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Above
is the CRB index, monthly basis, for the past 15 years showing the beginning
of the (second) upswing of the commodity pendulum. (This is the real
CRB index, the one which was started in 1955 and weighs the different
commodities equally, not one of the modern variants which overweigh the
energy group.)
To
an experienced chartist, it is a thing of beauty. Note, for example,
the double bottom which formed between 1998 and 2002. That formation
has predicted the entire commodity rise we have seen so far this
century. And if I had carried the chart back to 1980, then you could
see that the late 2008 decline carried almost precisely to the 1980 top at
337, indicating a normal pull back to support (with bullish implications) and
not an important top. Think of how much money it was possible to make
on the knowledge of this one formation alone.
But
today I wish to continue my theme that the theory of “deflation”
propounded by the media in late 2008 is the main enemy of speculator profits
at this time. I have argued that the theory is false a) because there
is not the slightest evidence of declining prices and b) because there is
enormous evidence of a massive rise in prices to come (perhaps the greatest
rise since the depreciation of the American continental from 1776 to
1780). Note, with regard to the first point, I disregard evidence which
commits the self-confirming fallacy. This is where people believe a
thesis and then act in a way which makes it appear to be true. That is,
in the latter half of 2008 the price of commodities went down due to
speculators who read in the media that prices were going to go down and sold
their commodities. Prices did not go down because of supply and
demand. The media can cause any move in any market, usually small, by
appealing to the greed and fear of these speculators. However, these
moves will be followed by opposite moves, and the speculators who believed in
them will lose their shirts.
Now
when any new theory hits the financial markets, true or false, the markets
discount it. Thus, when the “deflation” theory was
announced in mid-September 2008, the commodity markets were hit hard (see
chart above). But because there was no supply-demand reality behind
this theory, the speculators who sold when they heard it took terrible
losses, and many of them sold near the bottom.
What
we have had for the first half of 2010 is a secondary “deflation”
scare (see chart). The CRB is up by 40% from its Dec. ’08
bottom. Gold is up by 70% from its Oct. ’08 bottom. Yet the
gold community has allowed itself to be shaken by fear. Mark Hulbert
had an excellent article a week or so ago in which he pointed out that his
gold newsletter sentiment index had dropped to 23.5% bullish (on July 1) from
a high of 68% bullish last December. If even the gold bugs, who are the
toughest speculators and most skeptical of the media hype, are getting
scared, then indeed we are in a period of great fear.
And
yet, despite this fear look at how little the CRB index has declined since
January. Obviously, the media’s ability to scare the speculative
community is waning. First, the gullible ones have already sold.
(At the double bottom in gold in September-October 2008, there were two massive
short squeezes on the bears in gold, as evidenced by the Commitment of Trader
report for large speculators. On each squeeze, gold rallied close to
$200 in a month’s time. They won’t try that again for a
while.) And second, the economic facts are not supporting the theory.
It
would be perfectly normal for a decline in commodity prices to cause a
decline in consumer prices. This is what happened to some extent in the
1980s. The decline in commodity prices resulting from the second
downswing of the commodity pendulum was translated into a decline (or a
moderation of the rise) in consumer prices. For example, in 1986 crude
oil fell to $10 per bbl (from $40 in 1981), and this led to a decline in the
price of gas-at-the-pump below 80¢ per gallon. In the larger
scope, the commodity decline of 1980-1999 moderated the increase in the
Consumer Price Index and allowed the Republicans of that era (Reagan, Bush,
Sr.) to get away with massive printing of money.
Now
(since 2001), however, we are on the upswing of the commodity pendulum.
The “deflation” scare of 2008 can delay but cannot prevent the
massive increase in consumer prices which is coming. The combination of
the money which was printed in the ‘80s and ‘90s together with
the rise in commodity prices over the past 9 years (and yet to come) will be
too much. And since Bush, Jr. and Obama have continued the printing of
money for the past 2 years, this only makes the situation worse.
In
economics, there is often a fairly long time period between cause and
effect. For example, what is incorrectly called the Great Depression
was caused by the Federal Reserve and by the expansion of money during
WWI. Both of these events were the policies of Woodrow Wilson (who
passed the Federal Reserve Act in 1913 and led the U.S. into WWI in
1917). But because Wilson was long gone from the scene by 1929 the
stupid people who discuss politics in this country have never thought to
“blame” him for it. Instead, they follow the policy of
“blaming’ a President (in this case Hoover) for what happens on
his watch (meaning while he is in office). Similarly, Jimmy Carter was
blamed for the sharp price increases of the late 1970s, but these resulted
from JFK’s decision to adopt Keynesian economics (i.e., to print money)
in 1963 and Richard Nixon’s decision to abandon the gold standard in
1971. That, of course, is nonsense and is not followed in any other
area of our culture. One should blame a person for what he does (or
doesn’t do) not merely for what happens when he is on the scene.
This is directly relevant to forecasting today’s events because Ronald
Reagan escaped blame for (almost) doubling the U.S. money supply during his
two terms in office. The price increase which will follow from this has
been delayed by the commodity pendulum. When it comes, it will be a
monster, and the idiots will blame it on some future President. Right
now virtually no one in the field of economics has a clue about this, and
they will all be in total shock and surprise when it happens (as they were in
the early 1930s). Of course, it is the normal state of establishment
economists to be in shock and surprise.
