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Updated @ 10:00 p.m. EST, Monday, February 23, 2004.


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SAYING OF THE WEEK: One cannot wake up and say, "Let me see where I should invest my money today", since there may be no particularly compelling investments today, or even this month. One must be prepared to buy or sell at all times, since the best opportunities may present themselves only a few times per year, if even that often. --Steven Jon Kaplan

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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. Advance warning: there is less than a 50/50 chance of an update on May 2, but May 9 should resume as normally. Sorry that I was a day late today, but I fell asleep yesterday before the sun had finished setting (I was recovering from a bad stomach virus). My winning the Kitco gold poll for the second time in 2004 (http://www.kitcomm.com/comments/gold/2004q1/2004_02/1040220.135647.jorickeee.htm) cheered me up somewhat.

INTERMEDIATE-TERM FINANCIAL OUTLOOK: Gold is continuing its intermediate-term downward trend; in the short run, the yellow metal itself is slightly oversold, and is therefore likely to decline less than the shares. The normal spread of 200 between HUI and spot gold is likely to reassert itself over the next several weeks, especially as the stock market as a whole soon responds to the weakness in the Nasdaq, putting pressure on all equities, including gold mining shares. The double top in HUI from December 2, 2003 (258.60) and January 6, 2004 (258.02) confirms its intermediate-term downtrend, whereas the Nasdaq has likely completed another in a series of lower peaks dating back to its all-time high in March 2000. The U.S. dollar, after reaching 1.2929 to the euro in the morning of Thursday, February 19, 2004, has since rebounded a few cents. No doubt most of the move in the euro from 84.5 cents in June 2001 to 1.2929 last week was due to fundamentals, but there was a speculative element as well, as happens in all extended rallies, and this speculative element is likely to be shaken out soon. Most likely, the greenback still has about a ten-percent rise remaining, putting it near 1.12 to the euro, perhaps by midsummer. Whenever the U.S. dollar rises, gold generally declines, as gold is in essence an alternative currency. Gold will make its first 2004 bottom between $350 and $380, probably in the early spring, and then its second 2004 bottom in the summer, probably between $340 and $370, perhaps just before the Presidential conventions.

An extended comment about U.S. 10-year and 30-year Treasuries appears to be appropriate at this time. The Barron's "Roundtable" from late January and early February had one area in which all panelists agreed without exception: they each stated that the yield on the ten-year U.S. Treasury would likely end 2004 at 5% or higher, thus putting the yield above its zenith of 2003. It is rare at any time to have analysts forecast anything which is sharply different from current levels, and the fact that this was stated as a consensus opinion is even more unusual. It would be as unlikely mathematically as if all the panelists stated that the Nasdaq would end 2004 below its October 2002 low. No doubt the recent rantings, I mean intelligent comments, by Bill Gross and others whose past opinions were often right on the mark, as well as surprisingly bearish media and analysts' coverage of Treasuries' future prospects, have made investors convinced that, no matter what happens with the stock market, gold, or anything else, long-term U.S. interest rates will rise sharply, and soon. Mark Hulbert pointed out this rare situation in a recent commentary, and I have to agree with Hulbert and therefore disagree with practically the entire universe. If one looks at a chart of TYX, which represents the yield on the 30-year U.S. Treasury, one sees a clearly defined pattern of several lower highs dating back to August 2003. If one showed this chart to a financial analyst without stating what it was, that person would absolutely have to be bearish on TYX (bearish on yields, thereby meaning bullish on bonds, since yields move inversely to prices). It is the very definition of a bearish chart. Notice also the weak double bottom just a hair below current levels, and the huge gap between there and the June 2003 low. If this double bottom becomes a broken triple bottom, as I believe will happen, there is an enormous amount of open space, like a running back breaking through at the 25-yard line with 75 yards to go to the goal and not a defender in sight. The 30-year bond yield of June 2003 might not be achieved, but a double bottom, or even an intermediate retracement of some kind, would take the markets by surprise, especially since such a move could happen over the next several weeks. If I am correct about the stock market and gold declining, as well as the U.S. dollar rallying--the consensus for a falling greenback is nearly as unanimous as for falling Treasuries--this would support the case for rising Treasuries (i.e., falling Treasury yields). If a lot of money is exiting equities, Treasuries are a logical parking place for some of it, whereas a rising U.S. dollar will make Treasuries more attractive to foreign investors who are important purchasers. It should be mentioned that I received more criticism regarding my long-dated Treasury outlook than I have received in quite some time, with many readers saying that it was right for so many people (87%, according to this week's Barron's, page MW2, second column) to be bearish on the long bond, because "interest rates are obviously going higher", "Bill Gross can't be that stupid", "the trade and account deficits and Bush are a disaster for the country", etc., etc. I don't disagree with these fundamentals, but these facts have been known for months, as the economic data is allegedly improving, and meanwhile, month after month since early August 2003, the yield on the 30-year Treasury keeps declining. I definitely plan to hold onto my Treasuries.

