|
|||
THE VALUE
VIEW GOLD REPORT
|
| HEADLINE from 8 Sep 2004: "Electricity On" Boca Raton: On the afternoon of this day the electricity was restored to the residence of the author. A happy moment was that. More than two hundred thousand others remain unlucky. The next day a cold drink was enjoyed, right out of the refrigerator. After five days without power, the experience was better than you know what. Now, how do we get the salt to flow out of the shaker again? |
Hurricane Frances should be
a good lesson for people, and perhaps one that investors might
remember. Nothing created by mere human beings can accurately
predict a storm, change its direction, or mitigate its wrath.
Forgetting those lessons should only be done with ready acceptance
of the associated risks. Nature is stronger than mankind, and
does what it does without consideration of human efforts.
In our human world, global financial and goods markets exist.
In the United States the Federal Reserve is run by individuals
that believe they are smarter and faster than global markets.
Their actions, they believe, can forecast accurately, contain,
and control world financial markets. They may learn that "Mother
Nature" is more powerful, but only after the damage is done.
Across the sea, the Euro is building mass. Behind it will soon
be a bigger economy with more people than the United States.
Their current account surplus will need to be invested. The day
when Euro denominated individuals cease humbling themselves to
the U.S. dollar is on the calendar, though we may not know that
date. Europe's cash will ultimately be an important influence
on the denomination of international financial assets in the
years to come. The dollar will no longer be dominant, but have
a shared roll. This coming monetary tidal wave will wash away
dollar holders in a not unprecedented manner. (Weather and water
metaphors just come out this week).
The gurus on Bay and Wall Street talk about the vitality of U.S.
growth and the absolute importance of the U.S. economy and financial
markets to the world. They contend that the U.S. economy and
the dollar will remain supreme. A hundred years ago, they would
have made the same argument for the British economy and the pound.
They have forgotten that "Mother Nature" dictates whether
or not the electricity is on, not computer models in their offices
or at the Federal Reserve.
Canadian politicians and pseudo flag wavers, and in Mexico, dither
over the idea of a North American currency union. Recent strength
in the Canadian dollar has relieved the pressure on these myopic
monetarists. A symbiotic relationship requires that the primary
host remain healthy. When the U.S. economy pays the price for
the Federal Reserve's bubble approach to managing the economy,
the Canadian situation will not look so good.
Canadian investors should ask themselves an important question.
When the Euro is worth US$3.00, what will the Canadian dollar
be worth in Euros? Focus on the true matters, not the market
noise.
Before talking about fundamentals let us turn to one of the better
rules of technical analysis. A problem with using computers is
one no longer becomes intimate with the data. In the days when
we plotted on paper, the analysts developed an awareness of the
data in a special way. Each point had to be put on the chart
by hand. Relationships, and especially the way they developed,
just seemed more real. An analyst came to meaningful understand
of what was happening.
That fairly reliable rule dealt with attaching the next sheet
of graph paper. When the analyst got to the edge of the graph
paper, another had to be taped to it. The direction in which
one affixed the next sheet of graph paper was a fairly reliable
indicator of the future trend, or direction, of a market. May
sound simplistic, but a wet thumb does tell one from which direction
the wind is coming just as well as expensive meteorological equipment.
first graph
In the first graph we
are approaching perhaps the need to attach another sheet of graph
paper. That chart covers the last fifteen years of monthly
US$ Gold. Should we see the need to attach the "next page"
at the top, a fairly strong indication of the future direction
of Gold will be given. Besides, "breaking out" to the
upside on a fifteen-year chart would seem to convince even the
most skeptical of observers.
Patience, though, seems reasonable. Many may be anxious that
Gold has retreated from the high, and seems to be without a trend.
Breaking out into new territory is not easily done. With no
overhead resistance evident in this fifteen-year history of trading,
moving into that higher territory is likely. Immediate gratification
does not happen in markets.
Have a little patience, your reward for moving out of paper assets
and into Gold is on the horizon.
second
graph
Recent market weakness is in
part due to the U.S. dollar performing better. Of course too,
many market participants trade under the delusion that they can
predict the future for the U.S. economy, the European economy
and the price of oil. The second graph shows the cumulative
change in the official holdings of U.S. government debt since
the middle of May, and each bar represents a weekly plot. Since
mid-May, foreign central banks have purchased almost a hundred
billion dollars of U.S. debt.
That is a massive ticket, almost one quarter of the U.S. government
annual deficit. Little wonder the dollar has had a little strength.
If one does not own Gold, a bet is being made that these purchases
by foreign investors will continue indefinitely. That wager is
like assuming that the storm will never come ashore in your direction.
As discussed in our last article though, these accumulations
build up. The value of this burden is rising to a level that
is excessive. Too much supply will result in the value, or Gold
price, of that debt being pushed down by the markets. That can
be accomplished only by an increase in the dollar price of Gold.
(Readers not familiar with previous
article should read it for a complete understanding of this
phenomenon).
