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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. Notice that each paragraph now has a lead-in heading.

Recent comments are in boldface.

LOOKING FOR THE RIGHT SHOULDER: Now that gold mining shares have apparently completed both the left shoulder and the head of a head-and-shoulders pattern, they will probably complete the right shoulder over the next several weeks. HUI likely made its low point of 2005 at 190.45 on February 8. There is a small possibility of a lower low being touched over the next few months, but that is a long shot. In recent days, there has been a lot of talk about South Korea potentially diversifying away from its heavy U.S. Treasury holdings. The reality is that central banks worldwide, and in Asia in particular, have been quietly diversifying away from Treasuries, and U.S. dollar holdings in general, for several years, and will likely continue to do so for the next several years or more. However, when such activity becomes front-page news, that means that the short-term direction is going to be in the opposite direction, which means that the U.S. dollar is likely to resume its 2005 uptrend in the very near future, as the euro heads toward a new low for 2005. A rising dollar will put downward pressure on precious metals and their shares, especially on silver. Gold itself has probably not yet made its final bottom of 2005, but should do so over the next two months. The current spread between HUI and spot gold (roughly equal to GLD times ten minus HUI) has expanded in recent days, and is now almost exactly 220. Such a rise in the HUI/spot spread usually signals a downturn in precious metals over the subsequent several weeks. HUI has also shown a short-term overbought condition by roughly repeating its intraday highs between 217 and 218 over the past several trading days, with a slight downward bias, as is typical of the neckline of a head-and-shoulders pattern. There is also a common seasonal pattern in which gold and its shares are weak in the first half of March in odd-numbered years.

THE NASDAQ AND HUI: VIX, VXO, and VXN, important measures of implied index volatility, recently approached multi-year lows, with VIX itself touching 10.92 on Friday, February 25, 2005, just two cents above its multi-year bottom. This strongly suggests that the Nasdaq is likely to accelerate its downtrend of 2005; already there are five lower highs on its chart. With the U.S. dollar likely to gain ground as the Nasdaq declines, this will initially put downward pressure on gold mining shares as well; after this initial period, in which some goldbugs will complain that gold is "not responding to" the decline in equities, gold mining shares will begin to make a strong positive divergence by reversing direction and moving higher even as the Nasdaq continues its pattern of lower highs and lower lows. The Nasdaq is likely to touch 1900 within several weeks before making a significant bounce; this should be followed later in 2005 by lows at 1750 (matching the August 2004 nadir), then 1515 (the important 61.8% Fibonacci retracement of its entire gain from October 2002 through the first day of January 2005, when the Nasdaq peaked at 2191.60), and finally some even lower point in the autumn, perhaps near 1280. Notice that Barron's has an article in this week's issue in which the person being interviewed agrees exactly with my timewise guess of a major Nasdaq low in the autumn of 2006, even though his price projection, in my opinion, is far too optimistic (he is probably just being wimpy). Based upon the steepness of the Nasdaq decline, there are six reasonable alternative scenarios for the upcoming right shoulder low of HUI, as follows: 1) HUI bottoms around 205. This is the most optimistic scenario, in which gold mining shares have only above 5% downside from current levels. Given that there is no chart support for HUI until it is much closer to 200, as well as the great unlikelihood of there being such a shallow drop from the neckline, this scenario can probably be dismissed. 2) HUI bottoms near 201. This would be a symmetric right shoulder, in which the right shoulder low is fractionally above the left shoulder low. That would look beautiful on a chart, but gold mining shares usually don't display such precise symmetry. 3) HUI bottoms near 197. This would put HUI fractionally above its September 2004 low, and would therefore be the most likely scenario from a historic viewpoint, in which important intermediate-term lows from several months in the past are slightly exceeded. It would also cause a final shakeout of round-number-obsessed chart followers who will foolishly sell as HUI breaks below 200, which makes it even more likely to occur. 4) HUI bottoms near 193. This somewhat more pessimistic scenario would signify a classic double bottom, but is less common as a historic pattern for gold mining shares, except when equities in general are very weak. Therefore, it is only likely if my guess of a Nasdaq bounce at 1900 turns out to be inaccurate, and the Nasdaq falls rapidly toward its 2004 low of 1750, temporarily dragging down gold mining shares in its wake. 5) HUI bottoms around 189, making a slightly lower low than on February 8. This is only possible if there is some kind of news or a strong rumor about potential selling of gold by central banks, or something similar and widely reported. 6) HUI bottoms near 185. This is the most pessimistic of the likely outcomes, and I think also the least likely. The Nasdaq would probably have to quickly collapse toward its Fibonacci retracement level of 1515, combined with unusually negative news media coverage toward gold. Of these six scenarios, I would cast my vote for scenario #3 above, in which HUI bottoms near 197. As in my previous update from February 6 (see paragraph below entitled "February Update"), I believe that the risk/reward scenario for being long gold mining shares remains quite favorable, being roughly equivalent to being short the Nasdaq, and therefore gold mining shares should continue to be accumulated as the right shoulder for HUI is being completed. The Nasdaq should continue to be played on the short side, most easily by selling short QQQQ. Those who prefer physical gold to the shares should have their opportunity over the next several weeks to buy at what will likely be the lowest prices of 2005.