So
a picture begins to emerge in which everything makes sense. For some
time, I have been talking about the giant ascending triangle in gold which formed
from March 2008 to September 2009 and broke out upside in October 2009.
The price objective line is now at $2,500, and it will be $3,200-$3,300 by
spring 2011. What more natural way for the massive bull move needed to
fulfill this triangle to start than with a period of great pessimism in gold,
such as we are now going through? And what is more natural to produce
this pessimism than a rehash of the original “deflation” argument
of 2008?
The
theory of contrary opinion says to buy when sentiment is very bearish and
sell when sentiment is very bullish. Extreme swings in sentiment do not
occur frequently, and they are not the only factor which moves markets.
But it is wise to take advantage of them when they come along.
To
sum up, the media (preaching “deflation”) are false. The
chart (warning of “inflation”) is true. By only showing a
minor decline during this period of bearish sentiment, the CRB chart is
revealing amazing strength, strength which will manifest itself in the future.
As
I have noted, the strategy for making big money in the financial markets is
to put yourself in harmony with the long term trend. The trend is your
friend. Wait for evidence that a new trend has started (such as the
double bottom in the CRB above or the corresponding saucer bottom in gold at
the same time). Then take your position. MAINTAIN THE LONG
VIEW. Be aware that the media will try to shake you out of your
position first by bringing you up too close to events and second by telling a
number of lies along the way, all designed to get you to sell. (With
regard to the New York Times and the media which follow it, we know
that these are not deliberate lies because the Times lost an enormous
amount of money following its own advice. To identify the guilty party
vis a vis the “Great Recession” of 2008, we must step up a notch
to Secretary of the Treasury Henry Paulson, who came up with the idea of a
financial crisis and sold it to President Bush. It was Paulson’s
firm, Goldman Sachs, which was the chief beneficiary of the
“crisis” in the form of a $750 billion taxpayer bailout to
companies which owed it money and could not otherwise have paid. Even
more incredible, the Times had spent the previous 8 years telling the
country how stupid President Bush was, and yet they believed every word he
said when he endorsed the Paulson line on the country’s financial
situation.)
Of
course, even though trends go on for much longer than most everyone expects
and by far the most common mistake is to sell too soon, every trend must end
some day. So the second job before you is to identify the final end of
the bull trend when it does come.
In
the gold bull market of 1970-80, it was not terribly hard to see the top when
it came. First, all of those people who had made fun of us for being
bullish in the early 1970s now wanted to come on board. Second, the
speculative end of the group (silver and the exploration companies) exploded
on the charts. Third, the media were screaming “double digit
inflation,” and this was as close as they had ever come to being
bullish on gold. Fourth, the advance in gold in 1979 was 100% while the
advance in consumer prices was 13%. And fifth, the day of the top in
gold, Jan. 21, 1980, saw a classic one-day reversal on the chart: sharp move
up in the morning, heavy volume, decline in the afternoon to close near
unchanged. (Americans did not know about candlestick charting at that
time, but to the Japanese it was a very tall upper shadow and possibly a
gravestone doji.)
Remember
that the first downswing in the commodity pendulum lasted 8 years, and the
first upswing lasted 9 years. The second downswing (1980-1999) lasted
19 years, and therefore the second upswing will probably last a bit more than
20 years. Two other criteria will probably be a spike top and a real
gold price equal to the 1980 peak (adjusted for the value of the currency at
that date).
So
far none of these things have happened, and we can assume that the second
upswing in the commodity pendulum has a long way to go. And we are
making a lot more money with our sitting than we ever could have with our
selling.
The
paper money system is an evil which punishes those who believe in it. Just
like any other confidence game, what you need to do is to say in your own
head, “One cannot get something for nothing,” and then you are
free. Immediately you know what you have to do. You know exactly
how the present system started. In 1933, the Democratic Party said,
“We’re going to rob from the rich and give to you.”
Rob they did. Take from the rich? Not a chance. Once you
voted for rob, you became a victim. It is just like those people who
play the state lottery. They lose and lose and lose, but their heads
are full of big winnings around the corner.
For
those who will say, “One cannot get something for nothing,” I
write a fortnightly newsletter predicting the markets, with special emphasis
at the present time on gold. It is possible for you to avoid being
robbed. The system has no power over you. This newsletter is the One-handed
Economist. It costs $300 per year, and over the past decade it has
been outperforming the average U.S. mutual fund by about 2:1. You may
subscribe either by visiting my web site: www.thegoldspeculator.com and
hitting the Pay Pal button. Or you may subscribe by sending a check for
$290 ($10 cash discount) to; The One-handed Economist, 614 Nashua St. #122,
Milford, N.H. 03055. The One-handed Economist is published every
other Friday (most recent issue July 9) with special bulletins when
necessary. Thank
you for your interest.
Howard Katz
The Gold Speculator
Howard S. Katz is
the editor/publisher of the One-handed Economist, a financial letter which
combines fundamental and technical analysis. He was a bug on gold in the
1970s and became a bug on gold again in late 2002.
Subscribe to the Gold
Speculator (the One Handed Economist)
You can subscribe
to Howard Katz’s thoughts on commodities, stocks, bonds and real estate
are available in a letter entitled The One-handed Economist and published
every two weeks giving specific advice on trades in stocks and futures. This
letter is available (both electronic and paper copy) for $300/year with a
3-month trial for $100. Send to: The One-handed Economist, 614 Nashua St.
#122, Milford, N.H. 03055.(Include both electronic and mailing address.)
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