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SAYING OF THE WEEK: We get too soon old and too late smart. --Pennsylvania "Dutch" proverb

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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.

INTERMEDIATE-TERM GOLD OUTLOOK: The fundamental and technical picture for gold and gold mining shares has changed considerably in recent weeks, given the sharp decline especially in gold mining share prices. My target price for HUI, which I predicted on February 1 would bottom at 168.38, actually touched an intraday low on Friday, May 7, 2004 at 168.37 (see "Fibonacci lives", below). It is true that the HUI/spot spread usually expands before a price drop, and contracts before a price rise. This spread, which had been 148 in early December 2003, reached 211 late Friday afternoon, and is now slightly above 210. Therefore, the drop in HUI from 258.60 in early December to 168.37 late Friday afternoon, a total decline of 90.23 points, was due much more to the 63-point widening of the HUI/spot spread since early December, rather than to the modest 27-dollar fall in the gold price since that time. Normally a widening HUI/spot spread is bearish, but there have been many cases in the past in which double bottoms in share prices showed an initial spread of 210 at the first bottom, and then a spread of around 190 at the second bottom a few months later. One likely scenario, in my opinion, is that there is a short-term bounce in gold to the $390s or even above $400 by mid June, followed by a significantly lower gold price in July or August (perhaps $356 per ounce, assuming the sell stops near $360 are finally triggered). During this time, the HUI/spot spread may begin to steadily and progressively contract, indicating better times ahead. Perhaps if gold reaches $356 in late August (more on this calendar guess later), HUI will be at almost exactly the same price as today, in the mid- to upper 160s. Thus, while the media will be talking about how "gold is hopeless", "gold keeps going down", etc., gold mining shares will actually be making a double bottom, or at worst a tight head-and-shoulders bottom. One sign of a positive divergence will be if several leading gold mining seniors make higher lows in August than they are making in May, while the juniors show a mixed picture. Even in the unlikely event that gold goes below $350, I doubt that HUI will go more than a few points below 160. One reason is that 155 served as critical resistance for gold mining shares for a few years, and usually strong long-term resistance converts to even more powerful long-term support. Those who are short gold mining shares should seriously consider covering at this time. If gold does manage a sharp speculative bounce over the next several weeks, then one should short gold itself, rather than the shares, after such a bounce. It has often been the pattern that gold bottoms in August, for several reasons. One is the sparse lack of physical buying in the months of July and August, given a scarcity of important ritual festivals in those countries with the strongest physical gold buying, such as India, China, and the Middle East, and in recent years also from many African countries, less per capita, but actually more in proportion to their lower incomes. It should be mentioned, by the way, that if there does emerge evidence of serious physical gold buying at ANY point over the next several months, then one should immediately go long gold and/or its shares, since strong physical buying, especially from price-conscious, knowledgeable, mostly working-class third-world buyers, has long been a reliable sign of an intermediate-term bottom in gold. The worst time to buy gold is when dumb, emotional, mostly western, white-collar buyers purchase gold futures and gold mining shares on margin. Since these western buyers probably have ten or twenty times the annual income of their poorer Asian and African counterparts, maybe this is an equitable worldwide redistribution of wealth. Speaking of margin, no doubt the recent sharp price decline has been fueled at least in part by overeager gold share speculators betting their no-cap, adjustable-rate mortgages on $500 gold and being forced to liquidate due to margin calls. Another reason that gold often bottoms in August is that many speculative participants are on vacation (holiday) at that time, especially in Europe. They are required to put in stop-loss orders when they are not physically present, and it is therefore a simple game to wait until the maximum number of such participants is away, with the stops sitting their like ducks waiting to be slaughtered, which they then usually are. The last two weeks of August usually sees the greatest percentage of vacationers, and it is partially for that reason that gold itself has so frequently bottomed around that time. Sometimes gold bottoms instead in early August (as in 2002), so that possibility should also be kept open. I am not sure why gold so frequently peaks in mid-winter and bottoms in late summer, though that has been generally true for over three decades. I do not think it is possible that gold itself has bottomed yet, even though some gold mining shares perhaps already have. Silver is often a useful leading indicator for gold, so if silver begins to move steadily higher at some point over the next several weeks, while gold lags, then probably this will also be a good buying opportunity for the yellow metal.