THE LONG AND THE SHORT OF IT: At this point, it would be useful to mathematically analyze the risk/reward scenarios of my current two favorite alternative investments: being long gold mining shares, and being short the Nasdaq. First, let's consider the Nasdaq. I am strongly convinced that the Nasdaq in the second half of 2005 will complete a 61.8% Fibonacci retracement of its entire gain from its nadir in October 2002 through its peak on the first trading day of 2005, plus an additional 1% percentage decline, as it its usual pattern. This would put the Nasdaq around 1515. The mathematics of being short are slightly different from the mathematics of being long, assuming no margin is used in either case. If one is short one thousand shares of QQQQ at 40 dollars per share, then that requires an investment of 50% of the total, assuming no margin, which would be twenty thousand dollars. If QQQQ then falls by half, to 20 dollars per share, then the position gains 20 thousand dollars in value, becoming worth 40 thousand dollars altogether, or double the initial amount. Therefore, when you are selling short, if the asset being shorted falls by half, the percentage gain (100%) is identical to going long and having the asset double in value (also a 100% gain). Mathematically, using a lognormal distribution, the purely random chance of any asset losing half its value is the same as the chance of it doubling in price. Therefore, if one sells short the Nasdaq at its current price, and it falls to 1515, then one will make a profit of approximately 52%. Therefore, I have committed a substantial percentage of my personal funds to being short the Nasdaq, since I believe there is a high probability of making a 52% gain between now and late 2005. On the other hand, suppose that one has been recently purchasing, and continues to accumulate, gold mining shares with an average HUI price of 200. HUI still has stiff resistance at its prior high near 258, so with a generally rising U.S. dollar over the next several months, combined with bouts of periodic equity weakness, perhaps HUI will reach 250 between now and the time that the Nasdaq reaches 1515, for an HUI gain of 25% (assuming HUI was purchased at an average price of 200). Since the anticipated gain for being long a basket of gold mining shares is thus only about half that for the gain for being short QQQQ, I am committing a smaller percentage of my personal assets to being long gold mining shares than I am committing to being long the Nasdaq. Even if one were to conservatively cover a Nasdaq short position entered at current levels once the Nasdaq has fallen to 1760, just above its 2004 summer low, the resulting gain of 30% would exceed the possible profit from being long gold mining shares unless HUI is able to set a new all-time high above 260 before the Nasdaq can reach 1760, which is relatively unlikely. Of course, should there be a sharp volatility spike at the same time that the Nasdaq reaches 1515, such as VIX going above 40, making it necessary to cover the Nasdaq shorts, then if gold mining shares make a simultaneous partial pullback at the same time that the Nasdaq is bottoming, it may become prudent to put some of the cash from covering these Nasdaq shorts into additional purchases of gold mining shares. Notice that in 2001-2002, periodic reallocation would have been a powerful winning strategy, as the Nasdaq was weakest from January 2001 through September 2001, and again from August 2002 through October 2002, while gold mining shares staged their strongest upsurge from November 2001 through early June 2002. Thus, it was possible to emphasize either one or the other, depending upon its risk/reward scenario at the time. I believe that a similar blend, and periodic reallocation, will be a blueprint for success in 2005-2006, the first half of Bush's second Presidential term, just as it was in the first half of the first Bush administration.

