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SAYING OF THE WEEK: Never worry about missing a rally; there are several every year. Those who regret missing a rally never fail to miss the subsequent decline. --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.

Recent comments are in boldface.

INTERMEDIATE-TERM FINANCIAL OUTLOOK: As pointed out in last week's update, the U.S. dollar has been making a very impressive series of higher lows since February. In the past two weeks, repeated attempts to push down the U.S. dollar below its August lows (which are higher than the July lows) have failed, with the greenback often regaining most or all of its losses by the end of the day after early selloffs. On Friday, for example, the U.S. dollar was down more than a full cent versus the euro in morning trade, then continually fought back until ending the day unchanged. When this pattern is seen in any financial asset over an extended period of time, it generally precedes an extended rally, and a move higher is therefore what the U.S. dollar is likely to enjoy over the next several weeks, if not longer. Media coverage remains lopsidedly negative toward the greenback, while the dollar's modest rebound in the past seven months has received basically zero attention or comment. Very negative sentiment accompanied by rising prices is almost always a very positive sign for future gains. Interestingly, exactly the opposite situation can be seen for U.S. equities: a clear pattern of lower highs accompanied by rising optimism, with bulls outnumbering bears 2:1 in most surveys, and rising complacency as evidenced by multi-year lows in most index volatility measures. Thus, expect U.S. equities to decline while the U.S. dollar rises in value. There remain very few speculators on the short side for most currencies. The U.S. dollar may therefore be signaling an upcoming upside breakout. As the dollar rises, gold and silver prices are likely to decline. With gold, even though the yellow metal is only slightly above its average price for the past year, bullish sentiment is almost 80%. When optimism far exceeds performance, generally a price drop follows.

Gold mining shares have generally traded in the same direction as the Nasdaq over the past four years, although not always in matching percentages, particularly during rallies. Thus, the most important indicator for the near-term direction of gold mining shares is the same as the most important indicator for the near-term direction of the Nasdaq: implied index volatilities. VXO hit 13.12 and VIX hit 13.16 on Monday, September 13, 2004, while VXN hit a new all-time record low on the same day. VXO hit an intraday low of 13.94 on the most recent trading day, Friday, September 24. The obvious message here is not only one of investor complacency, but complacency in the face of a series of lower highs for almost all major equity indices dating back to early 2004. Looking at the chart patterns for individual gold mining shares, one sees a series of lower highs dating back to early December 2003, as well as a series of higher lows dating back to May 10, 2004. As U.S. equities generally decline over the next several weeks, with the Nasdaq likely falling by about one fifth, gold mining shares will likely follow in tandem, perhaps losing between one sixth and one fifth of their value on average. Either because equities have not experienced a sharp price decline since the early autumn of 2002, or because the media keep harping on the concepts of a "trading range" and a "dull, flat market", or because investors naively believe that U.S. equities cannot fall significantly in a Presidential election year (obviously no one remembers the year 2000), or because of some other reasons, almost no market participants are prepared for U.S. equities to set new lows for the year. This is in spite of the fact that most of the equity groups which traditionally lead the market have already hit new annual lows, such as semiconductor shares, while chart patterns for most equity groups show a classic failure to break and hold above their respective 200-day moving averages. The most likely interpretation is that the U.S. economy is slowing, and that liquidity is therefore drying up in the equity markets, which will negatively affect all stock groups, including gold mining shares. I expect the Nasdaq to make its 2004 bottom very slightly below its Fibonacci 61.8% retracement level of 1507 (see below for more Fibonacci retracement details), with the U.S. election having surprisingly little influence except probably to create a brief late October bounce. Quite a few gold mining analysts have proclaimed that gold is in a trading range with $380 as the downside limit, so there are likely many sell stops sitting very close to $380, and it will be tempting for gold bears to try to hit that target. With the sole exception of May, in which gold sagged to $371.25, the yellow metal has found repeated support at $387 this year, so it will be interesting to see if that key level is once again approached, and if so, if it can be broken to the downside. My guess is that a downside breach is more likely than not, since the strongest rallies for gold usually occur after a thorough shakeout, and small speculators in particular are heavily lined up on the bullish side at this time. As was the case in the first week of July, when gold mining shares continued higher for one week before joining the remaining U.S. equity groups in their downward trend, gold mining shares are very unlikely to be able to move higher as most U.S. equity groups decline. A falling tide usually lowers the level of all boats, if not necessarily by precisely equal percentages.