OTHER FINANCIAL MARKETS: We are also seeing extremes in many other financial assets. U.S. Treasuries are probably going to perform well over the next few months, having completed or nearly completed a double bottom with their August 2003 lows. The price of oil, a few cents below $40 per barrel, and which practically every commentator has said will continue to rise, will in my opinion almost certainly fall below $30 per barrel [not per ounce; thanks to several readers who pointed this out] within the next half year, so shorting crude oil is probably the safest futures play at this time (not on margin, of course). U.S. equities are seeing a serious deterioration in breadth, with small-caps and midcaps sharply underperforming after having led the way higher for several years, so I would anticipate a steep drop in U.S. equities over the next few months. In contrast to their behavior earlier this year, in which the most speculative shares held up well while their more conservative counterparts have suffered the steepest declines, I would expect those shares with the lowest dividends and the highest P/E ratios to see the most serious share price deterioration between now and August. It should also be remembered that the Democratic Presidential convention ends in early August, while the Republican one begins in late August. The buzz over the Democratic gathering will unnerve the markets, which psychologically always prefer the status quo (even though Democratic administrations actually see higher historic price gains), so that should lead to a mid-August low for the U.S. equity markets. As the late August convention is anticipated, confidence in the status quo and George W. Bush will be slowly regained, and then the usual pre-election bounce will probably be asserted. Perhaps the Nasdaq will bottom around 1500 in mid August and rebound to 1900 by late in 2004. Meanwhile, one likely big negative surprise for the U.S. financial markets will probably be a "sudden" "unexpected" "unpredictable" (take your pick) drop in U.S. housing prices. REITs have already discounted this event, but the general public still believes that housing prices are at all-time highs. The stock-market rebound was almost entirely liquidity driven by refinancing at record low mortgage rates with record high housing prices. Without both of these props, reality will eventually reassert itself.

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.

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. Given the recent sharp drop in gold mining share prices, this relationship has improved somewhat in favor of gold mining shares. 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: Several years ago I was teaching piano in Chinatown in downtown Manhattan. My star pupil not only improved his performing ability, but also began to write his own songs. One day, he surprised me by telling me he was treating me to supper for my birthday. I selected my favorite Thai restaurant called "Thailand" at the corner of Baxter and Bayard Streets (it has been there now for twenty years). My protégé asked me what to order, and I told him probably he should get one of their excellent curries, but not the "jungle curry", since that would be too spicy for him to eat. Naturally, he ordered the jungle curry, telling me that since he was from southern China, he could certainly eat much hotter food than any red-haired wimpy American from Baltimore. I warned him again to get either the red, green, or yellow curries instead, but he insisted, so I intentionally ordered the yellow curry for myself, the mildest of their signature dishes, so that he could swap later without losing face. When the jungle curry arrived, my overeager student took one bite, then without a word switched plates with me. I was truly surprised when he discovered that even the yellow curry was a lot spicier than anything his mother usually cooked (he was only a high school junior at that time, and had not eaten out very frequently), since that was mild even to my taste. I ended up eating both of our entrees, encouraging him to order something even more harmless than a Big Mac, such as pad thai, but he was too embarrassed to want to order anything further at that point. Finally, the bill arrived, and he made a great show of very proudly taking out his first, very recently obtained credit card to pay for both of us, only to discover that the restaurant accepted only cash; he had less than five dollars in his pocket. We have since become good friends, although to this day he becomes upset if I remind him of this incident.

REMINISCENCE OF THE WEEK: In the late summer of 2001, my brother and I visited Iceland. We went horseback riding, swam in thermally heated pools, went biking, and marveled at the Northern Lights (the aurora borealis). I had met an Icelandic man while playing bridge on the internet; we later sent e-mails and talked on the phone, and he was kind enough to drive my brother and myself around the country for two days. We saw amazing geysers and waterfalls, wide open countryside with a few domestic animals, and a generally austere landscape. Rainbows were almost an everyday occurrence. On the second day together, after we had just visited an ancient Icelandic graveyard, my friend said, "I'm not sure why, but I'd like to hear the news on the radio for a few minutes if you don't mind." My brother and I couldn't understand what was being said, but my friend told us "the World Trade Center was just hit by an airplane." That didn't make any sense to us, and then shortly thereafter he told us "another plane just hit the other tower, and they say it's terrorism." We drove immediately to my friend's house and, just as we arrived and turned on the television, on CNN we saw the South Tower fall.