CURRENT ASSET ALLOCATION: My own personal funds are currently allocated as follows: stable value fund (retirement fund with stable principal paying variable interest, currently 4.75%), 35%; Nasdaq-equivalent and related shorts, 32%; net long gold mining shares, 10%; gold and silver coins and related metals collectibles, 6%; other collectibles, 0.5%; cash and cash equivalents, 16.5%. In my March and April updates, I will discuss in more detail which gold mining shares I generally prefer for investment, and why.

FEBRUARY UPDATE: The outlook from the last update still applies; it appears, as predicted here several weeks ago, that HUI was completing a left shoulder just above 200, and now that the 200 level has been cleanly broken to the downside, we are now falling toward the inevitable head. The traders' commitments for gold have improved progressively, although they have not yet reached the net neutral level that has characterized every bottom in gold since December 2001, when commercials were net long gold futures for the last time. (Since the commitments are only released once per week, one cannot always see this net neutral point unless one extrapolates from intraweek values.) The traders' commitments for silver remain quite poor, indicating that silver still has a substantial decline upcoming. The traders' commitments for currencies continue to improve, but are still very far from levels that would mark a peak in the U.S. dollar. On Friday, February 4, 2005, the euro/dollar exchange rate broke below $1.29 U.S. to its lowest level of 2005, and has virtually no support until it closely approaches $1.20. Therefore, as the U.S. dollar generally increases in value over the next several weeks, this will put downward pressure on precious metals and their shares. Eventually, gold mining shares will be capable of resisting the pressure of a stronger greenback and will no longer decline when the dollar is rising. This will indicate that these shares have bottomed, and that gold and silver are only a few weeks away from their low of 2005. In other words, gold mining shares will likely bottom about three weeks before gold and silver bullion complete their bottom, while gold and silver will probably bottom about three months before the U.S. dollar completes its peak. The risk/reward scenario for being long gold mining shares has become roughly as favorable as the outlook for being short the Nasdaq, so investors should consider gradually establishing substantial positions in both over the next several weeks, while keeping a substantial amount in cash to make additional purchases in the future.

GREATER RISK IMPLIES A MORE SERIOUS RECESSION: It should be noted that GDP growth in the U.S., which was 7% a year ago, has declined an average of 1% per quarter. Assuming this trend continues, the U.S. economy will be in recession in slightly less than one year. Here are two reasons why the upcoming recession is likely to be far worse than the mild recession from 2000-2002: 1) In 2000, the only true bubble in the U.S. economy was in the Nasdaq, and those who were invested in the Nasdaq were at least on 50% margin. Currently, there are bubbles in the Nasdaq, in smallcap shares, in midcap shares, and more importantly, in real estate. So many Americans are invested in real estate that a drop of one half in real estate values, as happened in Japan in the 1990s, is likely to have a far greater negative effect on the economy than the 79% drop in the Nasdaq had from 2000-2002. We therefore have a very dangerous "double bubble". 2) In addition to much more risk in real estate, many Americans have purchased real estate on as little as 5% margin. Total mortgage borrowing is four times what it was in 2000, while the ratio of price to household income is at an all-time record. This means that, given even a mild downturn in real estate, many Americans will have a total mortgage obligation which will exceed the value of their homes, encouraging defaults and exacerbating the likelihood of nationwide bank failures, particularly in the most overvalued coastal urban areas.

