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Updated @ 11:00 p.m. EST, Sunday, January 25, 2004.


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SAYING OF THE WEEK: The financial markets usually act in the way which will benefit the fewest people. --Ed Seykota, as quoted by Jack Schwager in "Market Wizards".

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A special thanks to Mr. Don McEachern for designing the beautiful banner at the top of the web site, and a slightly different one seen on the back issue list.

WELCOME! This is the brand-new True Contrarian by the same yours truly. Given my recently expanded business responsibilities, I am no longer able to write during weekday trading hours, but will instead attempt to create a more entertaining and readable viewpoint once every weekend. Hopefully this will be a more lasting New Year's resolution than the usual annual commitment to clean up the garage. Each week will feature my intermediate-term financial outlook, my long-term financial outlook, and a personal reminiscence from my journal. Please write to let me know how you like my new design. I will also attempt to restore the humor which was so prevalent on this site in the 1990s, but which appeared to have inexplicably diminished in recent years. I will no longer be able to provide such critical detail as what time of day silver bottomed in March 1993 or the latest reports of gold jewelry buying in the suburbs of Dakar, but those who are interested in such data probably already know where to find it.

Recent comments are in boldface.

INTERMEDIATE-TERM FINANCIAL OUTLOOK: Gold is likely to continue its recent retreat, with occasional sharp bounces higher, as historically the yellow metal often makes an important low in late winter or early spring. Part of the reason for this drop is significantly reduced physical buying from major gold-consuming countries due to the paucity of important festivals during these months, as well as a reluctance to buy at the usually higher price levels of early winter. The heavily oversold U.S. dollar has begun a rebound which will probably continue through the spring or summer, and which will also likely depress the gold price. Commodities in general have had a very strong rally over the past 2-1/2 years, so if they decline in tandem with a rising greenback, they could stage a significant retracement as speculators bail out of leveraged long commodity positions. The traders' commitments for gold and for most currencies suggest that each time gold breaks below a minor round-number support level such as $420, $400, $380, etc., fifteen thousand or so speculator contracts will undergo forced liquidation through sell stops, thus preventing gold in the first several months of 2004 from being able to sustain a relatively high level which might otherwise seem reasonable on a fundamental basis. Gold and especially gold mining shares roughly tracked the Nasdaq for most of 2003, and this pattern is likely to continue for 2004. The Nasdaq made an important bottom on March 12, 2003; gold shares bottomed on March 13, 2003 (as measured by HUI). Both also made intermediate-term bottoms in late July/early August. The recent record ratio of insider selling to insider buying has been prevalent in the gold mining industry just as in technology and many other market sectors, and combined with recent eager public participation from the same investors who shunned gold when it was below $300 per ounce, is suggestive of an intermediate-term peak. Probably more importantly, HUI recently was unable to surpass its December 2, 2003 zenith even with gold $25 per ounce higher and silver $1 per ounce higher. As a general rule, when gold and silver are making new highs, but gold and silver mining shares are not able to set new highs, this negative divergence leads to a downturn of several weeks to several months for both the yellow metal and its shares. Given gold's historic tendency to bottom in the late winter or early spring, and then make a second (double) bottom in the summer, a pattern which has persisted in recent years (including 2003), look for gold to bottom around $372 in the spring followed by a lower low near $356 in the summer, while gold mining shares make a positive divergence by bottoming with HUI near 163 in March or April and then a higher low around 168-172 in June or July. This would imply that gold shares return very close to their intermediate-term bottom from late July 2003. Given that 155 was resistance on HUI for an extended period of time, it is likely for that level, now broken, to become the new solid support base. In early 2003, I predicted the bottom in HUI within less than two percent, but then far underestimated the late-year rally in gold mining shares, so those who did best followed my buying recommendation and then ignored me thereafter, just as my wife usually does. As a general rule, it is easier for me to pick bull-market bottoms and bear-market tops in gold shares rather than the other way around. My winning the weekly Kitco gold poll (http://www.kitcomm.com/comments/gold/2004q1/2004_01/1040116.135948.jorickeee.htm) was more luck than anything else.