PRESIDENTIAL POLITICS: Assuming that the U.S. Presidential election in early November 2004 is between Bush/Cheney and Kerry/Edwards, or two similar combinations, this will have an important impact upon the world financial markets. If Bush wins, then his lame-duck second term, which will last until January 20, 2009, will have little incentive to prop up the economy, as he and his advisers will have no possibility of a third term, because of the U.S. constitution forbidding it. Therefore, the U.S. financial markets will likely fall apart quite rapidly and in a sustained manner, with the Nasdaq easily reaching its fair value around 600, perhaps in September 2006. With Bush opposed to tax increases, while promoting every ridiculous spending plan on the planet, and even off the planet (such as the manned Mars mission), the deficit will reach historic proportions and the U.S. dollar will continue to stage a sustained decline. If Kerry wins, then he will not want the economy to fall apart, as they will be working hard for re-election. Kerry, or any Democrat, will almost surely create a new series of significantly higher tax brackets for the wealthy, thus sharply reducing the deficit. The lower deficit will keep the U.S. dollar from falling as much, and will keep Treasury yields from rising as much, although the U.S. stock market will still likely decline significantly, as there is no way to overcome its fundamentally overvalued condition.

FIBONACCI LIVES (and so does WD Gann)!: I have found the Fibonacci retracements to be quite accurate in predicting retracement levels within the context of long-term bull and bear markets. If one takes the Fibonacci sequence 1, 1, 2, 3, 5, 8, 13, 21, 34, etc. (each number represents the sum of the two previous numbers), one finds that the ratio of these numbers eventually approaches almost exactly .618. Similarly, in the financial markets, if any financial instrument in a long-term trend has a retracement in the opposite direction of that trend, most often .618 of the most recent previous gain is surrendered during such a retracement. (There are other retracement levels that apply in certain situations, but the .618 level is the key for most multi-month studies.) Now, let's put this theory to work. Gold shares as measured by HUI bottomed at 112.61 in the morning of March 13, 2003, its lowest level that year. HUI peaked at 258.60 on December 2, 2003. If one assumes that HUI is currently giving up 61.8% of this gain, then its bottom later this year will be 168.38. Gold itself rose from $319.10 on April 7, 2003 to $431.25 on January 6, 2004, so that would signal an upcoming 2004 nadir of almost exactly $362.00. For the Nasdaq, the post-bubble intraday low was 1108.49 on October 10, 2002; the recovery peak on January 26, 2004 was 2153.83. Assuming the January peak is not exceeded in the near future, if 61.8% of the gain is retraced, then the bottom for the Nasdaq later this year, perhaps just before the Presidential conventions, will be 1507.81. Be sure to save these numbers for future reference, so you can either congratulate me (or Fibonacci, a monk who lived in the twelfth century; they had gold back then, but not the Nasdaq), or else curse the both of us if "we" are wrong. To give credit where credit is due, this observation was first discussed in detail by W. D. Gann (1878-1955). Since the late great Gann had only a slide rule, not a calculator, he used the 5/8 level, which is .625, and almost exactly matches .618.