A SHORT-TERM PERSPECTIVE ON GOLD-MINING SHARES: It appears as though gold mining shares have completed a left shoulder in a head-and-shoulders bottom. The price of 200 for HUI, the Amex goldbugs index of unhedged gold-mining shares, is an important minor support level, which is likely to be seen once again as a support level in March or April after the first big bounce from the inevitable bottom runs into profit taking at the neckline. The trading action of Wednesday, January 12, 2005, in which gold rose 1% while gold mining shares fell 1/2%, confirmed that the current downward trend is not yet over. The spread between HUI and spot gold, which had contracted from 227 to 213, has regained half of its losses, and is now almost exactly 220. Looking at the traders' commitments, all of the following appear to be true: 1) the U.S. dollar has completed roughly one third of its counter-rally; 2) silver continues to demonstrate lopsided stale speculator net long positions, and therefore still probably has a substantial decline ahead; and 3) gold has seen the greatest improvement in its commitments, and is therefore likely within less than 10% of its eventual bottom, which will probably be its last deep bottom for the next two years. Assuming that the recent weakness in U.S. equities continues at least in the near future, combined with the repeated failure of gold mining shares to move meaningfully higher whenever gold is rising in price, as well as a few final heavy concentrations of sell stops for gold futures, precious metals shares are vulnerable to a final steep pullback in the short term. At some point, continued downside action in precious metals will no longer be reflected in the prices of gold mining shares, and when this happens for several days in a row, it will likely serve as an important buying opportunity. Another sign that a rally is closely approaching will be a repeated intraday pattern of early sharp weakness followed by a significant recovery later in the day.

A LONG-TERM PERSPECTIVE ON GOLD-MINING SHARES: At this juncture, it would be useful to take a break from the typical short-term outlook and review the performance of gold mining shares over a period of several decades. After performing very strongly during the Great Depression and reasonably well through the 1940s, gold mining shares generally declined during the boom years of the 1950s and 1960s. In the early 1970s, gold mining shares once again outperformed, as a sudden rise in inflation and a worldwide recession stimulated interest in the yellow metal, which was sharply increased when the U.S. left the gold standard. The excitement died down somewhat after the stock market bottomed in late 1974, but revived even more strongly in the late 1970s, as a sudden burst of inflation caused sharply negative real interest rates. By the end of 1979, and of course in January 1980, even Joe Q. Public was talking about gold and silver and precious metals mining shares. Gold prices declined throughout most of the 1980s, but even as late as the summer of 1987, gold mining shares continued to outperform most equity indices. This changed abruptly during the sharp stock market correction of 1987, when gold mining shares suffered a collapse of more than 40% as a group. After this catastrophe, both inflation and commodities began a more serious long-term decline, while real interest rates began a long-term ascent. Gold mining shares mostly continued to plummet, with periodic bounces, for more than 13 years, until they reached a historic very deep bottom in November 2000. For the next 1-1/2 years, convincingly reversing this trend, gold mining shares more than quadrupled in value as a group. Since June 4, 2002, gold mining shares have gone through an extended consolidation period, lasting almost twice as long as the powerful rally which preceded it. As a group, these shares are generally higher than they were at their spring 2002 peak, but not by much; assuming that we have not yet seen the bottom, the total rise from June 4, 2002 through the upcoming nadir will be roughly as great in percentage terms as a decent stable-value fund, with of course considerably more volatility. However, this may be a positive development for gold mining shares, rather than a negative one. In the financial markets, often a lengthy consolidation helps to shake out momentum players and other speculators who are indifferent to the sector, and are only looking for whatever is going up fastest and being hyped the most. The last year, in particular, has surely discouraged most short-term speculators who have had to suffer significant losses in mining shares even as the prices of precious metals have generally risen. Given the tendency of gold mining shares to perform most strongly in anticipation of a recession, as we saw in the 2000-2002 surge, combined with the fact that real U.S. GDP growth has declined steadily by one percent per quarter for each of the past four quarters, another meaningful move to the upside in gold mining shares is probably the most likely outcome once the current rising-dollar shakeout is complete. As with the previous strong gain, it is likely to also last for approximately 1-1/2 years.

