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SAYING OF THE WEEK: The good news is that there are thousands of ways to make money in the financial markets. The bad news is that there are millions of ways to lose money. --Steven Jon Kaplan

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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: Gold mining shares appear to have completed a head-and-shoulders first bottom, with the head at 163.81 for HUI just after the open on May 10, 2004. In this sequence, one usually gets a final retest of the neckline later in the year; this is sometimes called a "cup and a handle bottom". In more precise terms, HUI is likely to decline to around 173 in the second half of the summer of 2004, which will probably be HUI's final deep bottom for the year. This would be consistent with past historic double bottoms for gold mining shares, in which the second bottom averages about 6% above the first bottom. This would also be consistent with the 61.8% Fibonacci retracement level first discussed here on February 1, 2004; the average of 163.81 and 173 is 168.4, almost exactly matching the bottom predicted by the Fibonacci scheme (see more details several paragraphs down). In the past week, gold retested and held above the key $387 level, which had also been important support in early February. Simultaneously, the HUI/spot spread, which had expanded from about 188 to 202, has recently begun to contract again, and is near 198. The holding of support and the contracting of the spread appear to be pointing the way toward an imminent move above $400 within the next few weeks. Gold is not likely to surpass $415 per ounce this summer due to deteriorating commitments for most world currencies, which implies that the U.S. dollar will move significantly higher in July and August; the greenback usually moves inversely with the gold price. If the euro reaches $1.27 within the next month or so, it might then collapse as far as $1.13. There has also been too much gold call buying and highly (even ridiculously) optimistic short-term forecasts by gold analysts for gold to be able to make a sustained move higher over the next few months. The traders' commitments for gold have improved noticeably in the past few weeks, with commercials not adding substantially to their net short positions even as gold has rebounded from its low of $371.25 in the morning of May 10, 2004. These commitments, which are released 3:30 p.m. EDT each Friday and report the commercials' and speculators' positions as of the close of trading on the previous Tuesday, imply that commercials would currently be net neutral (neither long nor short) if gold fell to $371.25 per ounce, which exactly matches the recent low. This represents a significant rise in the net neutral price for gold, which had been $353.50 per ounce as recently as April. It is possible that gold will fall below its May bottom of $371.25 in the late summer, but if it does, it appears that commercials will go significantly net long for the first time in several years. The last time commercials were officially net long COMEX gold futures was in December 2001, which was a fabulous buying opportunity for both gold and gold mining shares. (For historical commitments data and charts on all futures, go to http://www.softwarenorth.com/ If you do order any of their futures charting products, please mention my name and you could get a special deal.) The traders' commitments for silver remain poor, suggesting that perhaps any selloff in precious metals later this summer will be more severe for silver in percentage terms than it will be for gold.

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. For those who asked about this, the HUI/spot spread is computed by taking the spot gold price and subtracting the value of HUI. If gold is $391 per ounce and HUI is at 193, then the HUI/spot spread equals 391 - 193 or 198. 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. 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 STILL 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. In some surveys, bullishness toward Treasuries has actually moved to the 4% or 5% level (not a misprint) for the first time ever. Oil prices are likely to continue their recent sharp decline, and in my opinion could even go below $30 per barrel in 2004, as the heavily speculative nature of the recent advance becomes apparent. The traders' commitments for crude oil and its refined products strongly support this conclusion, with commercials showing the heaviest short positions in years. In addition, even if U.S. equities stage a modest rebound over the next few weeks due to a recent drop in investor optimism, they will likely enter a significantly weak period in July and 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). I am still expecting official U.S. government data to show a "sudden" drop in real estate prices, which will change the entire perception of real estate as a "sure thing" and likely cause a sharp drop in investor confidence, and perhaps even help to trigger a recession which could become quite severe as early as 2006. REIT investors already know about this decline, but most U.S. homeowners and recent home buyers foolishly believe that real estate prices are 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 in between 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's lowest recent price was $371.25 spot in the morning of Monday, May 10, 2004. 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. Meanwhile, gold coins and collectibles are still selling at historically low premiums to their melt (intrinsic) values, and therefore merit consideration whenever gold is oversold.

U.S. equities in general will continue to decline until the dividend yield on the S&P 500, currently at about 1.75%, is between 7.5% and 10.5%. Great bull excesses are usually followed by equally severe recessions.

REMINISCENCE OF THE WEEK: In my senior year in high school, there was a family living next door that had grown up in the farm belt of North Carolina. They grew corn and other crops in the back yard, instead of planting the traditional lawn grass, and they had a huge dog which lived in a doghouse in the front yard. One day in January they went on vacation for two weeks to visit their family back on the farm. While they were gone, a small brown-and-white stray dog moved into the doghouse and begged for scraps in the neighborhood. Whenever I left the house for a walk, the stray dog would follow me for a block or two, unless our own family dog was with me, in which case it would stay at a distance and whimper. After a week had passed, the dog was still in the doghouse and I knew it would get kicked out the following Sunday when the next-door family was scheduled to return. On Saturday afternoon, as snow flurries fell, I walked to the library to return some books, and the dog followed me all the way, more than a mile, but stayed just outside the library door. I only took about half a minute to drop off the books, but when I went back outside, I couldn't see the dog anywhere. I looked around for almost an hour, then gave up and walked home. Perhaps the stray dog somehow sensed that the doghouse would no longer be available, and decided to head for a new place to live.

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.