GOLD AND REALITY: Gold often correlates closely to the real rate of return for short-term U.S. time deposits. The lower the real rate of return, the better for gold, and vice versa. The real rate of return is equal to the nominal time deposit rate (roughly equal to the anticipated Federal funds rate) minus the inflation rate. Of course, one can quibble over the current inflation rate, as well as which rate to use for the nominal rate, but in general, it can be seen that when gold peaked this past winter, inflation was about 2.0% while the anticipated Federal funds rate was about 1.0%, thus yielding a real rate of return of negative 1.0%. At the current time, inflation has risen to about 2.3% while the anticipated Federal funds rate is about 1.8%, yielding a real rate of return of negative 0.5%. As this is a less negative rate than before, it is logical that the gold price should be lower now than it was seven months ago. Looking forward, most observers expect the Fed to continue to gradually raise short-term interest rates; if this rise occurs more quickly than the corresponding rise in U.S. inflation, which is likely, then the real rate of return for U.S. time deposits will become even less negative (although it probably won't quite reach zero), and therefore the price of gold should drop further. It should be noted that when gold experienced its lowest point in 1999-2001, the inflation rate averaged 2.0% while the anticipated Federal funds rate was as high as 6.5%, yielding a real rate of return of as much as positive 4.5%.

OTHER FINANCIAL MARKETS: There is a seasonal pattern, mentioned in the September 20, 2004 issue of Barron's, in which U.S. equities often begin a sharp downturn on the first day of autumn. This pattern was first pointed out several decades ago by the same W. D. Gann who discovered the Fibonacci retracements (see below). This year appears to be no exception; it is likely that most U.S. indices made their final rebound highs on September 21, 2004, the last full day of summer. These highs, of course, were well below their June 30 levels, which were substantially below their winter peaks, continuing the clear 2004 downtrend. There is another strong historic pattern in which U.S. equities often perform poorly after the U.S. Federal Reserve has raised interest rates for the third consecutive time, known as "three steps and a stumble". U.S. equities certainly had a significant decline after the initial rate hike on June 30, which marked the post-winter recovery peak, and the upcoming plunge is likely to be at least as severe in percentage terms. U.S. Treasuries have interestingly moved in tandem with equities, showing intraday weakness on each of the past three trading days by surrendering early gains in late trading. Combined with strongly bearish commitments for the 30-year "long" bond, it is likely that U.S. Treasuries have either already peaked, or are very close to doing so. This continues what is likely to be a multi-year pattern of rising Treasury yields across the spectrum, as inflation gradually increases after more than two decades of declines. As in late April and early May, we are likely to see U.S. equities, precious metals, crude oil, probably most commodities, and Treasuries all declining in tandem over the next several weeks. Only the U.S. dollar is likely to see a move higher.

At 9:17 a.m. on Thursday, August 12, 2004, the South African central bank surprised most observers by lowering a key lending rate by half a percent, instead of leaving it unchanged as had been expected. No reason was given for this decision, but many presume that the central bank was concerned about the rand's powerful rally from 13.5 to the U.S. dollar in December 2001 to 5.9 to the dollar in late July 2004. Since most South African workers are bound to union contracts which are denominated in rand and include annual raises of roughly 9% per year in rand terms, the rand rally caused these workers to be paid more than twice as much in U.S. dollar terms, which caused a significant erosion of profit margins for those manufacturers who sold their goods in U.S. dollar terms, such as precious metals miners. The rand responded to the central bank decision by falling from 6.18 rand to the greenback just before the announcement, to 6.48 rand to the dollar immediately afterward, and 6.60 rand to the dollar a few days later. The rand/dollar exchange rate has remained close to 6.6 rand to the greenback over the past four weeks. South African gold mining shares responded to the rate cut decision with a sharp price surge that lasted for eight calendar days, through August 20. It remains to be seen whether this is a permanent change in policy by the South African central bank, or merely a one-time event. Since the South African economy is growing sharply in real terms, it also remains uncertain whether or not the rand will continue to decline, or will resume its uptrend if currency participants perceive the current rand level as being undervalued.

