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SAYING OF THE WEEK: Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one. --Charles Mackay

(1814-1889), in his 1852 preface to "Memoirs of Extraordinary Popular Delusions and the Madness of Crowds", originally published in 1841.

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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: The dog days of summer have arrived, and those who are expecting gold to make a sustained rally from current levels are likely barking up the wrong tree. A brief bounce is possible at any time, but other than an occasionally oversold technical condition, gold's most reliable signals are pointing the way generally lower rather than higher. The euro recently completed a failed upside breakout a week ago by repeatedly trying and failing to break above $1.245 U.S., matching its March right shoulder (the February peak was $1.2929), and has since dropped to just below $1.21 U.S. Most likely the euro will decline close to its November 2003 bottom near $1.135 U.S. Probably the news a few months ago that Warren Buffett was buying currencies triggered a lot of currency buying by the "little" (translation: stupid) guy, not appreciating that Buffett meant that currencies would be appreciating over the next five years, not necessarily over the next five months. These little stupid guys (and a few gals) will become increasingly worried as the euro moves below $1.20, and then even more nervous when the euro plunges below its 2004 nadir of $1.176, thus virtually ensuring a capitulation. Gold usually moves in the opposite direction of the greenback. Historically, many gold participants are on vacation (holiday) in August. Unless they use no leverage (margin) at all, they are required by their firms to place sell stops while they are away. The knowledge that these sell stops exist, combined with the fact that in May 2004, gold never reached $370 (its low was $371.25 on May 10), means that there are thousands if not tens of thousands of contracts set to trigger sell stops near $370, $365, $360, etc., down to about $340. Some of these sell stops have been on the books for months, making them "stale" and therefore historically more likely to be hit. There are also some recent (post May 10) concentrations of sell stops at $375, $380, and $385. To balance this, there are heavy physical buy orders by jewelers, fabricators, and others connected with the gold industry, especially around $350 and lower. Since there are some sharp cookies trying to frontrun the huge concentration of buy orders at the simple round number of $350, there are surely moderately heavy buy orders also at $351, $352, perhaps all the way up to $355 or even $360, suggesting that gold may bottom at $356 or $361, as it often has done in the past (since 1979) whenever gold has spent a few months above $400. The behavior of the traders' commitments as gold declines will likely give better clues as to the exact magnitude of gold's anticipated 2004 nadir. At a true bottom, there will also be evidence of heavy physical buying from the most important gold-consuming countries such as India, China, and the Middle East; such buying has been notably absent for almost a year. The current spread between spot gold and HUI is just above 210, implying that the gold price itself is likely to be especially vulnerable to a sharp decline over the next several weeks. As this spread contracts, it will imply that commercials, who were short 106 thousand futures contracts on the COMEX as of the close of trading on July 20, are covering their short positions. When this spread contracts sharply, as is likely when gold is very close timewise to a bottom, it will indicate that commercials are actually going net long. The investment community regards anyone who expects commercials to go net long COMEX gold as a stupid idiot (or worse), but I think that is exactly what will happen between now and the end of September, if not sooner. Commercials were last net long COMEX gold futures in December 2001, which was not coincidentally an excellent buying opportunity for both gold and gold mining shares. There are quite a few gold analysts who are saying that gold remains in a bullish pattern as long as it remains above $370 or some similar price. This is very dangerous logic, since what will the followers of these analysts do if and/or when gold does move below $370? No doubt some of them will panic and sell at or near the exact bottom. As I had said in a piece on March 2, 2004 (see archives at upper right), you either have to believe in gold or not. Those who are not true believers, or those who bought gold and/or its shares because their family or friends or Barron's or some financial talk show convinced them to, are the most likely to sell into any sustained weakness, since they were not committed to the yellow metal in the first place.