RING OUT THE OLD, RING IN THE NEW: Since everyone else is making their predictions for 2005, I see no reason to miss out on the fun. GOLD: I expect the low for 2005 to be $388 per ounce sometime in April, after two more quarter-point Fed rate hikes accompanied by steady or slightly slowing inflation makes the real rate of return on the best U.S. money market funds only slightly negative, or perhaps even slightly positive for the first time since 2001. As with almost each new congressional term, the U.S. dollar will likely rise for several months as optimism increases that the U.S. deficit will decrease in a bipartisan attempt to cut the account deficit, while a slowing economy and falling housing prices dampen the demand for imports, thus also improving the trade deficit. The massive army of stale long-side speculators is sitting with their sell stops precariously at and near $400, so even if gold bottoms at $382 or $393 per ounce instead of $388, the yellow metal will surely break below $400 to shake out this horde of uncommitted longs. The high for gold in 2005 will likely be near the end of the year, as the U.S. economy finally goes into recession; $510 per ounce looks like a reasonable level if worldwide real estate prices finally decline substantially (meaning at least 12%), or $480 per ounce if they do not (yet). Notice that the rate of U.S. GDP growth, according to official U.S. government data, was 7% a year ago, and has now declined an average of 1% per quarter for each of the past four quarters. Assuming this trend continues, the rate of U.S. economic growth will be negative 1% a year from now. SILVER: As with gold, the low will probably be in April 2005, with a price either slightly below or slightly above six dollars per ounce. The high for 2005 will be near the end of the year, with silver near $9.50 per ounce. Silver will remain more volatile than gold, and will probably be one of the best worldwide investments over the next 20 years, with silver's greatest percentage gains likely occurring in 2010-2020 after U.S. equities finally complete their deep bottom sometime within the next decade. HUI: The Amex goldbugs index of unhedged gold mining shares, which is currently down about one sixth from its highs of a year ago, is likely to fall by an additional 10% to 15% until it bottoms in March 2005 near 188. This prediction of HUI's 2005 bottom at 188 was derided by most readers when it was first published, but it was very closely approached on February 8, 2005, when HUI made a low of 190.45. This will likely turn out to have been the nadir for 2005; if not, the upcoming low will be only slightly below this level. One possible scenario is a double bottom: in March, gold makes a low of $394 as HUI reaches 188, and then in April, gold makes a lower nadir of $388, while HUI makes a higher low of 194, thus forming a classic positive divergence. As is usually the case, buy gold and silver mining shares early, and the metal itself later. Late in the year, HUI should break above its December 2003 high, and then gain an additional 10% to 15% above that level. GREENBACK: The U.S. dollar will likely rise against most world currencies for several months, reaching a late spring peak near 90 on the U.S. dollar index, and the euro falling simultaneously to almost exactly $1.20. By the end of the year, the U.S. dollar should be at an important low, with the euro at a corresponding new all-time high near $1.48. NASDAQ: In a virtual repeat of 2001, the stock market will move progressively lower. Expect the Nasdaq to first decline to 1750 in the spring, then after bouncing to 1900, to drop again to 1500 in the summer, and finally after another bounce by late summer, to make an autumn bottom near 1250, before ending the year very close to 1475. INTEREST RATES: The U.S. Treasury curve will continue to flatten, with short rates rising to approach but not quite reach 3%, with long rates falling in the first quarter, but later rising to end the year with the ten-year Treasury yield near 4.75%.

FIRST THE EXTREMES, THEN THE INEVITABLE REGRESSIONS TO THE MEAN: All three key measures of implied index options volatility, VIX, VXO, and VXN, are close to multi-year intraday lows. Equity put-call index readings are at their lowest sustained levels since the summer of 1987. Investor bullishness in some surveys is at its highest level since the 1980s. Insider selling has returned to its all-time record levels seen in 2000, with technology shares in some cases setting new all-time records. Semiconductor indices remain in an extended pattern of lower highs dating back to early 2000. It is likely that U.S. equities will continue their usual pattern of declining sharply in the first half of the second term of a Republican president.