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. The Nasdaq has now fallen for five consecutive weeks (yes, really). Given today's action, this may be the sixth straight weekly drop. The total percentage pullback in tech shares is still considerably less than in gold mining shares, but it is likely that the Nasdaq, eager beaver that it has always been, will work hard to catch up. Semiconductor shares in particular have been among the weakest tech performers, averaging double-digit losses since their January peaks. Just as semiconductors rallied from February 2003 to March 2003, a month in advance of the rest of the market, so are they now apparently once again a month in advance of the rest of the market, but this time on the downside. An interesting related observation is that the number of consecutive weeks in which more market newsletter writers are bullish than bearish has set a new all-time record going back to the inception of this survey in the early 1960s. Notice the following behavior: QQQ made its final peak at the open on January 20, a historically traditional day for an important high (gold made its all-time peak on January 20, 1980). The Nasdaq reached a higher zenith at the close on January 26, but the QQQ failed to confirm this new high; the same bearish divergence for technology shares was seen in December 2001/January 2002, just before the Nasdaq fell more than 40%. Tuesday's volume exceeded Monday's in the final week of January, while the magnitude of its decline surpassed Monday's gains; this is also typical topping behavior. Notice that so far in February, the short-term behavior of the Nasdaq has paralleled gold mining shares' performance very closely. This pattern prevailed for most of 2003, and will probably continue for 2004 and 2005 until proven otherwise. To be fair, 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.

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 $319.10 on April 7, 2003, so the next low will likely be between $340 and $370 an ounce later this year, perhaps in a double bottom in the spring and summer. 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 has apparently reasserted itself once again. Inevitably gold will go above $500 per ounce, perhaps even as early as 2005, and then above $600 at some point in the next several years. A decade or so from now, after the U.S. stock market has had some time to recover from a very deep bottom, gold might stage a typical late-recession rally and spend a few years above $1000 per ounce. Since gold averaged about $350 per ounce from 1979 through 1996, it seems reasonable that its median price in the next two decades will be perhaps at twice that level, near $700. My guess is that gold will probably not ever exceed in inflation-adjusted terms its all-time peak from January 21, 1980, but given the recent U.S. equity euphoria, perhaps anything goes.

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, 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: My father worked for the former Westinghouse corporation, now extinct, for more than 38 years. In 1966, when I was just six years old, there was a special "Family Day" celebration on company premises, held every few years for the families of employees. There was unlimited food and drinks and entertainment, but for me, the highlight of the day was sitting in front of a real computer and typing on its keyboard, the first time I had ever seen a computer except on TV. The computer asked me a few personal questions, then informed me of the exact date of my death. I turned to my father and said, "How does the computer know for sure? Suppose I run out into the highway, does that mean nothing bad can happen?"

REMINISCENCE OF THE WEEK: In the summer of 1966, my family spent one week at a summer camp in the Poconos called Barrow Lodge. It was a memorable experience for me because each day started with everyone gathering together to sing the camp song in unison: "We welcome you to Barrow, we're mighty glad you're here, we sing you in, we sing you out, and then we raise a mighty shout . . . ." After the song, the parents separated from the kids: we ate breakfast, lunch, and supper apart from the old folks, and had swimming and fun games in between. My parents wanted to return a few years later but could not find any information about the place, so it remained a memory. A few years ago I decided to see if I could find the theme song, which I had somehow been able to memorize all that time, on the internet. I could not, but I saw mention of a ham radio station with the Barrow Lodge name. I e-mailed a copy of my remembered lyrics to the owner of the radio station, saying "This was the real Barrow Lodge, have you ever heard of it?" and, to my great surprise, he responded with a corrected version, having been the son of the original owners. The mystery of the camp's disappearance was resolved, also: the U.S. government seized the camp by its power of eminent domain in the fall of 1967 to build a dam which, alas, was never built. The land has still not been used for anything else. I won't comment upon what this says about the federal government.

(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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