Silver's traders' commitments are among its worst in history (see http://www.cftc.gov), with commercials as of the close of trading on July 20, 2004 (reported at 3:30 p.m. EDT on July 23, 2004) long 9,777 and short 72,715 futures contracts. Because of this, silver is likely to closely approach or even go below $5.00 per ounce (not a misprint) over the next several months. At a bottom for silver, large speculators are usually slightly net short; currently, large speculators are long 43,271 and short 3,272, which is about as lopsided as one will ever see. Meanwhile, the traders' commitments for those currencies which correlate most closely with gold and silver are pathetic across the board. Showing long/short for each, roughly in order of importance: Swiss franc, 8446/42827; Canadian dollar, 15734/61096; British pound, 14143/62957; Australian dollar, 7847/25001; euro, 50330/106280; U.S. dollar index (inverse relationship), 9645/1076. I can't see how this can lead to anything other than a continuation of the current strong U.S. dollar bounce. The consensus perception in the financial markets is that the U.S. Federal Reserve will be raising interest rates steadily for the next two or three years, by a quarter point each time; this is clearly negative for precious metals. I feel certain that a slowing economy, as demonstrated by recent weakness in worldwide equities, leading to a U.S. recession in 2005 to intensify sharply in 2006, will put an end to the Fed rate hikes sooner rather than later, enabling gold and silver to revive sharply once the public realizes that this is happening. However, the public, being what it is, will be (as always) late to recognize this knowledge, and so precious metals will be forced to suffer in the short run.

OTHER FINANCIAL MARKETS: U.S. equities could have a bounce at any time, but the fear in the market remains far too low for a sustained bottom, so equities will sooner or later drop to their August 2003 lows, and possibly several percent below those nadirs, depending upon how much fear is generated by such a decline. The less the worry, the greater will be the eventual drop. Given the Presidential cycle, this decline is likely to be followed by a sharp rebound all the way back to current levels. For example, the Nasdaq will probably make a low near either 1650 or 1500, perhaps in late August, then rebound all the way to its current level near 1850 shortly before the election. Looking forward to 2005 and 2006, I would expect the October 2002 lows in U.S. equities to be retested in 2005, and then smashed convincingly in 2006 as the Nasdaq collapses all the way to fair value near 650.

Long-dated U.S. Treasuries remain the best among a poor selection of conservative investment vehicles at this time, although their strong performance in the past several weeks makes them less compelling than they had been in June. A rising U.S. dollar should encourage purchase of Treasuries, while the likelihood of continued weakness in U.S. equities will mean that money will be leaving the stock market, some of which will find its way into Treasuries. The Fibonacci retracement of 61.8% of the recent decline is a reasonable expectation; for TLT, for instance, this would represent a level of 87.29 as an upside target this summer (its early June low was 80.51). U.S. equities have continued their repeated bearish pattern of peaking in the morning or early afternoon and then declining steadily in the final few hours, which is almost always a bearish omen. Semiconductors have been consistently among the weakest performers in 2004 (next to gold mining shares, of course), while key resistance levels from earlier in the year have repeatedly served to reject attempted moves higher, as was confirmed in late June and July trading. Key volatility readings such as VXN and VXO have now completed bottoming patterns, which has very bearish implications for U.S. equities over the next several weeks. 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, 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 most likely collapsing to its historic mean fair value around 650, perhaps in September or October 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 long-term decline, as it has already been doing anyway for more than thirty years. If Kerry wins, then he will not want the economy to fall apart, as he and his associates 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, probably very closely matching the tax code during the Clinton administration, 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. Extreme overvaluations in the financial markets almost always lead to equally extreme undervaluations, and vice versa.

RE-ELECT GEORGE W. BUSH: Make no mistake about it, President George W. Bush is one of gold's best friends. By ensuring the huge increase in the U.S. account deficit through idiotic temporary tax cuts, which are scheduled to gradually expire each year from now through the end of 2010; by intentionally depreciating the U.S. dollar and by extension causing the U.S. trade deficit to soar; and by artificially depressing short-term interest rates to devastate normally conservative savers while encouraging them to become market and real estate speculators, the price of gold in U.S. dollar terms has increased by about half during Bush's first term as President. If re-elected, gold is likely to rise by a roughly equal percentage during a second Bush stint. True goldbugs should be campaigning aggressively for the President's re-election, as Kerry might attempt to improve the long-term health of the U.S. economy, or even do something really crazy such as establishing a coherent economic policy.