One of the old college jokes is about the difference between research and plagiarism. Plagiarism is taking material from another author. Research takes ideas from more than one source. For the fourth graph we are indebted to articles by Martin Wolf in The Financial Times. Martin is unique in that he is one of the few journalists that actually understands the subject about which he writes. He has a new book out on globalization which is recommended for those that want a fuller understanding of the matter.
third graph
Portrayed in third graph
is the ratio of the value of U.S. imports to the value of exports.
If the ratio is rising, the nation's level of imports is rising
faster than it exports. Yes, that is the pesky trade deficit
about which we worry. Note that in the early part of the graph
the line moved in a lateral pattern. U.S. imports and exports
were moving in conjunction with each other.
Then the ratio rose in the 1990s. The good time era of the Greenspan
Stock Market Bubble prosperity created a taste for imported goods.
That false prosperity caused imports to begin an era of a serious
imbalance with exports. The ratio then turned flat far a while.
After the stock market corrected for the Federal Reserve's hubris,
a recession developed. The ability of the former rich to import
fancy goods faltered. The Fed, apparently worried about the economies
of the rest of the world, lowered rates. In the latter part of
the graph the ratio is again rising, and foreign producers were
saved. A Housing and Mortgage Bubble is financing again the importation
of massive amounts of goods.
Make sure before going on that you understand two of the implications
of this ratio. First is that U.S. consumption is above the country's
productive capacity. Those excessive purchases are now financed
by borrowing from foreign investors. Should the Federal Reserve
be forced to finance them, that inflation all have been anticipating
will occur.
Second,
that imports are rising faster than exports means the U.S. dollar
is over valued. That means
that Gold is under valued. The U.S. dollar, during this period,
has been able to buy too much Gold. This concept of the dollar
over valued implying Gold undervalued is a concept more have
come to recognize. As an investor, this concept if fundamental
to your understanding.
Two other factors are also at work here. Space does not permit
an extensive discussion. A structural problem has developed as
bubble economics caused the dollar to be over valued. Production
moved offshore to counter this disadvantage. A second matter
is the importation of oil at higher prices. For you see, under
the Fed's view of the world the U.S. does not need to drill for
oil as technology and the internet will provide. This author
is still waiting for gasoline to come out of the internet connection.
The fourth graph brings this concept together with the
price of Gold. Shortly after the ratio passed upward through
about 1.2 the price of Gold bottomed. Around the world, markets
recognized the over valuation of the U.S. dollar, as indicated
by a low price for Gold. The ratio's long-term rise is an indication
that the U.S. dollar is still over priced, and that Gold is under
priced. As we have been finding in our research, the only indicator
not suggesting that the Gold Super Cycle is still well on track
is the inflation numbers put out by the government. We all have
our opinion on that matter so no comments are required.
fourth graph
A factor which should give
Gold investors further encouragement is that despite the rise
in the dollar price of Gold, the ratio has not been meaningfully
reversed. High oil
prices are certainly part of this condition.
Competition in the future for resources around the world is not
going to be materially reduced in the decade to come. Does anyone
really believe China and India will consume fewer resources 3
or 5 or 8 or 10 years from now? What oil prices do in anyone
week is nothing more than statistical noise.
Note also that this rising ratio has been dragging Gold out
and upward to the recent fifteen year high. Fundamentals are driving
the Gold price, and will drive it higher. Remember that this process is really the U.S.
dollar being devalued. Do not let the analysts on Bay and Wall
streets, most of which don't know a fundamental from a rubber
duck, keep you from reducing your exposure to paper assets and
adding to Gold and Silver holdings. When that financial advisor
whips out those color charts on asset allocation, look for the
Gold recommendation. If no Gold or Silver is included in a meaningful
manner, and we do not mean some pitiful five percent or so, simply
look them in the face and say, "That is nuts."(Obviously,
this author would use another adjective).
last graph
For whatever the true reason,
our intermediate indicators for Gold, as shown in the last
graph, and Silver seem to be moving toward buy signals. Short
term measures gave buy signals on both last week. An important time to
buy Gold and Silver may be approaching, and hopefully you are
ready to do so.
When Gold is trading for more than US$1,200, will you be sitting
on profits or still reading brokerage reports on technology stocks?
Sep 12, 2004
Ned W. Schmidt
Ned W. Schmidt, CFA, CEBS is publisher of THE
VALUE VIEW GOLD REPORT. That report now includes a weekly message,
TRADING THOUGHTS, to help investors identify timely points for
buying Gold and Silver.
You can
join him for the Gold Super Cycle here.
His monumental report, "$1,265 GOLD," with 255
pages and 98 graphs, is now widely known, and is available at
www.amazon.com
or from the author.
This work has now been read by investors in over twelve countries.
Ned welcomes your comments and questions. His mission in life
is to rescue investors from the abyss of financial assets and
the coming collapse of the U.S. dollar. He can be contacted at
nwschmidt@earthlink.net.
Copyright ©2004 Ned W.
Schmidt. All Rights Reserved.
________________
321gold Inc