LOOKING BACK, LOOKING FORWARD: After three consecutive very strong years in 2001, 2002, and 2003, gold funds a year ago had dominated the list of top-performing mutual funds over the previous three years. However, after their loss of one sixth of their value in the past year, gold funds have been overtaken by various specialty midcap, smallcap, and international funds in the list of top multi-year performers. This will likely lead to continued weakness in the first few months of 2005, as some investors habitually chase winners and sell assets which appear to be losing momentum. However, by the end of 2005, gold funds are likely to powerfully dominate the list of top-performing mutual funds over the previous five years. This is due to three factors: 1) their extremely depressed levels in late 2000; 2) their very strong gains since then; and 3) most other equity groups likely having substantial losses from late 2000 through late 2005. So early 2006 should see extended gains for gold mining shares, as some investors purchase the fund winners of 2005 while others buy the five-year winners, which will be mostly gold funds at the top in both categories.

WHY THE DIVERGENCE? A number of theories have been advanced on gold chat sites and in the financial media about why gold and silver mining shares in general are so significantly underperforming bullion. One theory is that, with the end of the year approaching and these shares showing one of the greatest percentage losses of all equity groups, they are being heavily sold for tax-loss purposes to offset gains in other equity groups. This waterlogged theory, really more of a poor excuse than anything else, was trounced by the activity on Wednesday, January 12, 2005, when gold rose 1%, but gold mining shares fell 0.5%. Or maybe some gold investors don't realize that tax-loss selling doesn't work after December 31. Another theory, discussed on this web site in the last update, cites the existence of a new exchange-traded fund of gold bullion (to be followed very soon by a second such fund). Now, investors who want a liquid trading vehicle no longer need to purchase gold mining shares, since they can achieve similar objectives by purchasing one of the gold ETFs. Since the gold ETF exactly follows the gold price, investors also do not have to be concerned with the unpredictable volatility of any given gold mining company, or with the management capability, unexpected geology, and political developments at any particular mine, or with the nasty tendency of gold mining shares to often decline whenever the Nasdaq is falling sharply, even if the gold price is rising. Some have even gone as far as to say that, with gold ETFs, investing in gold mining shares is obsolete. Other theories fall along the well-worn, but hardly credible, conspiracy line, in which some shadow powers are intentionally depressing these share prices. Although these various theories, except for the conspiracy nonsense, each contain some kernel of merit, it is likely that the shares are just following their usual historic pattern of leading the metals, and that once gold and silver decline, the normal spread will reassert itself, as it has always eventually done, and which I personally expect it to once again do.

I DON'T CARE IF YOU MISTREAT ME, BABY, JUST GIVE ME A REASON: Many participants in the financial markets feel more comfortable if they feel there is a logical explanation for various developments that are occurring, especially if such developments feel counterintuitive (as with the divergence between the prices of precious metals and their shares). If the U.S. dollar rebounds, therefore, people will be looking for reasons, no matter if they have nothing to do with the rally; just so they feel there is a "rational" justification for the move. To that end, here is a whole set of such reasons, so you can pick your favorite(s) on any day when the dollar is higher: 1) John Snow, the clearly incompetent Treasury secretary, is likely to resign soon. Even if Mickey Mouse is appointed to take his place, it will be seen as an improvement, and will therefore be interpreted as dollar-friendly. 2) Recently, congressional Republicans began to speak for the first time in many years about the idea of raising taxes on the wealthy. As long as such talk continues, it will be perceived as potentially reducing the huge U.S. budget deficit, as Kerry would probably have attempted to do, and will therefore be interpreted as dollar-friendly. 3) There has been a lot of evidence about slowing economic growth in Europe. This evidence has been mostly ignored, but if the U.S. dollar rallies, especially against currencies such as the euro or British pound, you can be sure that there will be a lot of talk about declining German business confidence or higher unemployment in France. 4) Any time that the dollar moves higher, there will be "talk of currency intervention", even if it is meaningless. 5) After the U.S. dollar has moved noticeably higher, there will be a lot of talk about how the greenback had been "clearly oversold" (even though no one apparently has such clarity today) and that a rebound was therefore "inevitable".