In many ways, there is an important analogy of January 2004 to August 1987. In August 1987, gold mining shares began a correction from all-time peaks which would cause them to decline 40% by November. The Nasdaq also dropped around 40% over the same period of time. Both then had a modest bounce thereafter. The major difference between these two groups was that gold shares continued generally downward for another 13 years, whereas the Nasdaq had suffered only a brief correction in a bull market which would last another 13 years. Now we are probably at the opposite juncture. The Nasdaq's upcoming correction will probably be followed by a downturn which could last for perhaps a decade, while the likely correction in gold shares over the next several months will be merely a typical pullback in the context of a long-term strong bull market which could continue for another decade or more.

As gold shares drop, the Nasdaq will decline more or less in tandem. This has not happened yet, although the Nasdaq has now gone virtually sideways since QQQ touched 38.35 on Friday, January 9, 2004, more than two weeks ago. Given their very close correlation over the past few years, the Nasdaq will most likely soon follow gold to the downside. I had not anticipated correctly that the Nasdaq would almost double from its October 2002 bottom. Like an 18-wheel truck wanting to go in the opposite direction, perhaps it cannot shift from 70 miles per hour north to 70 miles per hour south without a slow turning process. It should be kept in mind that an investor in Paris or Rome or Dubai or Johannesburg or Toronto has been generally unimpressed with the rallies in U.S. equities and in gold. Gold has actually been flat in terms of most world currencies since the summer of 2001, while the U.S. financial markets, although certainly higher in U.S. dollar terms, are little changed in terms of most world currencies. Therefore, as the U.S. dollar stages a typical seasonal rebound, made more likely by a nearly unanimous consensus that the greenback is hopeless, the U.S. financial markets will continue to remain flat in terms of other currencies, which means that they will decline in nominal U.S. dollar terms. U.S. Treasuries will likely be one of the greatest beneficiaries of a rising dollar and money exiting equities; the near consensus bearishness toward bonds is likely to be fooled, at least in the short run.

LONG-TERM FINANCIAL OUTLOOK: Gold will continue to make a pattern of higher lows as its strong bull market from April 2001 to the present continues throughout the next 10 or 15 years. The most recent major low was at $319.25 in April 2003, so the next low will likely be between $340 and $370 an ounce later this year. Gold has surpassed $400 per ounce in many years in the past dating back to 1979, but has gone above $440 per ounce in only a few years, so that barrier is probably about to reassert itself once again. Inevitably, however, gold will go above $500 per ounce, and then above $600, and a decade from now will probably move about $1000 per ounce, though gold will probably not ever exceed in inflation-adjusted terms its all-time peak from January 21, 1980. Meanwhile, gold mining shares will make a similar pattern of higher lows, although given their current P/E ratios, gold itself most likely offers a superior alternative to gold mining shares, given that gold has only about one third the potential percentage downturn of the shares, with roughly the same upside percentage potential. Since gold's rally has been almost entirely due to the U.S. dollar's decline, gold's price has been basically flat in terms of most other major world currencies. This is likely to change in the future, with gold rising perhaps twice as much as the U.S. dollar declines, and gold generally rising in terms of most world currencies. The reason is that the world's major industrialized nations are not just going to sit back and let the U.S. devalue its currency uninhibitedly. Given any threat of recession, the European central bank and Japan's central bank and Canada's central bank and Australia's central bank are going to depreciate their currencies aggressively, and given that their short-term rates are generally far above those of the U.S., they can depreciate more aggressively and more impressively than the U.S. can, given that the U.S. has basically exhausted nearly all of its interest-rate cutting potential already. This process of competitive devaluation will help gold to rise even without cooperation from a falling U.S. dollar. For that reason, gold producers in South Africa, which have been suffering from the price of gold actually declining in South African rand terms while wages have been rising at about 10% per year, will see far improved profits relative to most other producers. Therefore, those who are currently invested in gold producers primarily outside of South Africa should consider progressively selling at this time, and then reinvesting in South African producers as these shares bottom later in 2004, as well as in physical gold itself and gold coins and collectibles, which as a rule are still selling at historically low premiums to their melt (intrinsic) values. Already South African gold mining shares are outperforming on the downside by declining only about half as much as their counterparts elsewhere, although the real sign of their strength will be their surprising ability to show greater percentage increases on the upside beginning later this year and likely continuing throughout 2005 and 2006.

