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Updated @ 10:20 p.m. EST, Tuesday, March 23, 2004.


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SAYING OF THE WEEK: In case you missed the U.S. equity bull market, don't worry; it will soon be out on video. --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 per week. Each issue 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.

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.

INTERMEDIATE-TERM GOLD OUTLOOK: Gold has been able to moderately rebound in recent weeks, but gold mining shares have been badly underperforming the yellow metal, with the spread between HUI (the Amex Gold Bugs Index) and the spot price of gold moving above 190 for the first time since July 2003. Yesterday, gold was up five dollars while HUI actually fell. This is typically the prelude to an extended decline for both, and since gold could still decline $50-$70 over the next several months, the downside risk remains considerable in the near term. The recent speculative rallies in the less liquid precious metals such as platinum and silver appear to be running their course; in the likely event that they decline sharply between now and the summer, gold is likely to move to the downside in tandem, though probably less spectacularly. Bullish sentiment toward gold, as measured by Market Vane, is currently at 74% (perhaps even higher since these numbers are released on Wednesdays); such a level is unusually elevated for what is likely a head-and-shoulders peak, and is setting the stage for a potentially significant move to the downside as this bullish sentiment declines to a more typical intermediate-term bottom level of 33%-43%. Should the Nasdaq remain weak over the next several months, this is likely to cause gold mining shares to fall in sympathy, no matter what is actually happening with the gold price. Gold mining shares have been closely tracking the Nasdaq since the second quarter of 2002. This year, gold mining shares moved somewhat lower initially, but the Nasdaq has now caught up. The U.S. dollar similarly has been partially depressed by short-selling speculators (or long-side speculators in currencies such as the euro), while its very modest rebound in the past several weeks has surely not been sufficient to knock out enough of them so far. Gold and its shares will probably continue choppily and lazily lower, thus frustrating long-side speculators who are not psychologically committed to a long-term position, and also thwarting long options players on either side by refusing to move sharply in either direction. The double top in HUI from December 2, 2003 (258.60) and January 6, 2004 (258.02) confirms its intermediate-term downtrend.

WHY I DON'T THINK GOLD HAS BOTTOMED YET: Some people have written to say that they believe that gold bottomed three weeks ago at $387.95 per ounce. Here are several reasons that I believe that gold has not yet bottomed: 1) sentiment is far more bullish toward gold then is typical of an important intermediate-term bottom, now 74% or higher in most surveys such as Market Vane; 2) the traders' commitments for gold show predictable deterioration whenever the yellow metal moves above $390, and currently show a commercial position of at least 111 thousand contracts net short. At a bottom, this number would likely be closer to its August 2002 or April 2003 levels around 40 thousand; 3) junior gold mining shares usually perform the weakest just before a bottom, as the seniors resist further downside movement. Instead, the seniors have clearly shown the weakest charts, and some juniors have barely budged from their recent highs; 4) commodities are usually in a freefall when gold bottoms. Although they have pulled back slightly from recent substantial gains, their total percentage drop has been miniscule; 5) silver usually bottoms before gold, illustrating a lack of eagerness to make a speculative bullish bet on precious metals. In sharp contrast, silver recently made a new 16-year high. Silver mining shares are near their recent peaks and are both wildly overbought and overvalued, which almost never happens when a bottom is near for gold mining shares; 6) gold mining shares usually outperform gold for several consecutive days before gold bottoms, whereas instead the shares have been underperforming the metal since gold has bounced, especially in the past two weeks as the HUI/spot spread moved above 190 for the first time since July 2003; 7) North American shares gemerally outperform South African shares in the final weeks before a bottom, but there has been no such relative outperformance yet; 8) following a bottom, gold mining shares consistently perform poorly early in the day and rally later on, showing the public unloading to professionals, such as in the spring of 2003, when they fell in the first hour of trading 44 out of 49 days following their March 12/March 13 nadir, then generally rebounded to close higher. In contrast, gold mining shares have been generally strongest early in the day and weaker later on, which is not a bullish omen. None of this is conclusive proof, but together they do not demonstrate the typical pattern seen at a bottom.

As gold shares drop, the Nasdaq will continue to decline more or less in tandem. Even as the Nasdaq has generally declined, measures of market volatility such as VXO and VXN have barely moved higher, indicating that the decline still has a long way to go. Technology shares should continue their downward move throughout March, with an occasional sharp bounce, as QQQ approaches important support near 33.88. Done! A new target will be released in next week's update. Given the record or near-record low implied volatilities in technology shares as of last week, technology shares are likely to confound the experts on both sides by being very volatile and choppy this year. I would expect the Nasdaq to bottom around 1500 in August, thus moving below even the most pessimistic forecasts for the summer, then rebound sharply to around 1900 late in the year. This will have the effect of shaking out speculators on both sides, while actually following the typical script for a Presidential election year. 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 the 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.

LOOKING FORWARD TO 2060: I'll make a very far forward prediction by stating that I believe U.S. equities will make a double bottom in 2010 and 2018, with the Nasdaq bottoming near 300 in 2010, rebounding to around 550 sometime thereafter, and then making a final double-bottom retreat to around 400 in 2018, followed by a roaring bull market that will bring the Nasdaq to the 3000-3500 level by perhaps 2035, followed by a relatively mild bear market. The all-time Nasdaq high of 5132 from March 2000 will probably not be seen again until 2060 at the very earliest.

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.

LONG-TERM GOLD 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 10.5%. Great bull excesses are usually followed by equally severe recessions.


REMINISCENCE OF THE WEEK: In August 1974, our family drove to West Virginia to spend a week at a small cabin in the woods. We were always looking for the deer that we were told were nearby, so after a few days when my sister finally saw one, she naturally yelled "Deer, deer!" and they all ran as fast as they could in the opposite direction. We went to a town called Thomas where there was a very steep, long flight of steps, so naturally my brother, sister, and I had to keep running up and down from top to bottom as our parents were interested in moving on to other things. President Nixon was said to be prepared to make a major speech, so since there was only one real community television in the town where we were staying, about 150 people gathered around to see Nixon resign. I watched the whole thing, commentary and all, even though I was tempted to join my brother and sister who were playing pinball games in the adjoining room. To my surprise and delight, Gresham's law had apparently been repealed in this part of the country, so I had no difficulty picking up silver dimes and quarters (which had been out of circulation for almost a decade in my home town of Baltimore) as well as very old nickels and pennies. I got in the habit of paying for everything with bills only and to ask for as much change as possible.

REMINISCENCE OF THE WEEK: When I was fifteen years old, there was a new guy who moved into the neighborhood named Kelly. Kelly could talk anyone into doing anything. He loved to play Led Zeppelin, so we formed a two-man band, Kelly on his electric guitar, and myself on acoustic piano. One day I bet Kelly a submarine sandwich that, if I dialed any telephone number, he couldn't keep the conversation going for one minute or more. I was sure I had won after a middle-aged female voice answered my random selection, but after three minutes, he could have asked the woman for a date and she probably would have accepted. That taught me how dangerous it is to bet that something won't happen, in the financial markets or otherwise (the same lesson learned by Sky Masterson in "Guys and Dolls"), and how easily some people can be persuaded to do some pretty stupid things. Eventually Kelly became some kind of salesman; probably he'll sell you semiconductor stocks if you speak with him for three minutes.

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.


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