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 may have been the final low for 2004. Gold mining shares are likely to either approach or break modestly below their May lows, most likely in August or September. Since 155 was strong resistance for HUI in 2002 and early 2003, it is now equally strong support. HUI might therefore make its final 2004 low near 157, but I think it is more likely to make a double bottom near 166, which is just below its 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 $350 and $370 an ounce later this year. 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.

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 1.79%, is between 7.5% and 10.5%. Great bull excesses are usually followed by equally severe recessions.

REMINISCENCE OF THE WEEK: When I was in London in February 1993, I checked several banks and money exchange centers, but eventually found the best sterling/dollar rate at a manufacturer of Scottish kilts. At the time, I was working at the Jersey City division of Telerate, which had an important sales office in London. Once each day, a salesman from London would call me about his complaints of the day. I hadn't told him that I was going to the U.K., so he had no idea that I was nearby. When I called as usual to get his daily gripe, I listened for a few minutes and responded, "I think I'd understand it better if I saw it in person. I'll be right over." He thought I was kidding, until I showed up at his desk. For a full minute, he said nothing at all, then he proceeded to show me problems which were difficult to describe on the telephone, and tried to keep me in the office for the remainder of the day. This reminds me of the old Russian proverb that if you see a cow speak, you are at first too amazed to say anything; then you soon find yourself correcting its grammar and syntax.

REMINISCENCE OF THE WEEK: After my best friend from high school went off to college and beyond, he had several girlfriends, each of whom was about a decade (or more) older than he was. One day I went to visit him in Chicago, and he was acting rather mysteriously. He told me, "When we get to the restaurant where we're having dinner, I'm going to introduce you to the latest woman in my life." When we arrived, he had me try to guess who the person was. No one looked even remotely like a possible candidate, so after several minutes of wrong guesses which he found hilarious, I had to surrender. He turned to the teenager sitting very quietly alone just behind us and proclaimed, "Here she is!" I responded, "That's ridiculous. Either this is a stupid joke, or else you're out of your mind." They've been together now for almost twenty years, and they still haven't fully forgiven me for that comment.

REMINISCENCE OF THE WEEK: In the late summer of 1984, I was visiting a friend who used to live in my block in Baltimore, but who had moved to Brooklyn, New York about a year earlier. My friend lived on the border between a Hasidic and an Hispanic neighborhood in Brooklyn, not far from the Williamsburg Bridge. It was a Friday evening, and the sun was just beginning to set as I was walking down Harrison Avenue, when two boys dressed in 19th century Polish garb approached me and asked me to follow them. I soon found myself in a tiny synagogue, where the rabbi asked me to please lower the thermostat; as it was very close to sundown, they did not want to violate the Sabbath by doing it themselves. I think the rabbi sensed what the boys could not, that I was actually Jewish, even though I did not wear any head covering and was dressed in casual secular attire. When I departed the synagogue, I wished the rabbi a peaceful Sabbath by saying "Shabbat Shalom". He did not return my greeting.

REMINISCENCE OF THE WEEK: In the summer of 1983, I went to visit my best friend from high school, who had moved to Chicago to attend the university in Hyde Park. He was rather busy during the daytime hours, so I explored a lot of the city on my own. One morning around 10 a.m. I headed for a park, and discovered an elaborate sculpture which looked like it might be or once have been a fountain. I walked over to it, and finding it intriguing in its design, I went toward its center to examine it more closely. Suddenly I heard a whirring sound, and soon discovered that it was very much a live fountain, which began to spout prodigious amounts of water. Since it took me quite some time to climb out of the middle of the contraption and move away from the range of the spray, I was thoroughly drenched, at which time the fountain shut down as rapidly as it had started up. I walked around to the other side of the massive sculpture and saw that it was called "Buckingham Fountain", which I later discovered was the most famous fountain in the city. Its posted hours of operation were clearly in the afternoons and evenings only, so the person in charge of its maintenance must have turned it on that morning solely for my benefit.

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: 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.