U.S. equities in general will continue to decline until the dividend yield on the S&P 500 is between 7.5% and 9.5%. Great bull excesses are usually followed by equally severe recessions.

REMINISCENCE OF THE WEEK: In the cold winter of early 1979, I was asked by my freshman class at Johns Hopkins to perform some songs on the piano for a special event called "Gold Rush Days". The idea was to recreate the lively atmosphere of an old California saloon. I found a few unusual books in the library about songs that were song by the gold rush pioneers, usually set to popular songs of the day. (I still remember the words of one song done to the tune of Stephen Foster's "Old Dog Trey": The happy days have passed, the mines have failed at last, the canyons and gulches no longer will pay; there's nothing left for me, I'll never ever see, my happy happy home far away . . . .) After playing a few tunes, more and more 18-year-olds gathered around the grand piano where I was performing, beers in hand (it was legal then). Finally, about a dozen people were leaning against the piano, when in the middle of a lively tune, I heard a loud crack and the legs fell down, one by one, as I barely escaped being crushed by the piano's collapse. After recovering from the shock, somehow we were able to prop it back up just enough to continue with the show.

REMINISCENCE OF THE WEEK: In the fall of 1977, I played piano for our high school production of "Guys and Dolls". This was probably the most fun I've had, before or since. Our choral director, Mr. John MacLaughlin, had a wonderful sense of humor and knew how to nurse hurt egos and prevent conflicts from turning serious. After each rehearsal, we'd carpool with those who were old enough to have drivers' licenses and lucky enough to have cars, and go out for a snack or to someone's house to chat much later than we should have. On the night of the first performance, we all dressed as gangsters and went out afterward to a restaurant where some of the other diners thought we were real junior Mafioso. To this day, I can still play all of the songs, my favorite being "More I Cannot Wish You". When I went to my 25th high school reunion recently, I still remembered people based upon their role in that musical. To my greater surprise, our choral director was there; none of us had seen him since 1978. He helped us to recall what really were the good old days.

REMINISCENCE OF THE WEEK: In the summer of 1971, my parents decided to drive my sister, my brother, and myself to Provincetown, Massachusetts, at the end of Cape Cod. They had heard that the town was a historic Portuguese fishing village and felt it would be an educational experience for us to experience the well-worn, hardworking atmosphere. Well, the fishermen were still there, and it was a quaint, blue-collar town, but only from about 4 a.m. until 9 a.m. After that, the hippies that gave Provincetown the recent moniker "Haight Ashbury East" began to dominate, so by the time we passed through the increasingly crowded streets on a Sunday afternoon, we were being offered love beads and peace necklaces left and right, accompanied by distinctly non-Nixonian utterances, as long-haired twentysomethings and teenagers of both sexes approached our car from all directions. It was certainly an educational experience, no doubt about that. No longer were hippies those strange folks I only saw on TV; they were real people. When I got home I made my own tie-dyed psychedelic shirt and learned to play "Age of Aquarius" on the piano. I wasn't allowed to let my hair grow too long, though.

(c) 1996-2004 Steven Jon Kaplan Your comments are always welcome.

AUTOBIOGRAPHICAL SKETCH: I was born and raised in Baltimore, Maryland, U.S.A., and was graduated from the Johns Hopkins University with a Bachelor of Engineering Science degree in May 1982. I have been studying the precious metals markets since the 1970s, and began this web site in August 1996. I have been writing music and short stories since the mid-1960s. I maintain a fiercely independent stand toward the financial markets and toward everything else in life, and am not compensated for my writings by any person or organization with the exception of the advertising banners posted on this site. I am also a pianist, computer programmer, bridge player, and runner, and enjoy world travel. I appreciate all those who have quoted the various sayings on my web site over the years, which have wound up in some pretty interesting collections. Those who do not like my opinions can feel free to stuff it up their respective butts.


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