinkable only a few years earlier. I printed out stock tables from 1975 up until the January '80 top and was totally stunned at what I found. Let me give all you fellow gold and silver investors and people reading this essay who are thinking about buying some gold and silver shares a few of the many examples of the kind of gains that were made in the last gold and silver bull market a generation ago (before cell phones, the internet, and p4 computers) so you can have an example of the kind of gains we may see in the new gold and silver bull in the 21st century.

Lion Mines – 1975 price $.07 / 1980 price $380
YES, that’s right. It’s not a misprint. You could have bought 1000 shares of Lion Mines in 1975 for around $50 dollars at 7 cents per share and held on for 5 years riding the wild gold and silver bull until 1980 where you then sold those same shares for $380 each for a total profit of around $380,000. Not bad hey!!!!! This is only one of many more examples:

Bankeno – 1975 price $1.25 / 1980 price $430

Wharf Resources – 1975 price $.40 / 1980 price $560

Steep Rock – 1975 price $.93 / 1980 price $440

Mineral Resources – 1975 price $.60 / 1980 price $415

Azure Resources – 1975 price $.05 / 1980 price $109

These are only a handful of gold and silver stocks that participated in what I consider one of the biggest financial opportunities in the history of human civilization. I don’t know of any other time except maybe the .com bubble where in only a 5-year time span you could have tuned so little into so much wealth. Imagine buying in 1975 a handful of gold and silver stocks for under a dollar and selling them in 5 years for $100, $200, or even $500 per share as gold fever ripped through Wall Street. This is a great example of the kind of investing philosophy that Dr. Marc Faber talks about where to be a great investor you only need to make a few good investment decisions in your whole life to be successful. This one decision in 1975 to buy just a handful of gold and silver stocks and sell them near the all time highs of hundreds of dollars per share could have set you up financially for the rest of you life!!!!.

I truly believe we are at that same juncture as in 1975, but only this time the fundamentals are even better for gold and silver. The similarities between the 1970s and today are uncanny. I strongly recommend everyone reading this essay find a copy of James Dines' prophetic classic “The Invisible Crash” known around the world as the gold bugs' bible. The book is basically a documentary and case study of the stock and gold markets of the 1960s to mid-1970s. The things that Mr. Dines wrote about back then could have easily been written just last week or talked about on CNBC yesterday.

Here are a few quotes from one of my most cherished books.

“It will be hard for people to believe this but, via inflation, their own government did them in. Practically on a daily basis in 1974 people saw rising prices in grocery stores, as they received fewer goods for their dollars. A full-fledged panic away from paper money could start”.

Or how about this nice quote?
“When people see gold and silver standing alone amidst the economic ruins, they will realize that we gloom and doomers were actually right. Hopefully, eternal optimists will pay more heed to warnings the next time around”.

I like this one the best:
“Too much paper has been printed in the past, and will have to be wiped out no matter what.”

This is a good one too.
“People say gold is useless. Not true. It is demonstrating its function right now. Gold is the ballast for the printing press used in making paper money, and gold relentlessly punishes offenders”

The list of timeless quotes goes on and on in this awesome book, but I will leave you with one last quote from this magical book that is very import and relevant to today’s problems in the US dollar and the so-called economic rebound.
“It’s dawning on many people that to defend the dollar, US interest rates will have to go up; else, money will be transferred from the U.S to England to take advantage of higher interest rates, and a dollar crisis would ensue. However, if interest rates go up, this might choke off the boom in our economy. What a dilemma!” 

WOW that about sums it up. That quote could have been seen in many newspapers just this week!!!

Like I said before, the similarities between now and then are simply stunning. All of these quotes tell the real story of why gold (and silver) are so important throughout history and that history does really repeat itself. These quotes are the real fundamental cornerstone of why gold is in a bull market today and why the current rally in the general equity markets is only a bear market rally or a secondary reaction based on 45-year low interest rates, several tax cuts and by the fed flooding the world with fiat (unbacked) dollars!! Once the Fed raises interest rates to save the dollar (Coming to a theater near you!), the stock markets, bond markets, housing markets and credit markets will implode.

For anyone reading this essay that would like to know the real story of why the US dollar is doomed unless the Fed starts to raise rates fast, I would highly recommend another one of my most favorite books “The Dollar Crisis” by Richard Duncan. In this book, Mr. Duncan takes you step by step through the causes and the consequences of the US dollar crisis. If you want to know why gold and silver will explode in value, you must have the information in this book. Here is one small quote that gives you an example of why gold and silver are in a bull market and why the dollar is set to fall to much lower levels in the future:

“Balance of payments deficits of an unprecedented magnitude have resulted in credit induced economic over heating on a global scale. The foundations for sustainable economic growth will not be restored until this flaw is corrected and the U.S. trade deficit ceases to flood the world with U.S. dollar liquidity. That will require that the dollar standard be replaced by a new international monetary system that does not generate, or even tolerate, rampant credit creation.”

This current environment for the dollar is horrific to say the least. Look at these two charts below. One is of the US dollar index and the other chart is of that the infamous stock, Enron. Don’t these two charts look very similar!!!

If you believe in the Elliott wave theory like I do--that all financial charts are based on greed and fear and that those two human emotions print beautiful fractal (patterns within patterns) pictures--then these two charts should shock everybody! (The numbers in the two charts are not Elliott wave counts, but they are there to help the reader clearly see a similar pattern in both charts) If the dollar even slightly follows the same pattern that Enron did--and at this point it really does look that way--then the US economy, stock market, and social structure have some very hard times ahead.

