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SAYING OF THE WEEK: The investment climate is usually feast (high yields everywhere) or famine (high yields nowhere). The greatest risk is in attempting to gorge oneself during a famine. --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 True Contrarian by the same yours truly. I will attempt to create an entertaining, readable viewpoint a few times per month. 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 work on restoring 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: It appears that HUI completed its 2004 bottom at 163.81 just after the open on Monday, May 10, 2004, the day after my last update. This represented an HUI/spot spread around 208. It is probable that gold itself will make a lower low in July or August, perhaps near $356 per ounce, but that gold mining shares will make a higher low, with HUI bottoming roughly ten points above its May 10 nadir. If gold craters at $356 with HUI bottoming around 174, that would represent an HUI/spot spread of 182, which is consistent with past behavior at a second bottom. In general, this is the usual historic pattern of a contracting HUI/spot spread in a bull market, and has roughly an 80% probability of occurring. There is perhaps a 20% chance that HUI will make a lower low near 157, just above key support at 155 which had been important resistance, but that would probably require gold to go below $350 an ounce; this has to be considered a long shot since that would imply that gold commercials would be heavily long COMEX gold futures, which is not typical of a bull market. The traders' commitments for gold recently showed commercials net short just over 57 thousand contracts, which is consistent with a short-term bottom, although perhaps not quite bullish enough for a longer-term bottom. Similarly, sentiment toward gold has moved down to the 50%-60% range in most surveys, reasonable for a short-term bottom, but not at the 40% level which usually characterizes longer-term lows. Worldwide physical buying has also considerably lighter than is usually seen at a true low. Gold and its shares should continue to perform well for another month or so, or until gold reaches about $406 per ounce. However, too many gold analysts are calling for sharply higher prices in late 2004, making it very unlikely that the rally will continue uninterrupted this year. Similarly, short-term long-side speculators appear to be pouring back into the gold and silver markets, and must inevitably be disappointed even as more patient long-term holders will eventually be handsomely rewarded. The U.S. dollar probably made a short-term bottom near $1.18 to the euro; after falling to perhaps $1.24 per euro over the next month, it will probably try to reach its yearly high near $1.13. Notice that the HUI/spot spread has narrowed considerably from its level of 211 just two weeks ago. If the HUI/spot spread suddenly widens at any point over the next several weeks, it will probably signal the next drop in gold and gold mining shares.

OTHER FINANCIAL MARKETS: I very much like buying long-term U.S. Treasuries at this point. Surprisingly, they have become the ultimate contrarian U.S. investment. Both ordinary Treasuries and especially zero-coupon Treasuries have become almost universally disliked by investors. It is generally assumed that higher oil prices are somehow inflationary, whereas they actually divert money from the economy and are probably deflationary. In addition, oil prices are likely to fall over the next several months as the heavily speculative nature of the recent advance becomes apparent. In addition, U.S. equities are entering what will probably be a weak period, at least until mid August, and some of the money exiting equities is likely to find its way into Treasuries, if only for a lack of serious alternatives (the precious metals market is far too small to absorb more than a tiny percent of any fund flows). One negative surprise to the U.S. economy in the next few months will be a "sudden" drop in real estate prices. REIT investors already know about this decline, but the average U.S. homeowner foolishly believes that real estate prices have remained at record highs.

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. The actual bottom for HUI was 163.81 just after the open on Monday, May 10, 2004, which I suspect was the final low for 2004. Look for a double bottom with HUI making a higher low around 172-175, perhaps in August. The average of these two bottoms will then be almost exactly the Fibonacci retracement level. 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. The May 10 nadir was $371.25, suggesting that the bottom for gold itself has not yet been made. 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. 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 1976, my family drove from Baltimore to Toronto for a reunion with our Canadian cousins. On the way, we stopped to take a boat tour of the "Thousand Islands". There was a local band performing pop tunes on the ship, and my younger brother was very impressed by them, not having previously seen live musicians except for kid pianists who performed with me in classical recitals. My brother assumed that they must have given up their usual national TV gigs to play on the boat. He was most impressed with their rendition of "Welcome Back, Kotter." Meanwhile, I convinced my somewhat gullible brother that one of the islands we would be passing was Gilligan's Island, so he should keep his eyes open for the Skipper and the Professor. He was somewhat skeptical, so he asked quite a few passengers if we were really going to pass by Gilligan's Island, and several of them assured him that we would. From time to time, he would cry out "I just saw Gilligan! Look over there!"

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.