I am 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, as evidenced by the very bearish chart patterns of the REIT indices IYR and RWR, but most U.S. homeowners and recent home buyers, aided and abetted by the media, foolishly believe that record high real estate prices will continue to show significant annual gains for many years to come. The consensus is about as strong as the surveys four years ago that showed the average investor expecting the Nasdaq to continue to rise 30% per year for at least another decade.

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, and 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 HUI had given up 61.8% of this gain, then its bottom this year would have been 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 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 2004 low so far was on May 10 at $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 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 only 1.79%, is between 7.5% and 10.5%. Great bull excesses are usually followed by equally severe recessions.

REMINISCENCE OF THE WEEK: As mentioned in more than one previous reminiscence, in November 1977 I played piano for our high school production of "Guys and Dolls". One of the liveliest and cutest members of our cast played the role of a "Hot Box girl", performing two burlesque numbers in the show. As a student, she was quiet in class, but outside the classroom, she was very outgoing and enjoyed life fully. She was always the center of attention when we would go to the local diner during rehearsal breaks. Since high school graduation, I have not seen her again, but three years ago I was, shall we say, somewhat surprised to see her name in print. In the "New York Times" Sunday "Styles" section, from September 2, 2001, was a front-page article by their lead society writer, Guy Trebay, entitled "All Undressed and So Many Places To Go". On the page 8 continuation, she is given two full paragraphs. One sentence should suffice for a family-oriented web site: "For herself, however, the experience of going naked at Lighthouse Beach this summer was liberating."

REMINISCENCE OF THE WEEK: I used to attend a summer music composition camp known as the Walden School. It was run by an energetic, inspiring man named W. David Hogan, Jr. We were each assigned to a kitchen crew in order to set out the dishes and silverware, and to serve the food and drink. There were two crews per meal. One day, our crew showed up as usual, but the other crew was nowhere to be found. We didn't know what to do, so we decided to do the best we could with our limited numbers. Naturally it took twice as long to set up as usual, so we still had a few tables to go when the counselors and kids began to pour in for supper. We tried to work a little faster, when the other crew suddenly showed up. It turned out that they had been playing a close game of handball that went into overtime, and they didn't want to interrupt the game to do something boring like setting the tables. The second, tardy crew tried to cover up for their misdeed by rushing to set out the final table, which was comprised of the most senior staff and counselors. They did a good job at first, but when they served Mr. Hogan himself, the head of the tardy crew rushed just a little too energetically, and tipped an entire meal and large cup of grape juice onto David Hogan's freshly washed shirt, tie, jacket, and pants, not to mention splattering the director's face with some kind of vegetable medley. Needless to say, that particular crew did quite a bit of floor scrubbing, lint cleaning, and every other conceivable and inconceivable task for the remainder of the summer without a complaint.

REMINISCENCE OF THE WEEK: When I was a kid, the most popular birthday activity by far was to have a duckpin party. In Baltimore, unlike other American cities, almost every bowling alley is divided into two halves. In one half, there are lanes with tenpins that require fifteen-pound balls and where you throw the ball twice per frame, as you can find throughout the U.S. In the other half, there are lanes with pins that are much smaller, known as duckpins, for which you throw a ball weighing only 3-1/2 pounds, and where you get three throws per frame. It's more difficult to throw a strike (all pins down in a single throw) or a spare (all down in two throws) with duckpins, since the ball is far less powerful, so a score of 120 is considered very good. Kids almost always prefer duckpins, because they can hardly lift the larger balls needed for regular tenpins, and because it has been the norm for Baltimore youth for decades (although this tradition has somewhat faded in the past twenty years, alas). Our parents would drop us off at the bowling alley, whereby we would bowl for about 1-1/2 hours. Afterward, we would gather in a big room nearby to eat strawberry ice cream and pound cake, and be entertained by someone dressed as a clown, who would then suffer the indignity of having leftover melted ice cream and cake thrown at him whenever any of his antics were less than excellent. As a true contrarian even then, I decided that for my ninth birthday, I would have my friends meet at Patapsco State Park just west of the city limits. Instead of bowling, we all went on a five-mile hike along a stream with a waterfall, and instead of ice cream and cake, we had barbecued goodies with lemonade and root beer. The general attitude afterward was "it was weird, but we had a lot of fun and we learned something". I guess that's similar to the reaction of those who read this page after perusing the usual web sites.

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.