The only way to stop the waterfall decline in the U.S. dollar is for the Fed to raise interest rates to attract more buyers who at this point are getting better returns in other safer currencies around the world. But if they do that and raise rates, they will cause a simultaneous crash in multiple markets (stock, bond, housing and credit). Only gold and silver and the companies that take it out of the earth will prosper in that environment. Greenspan has painted himself into a corner that many believe he will not be able to get out of.

Investing in gold and silver shares and the physical metal now and holding them for the next 3-5 years could be the only financial decision you have to make in your entire life. No need to trade in and out and get killed on commissions and slippage. Just buy a basket of gold and silver stocks now when many are still under $5 per share and wait until you see headlines in the newspapers similar to the one that I opened my essay up with. Remember, when that front page story was run in January 1980, most gold and silver stocks were trading over $50 per share and lots were trading over $100 -$200. Some were trading even as high as $500 per share when only a few years earlier you could have bought the same stocks quietly for under 1 dollar. I can tell all of you out there that there is not one gold or silver stock that I know of that is anywhere close to trading at or over $100 per share. Just look at the long term picture of the XAU gold/silver stock index. It is not even close to an all time high yet!!! It just recently broke out of its massive text book perfect head and shoulders reversal pattern.

I know it’s hard for most people to think that gold and silver will surpass their old January 1980 highs of $850+ for gold and $50+ for silver, but that is what a 20+ year generational bear market will do to a whole nation of investors who have grown up with falling real assets (gold and silver) and rising paper assets (stocks and bonds). When the tide of human emotion swings and paper assets really start to fall hard (the day the fed bites the bullet and raises interest rates to save the dollar), the lust and fever for real assets will be unbelievable. The .com bubble where many stocks went from pennies to hundreds of dollars per share will look small compared to some of the upcoming gains in the first ever gold and silver bull market of the 21st century. Unlike the .com bubble that was based on easy financing, false profits and aggressive accounting, the coming explosion in gold and silver stocks will be all about supply and demand and a mad fear to protect one’s savings from paper destruction. When the entire world wants a piece of the gold and silver stock bull market, there will only be a limited supply of shares so they will have to be bid up to unthinkable levels. The gold and silver stock sector is very small compared to the bond market and the overall stock market and it won’t take much to push these stocks into the stratosphere.

I am sure that most of you reading this essay have co-workers that couldn’t even name one silver stock, but in 3-5 years they will be telling you what silver stocks to buy and that will be a sign that the top is near.

The situation for gold and silver are almost perfect. Believe me, if gold and silver don’t surpass their old 1980 highs in the next 3-5 years, they never will. I strongly believe that after reading dozens of books and most of the writings on gold and silver and pouring over newspapers from the 1970s to early 1980s, that the opportunity in gold and silver and the companies that mine them in the next 3-5 years is a once in a lifetime opportunity. Even a modest investment today in a few silver and gold stocks could change your financial destiny in just a few years.
Edward Gofsy
John in VA:

What do you think?

Nothing like an open invitation!! ;)

OIL: I don't think any amount of interest rate increases will tame oil, and oil affects everything else. Oil spent most of the 90's below $20, bottomed at $10 in 1999, and then took off without looking back. If we haven't already, we'll reach "Peak Oil" shortly. No, that doesn't mean we're running out, just that the cost of oil will eventually plateau somewhere north of $100. Could go much higher short-term, but alternative sources will eventually temper things a bit.

BASE METALS: Short-term bubble? Yes. However, long term it's supply & demand. There simply hasn't been the investment necessary to meet growing demand, especially from Asia. Rogers is especially giddy about Lead. It takes up to 10 years to get a mine and follow-on processing facilities up to full speed, and they've just gotten started.

SOFT COMMS: Again, it's supply & demand. Rogers loves sugar in particular. There are billions of people out there that are finally getting the wherewithal to eat better.

[BTW, Roger's research dispels the notion that economic slowdowns lower resource consumption. The world's always growing, and so do its needs, even during bad times.]

PMs: Okay, we have inevitable price inflation due to oil, metals & food stocks. Add in the demise of the world's reserve currency (with no viable replacement), "global competitive devaluation", terrorism, etc. and you come up with the perfect storm for gold. Throw in the industrial supply/demand factors for silver, and it looks even better.

IMHO, Bernanke is between the proverbial rock and a hard place. All roads lead to depression. We agree that housing is toast, no matter what happens. Well, the economy & government are both dependent on low rates, so a Volcker move is a killer. OTOH, low rates will stoke true inflation (given already runaway liquidity), kill the USD, and render all dollar-denominated debt radioactive; end result will be higher rates anyway, as the bond markets will demand it to offset risk.

The coming depression will be both inflationary & deflationary. Hard assets will all decline precipitously, whereas necessities will simultaneously soar, all while wages stagnate and unemployment rises.

Should I continue?
Amazing action in the markets today. Dollar up, stocks down, bonds down (yields up), PMs down. Could only be due to expectation of more FFR increases...
[BTW, Roger's research dispels the notion that economic slowdowns lower resource consumption. The world's always growing, and so do its needs, even during bad times.]

when rogers talks about growth even during a depression like the 30s, remember that those commodities fell HARD, then out of about 1932.

Yes, pretty much everything got hit hard then. First the 1920's speculative bubble burst, then deflation. Still, America wasn't as import-dependent as it is now, and the Fed won't follow the same playbook.
****Mogambo sez: The recent $22 plunge in gold and $2 plunge in silver is just the death throes of the scumbags who have engineered the huge short interest in metals futures, and are now being choked to death by it. Every dip like that is Lady Fate smiling on you, letting you buy gold and silver at a temporary bargain! Whee! Lucky you!
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