SECOND VERSE, SAME AS THE FIRST: Although there are always many attempts to simplify predictions in the U.S. financial markets, I have not seen a single commentator make the very elementary suggestion that the behavior of the markets in the second Bush term will almost exactly follow the behavior in the first term. This even has the advantage of being supported by historical precedent. Although a precise repeat is unlikely, the basic themes are likely to be similar. Therefore, knowing that the price of gold made an important historic low (at $254 per ounce) in April 2001, it seems reasonable that gold will make an important low in April 2005, give or take a month. The yellow metal may also gain about 60% overall in the second term, as it did in the first Bush term. Just as the stock market declined sharply from the Presidential inauguration through October of the following year (2002), it would be reasonable to expect a repeat performance there also, with the Nasdaq likely declining by a similar percentage (about two thirds) through the autumn of 2006.

THE TIMES, THEY ARE A CHANGIN': In addition to a sudden burst of insider selling in gold mining shares, there has been a marked increase in insider selling in most industry groups, roughly matching the highest levels ever seen in U.S. history, such as in early 2000. The official insider buying/selling numbers for November 2004, as reported by Thomson Financial, show the highest overall insider selling since August 2000, with some ratios setting new all-time peaks. With near-record complacency and a new greater extreme of investor bullishness in many surveys, combined with low cash holdings in mutual funds, it is likely that investors have committed all available capital to the financial markets, and that another down cycle in most equity markets is about to begin, which could end in two years with these markets at roughly fair value, which would be below 700 for the Nasdaq. This would be a fairly common development, especially for the first two years of a second Republican Presidential term. The reality of a slowing economy, combined with the waning of the temporary economic stimuli brought on by temporary tax cuts and the since-departed mortgage refinancing boom, are likely to lead to a recession which will begin in 2005 and intensify in 2006. The semiconductor indices in particular, which have been a reliable leading indicator of the financial markets since the 1960s, have been very weak, in many cases not even reaching their levels seen when Kerry conceded the election to President Bush in the morning of Wednesday, November 3. The Philadelphia Semiconductor Index, or SOX, has seen a pattern of nineteen lower highs since its all-time peak of 1362.10 on March 14, 2000, including nine lower highs in the year 2004 alone. As liquidity is drained from the financial markets, exacerbated by the commitment of many nations toward raising short-term interest rates, equities and commodities are likely to decline in tandem. One important difference is that commodities are likely in a long-term bull market, so the upcoming drop will be merely a correction within a longer-term upward trend, whereas with general equities, the upcoming drop will be a resumption of the trend of lower highs which began in early 2000 and which is likely to continue for several more years.

LOOKING BACK NOSTALGICALLY ON THE PRESENT; IT'S DÉJÀ VU ALL OVER AGAIN: I was truly stunned that Bush was able to defeat Kerry in yesterday's U.S. Presidential election. Kerry carried exactly the same states that Al Gore won in 2000, plus New Hampshire, and minus New Mexico and Iowa, all of which were obviously not enough. I guess the American public is eager for another four years of stubborn incompetence, including mostly declining stock markets, a falling U.S. dollar, ever-widening deficits, continued "temporary" tax cuts, and whatever else is needed to ruin what is still left to destroy in the U.S. economy. Four years from now, Americans will likely look back nostalgically toward the present time, since real estate is almost certain to join the Nasdaq in the category of assets which have collapsed. Meanwhile, after having the first net job loss since Herbert Hoover, Bush will prove that the performance in the first term was no fluke by causing the unemployment rate to at least double from its current level of 5.4%, meaning that it will be 10.8% or higher, which has not been seen in the U.S. since 1983. One should never overestimate the intelligence of the American voter. The greatest strength of a democracy is also its greatest drawback: those who are least informed about government policy carry equal weight in decision making with those who are most informed. On the positive side, if you can call it that, it is clear that if the U.S. economy collapses over the next four years, which is almost certain, the fact that the President, the Senate, and the House of Representatives are all Republican will enable whichever Democratic candidate becomes President in 2008--in a landslide--to enact real change. This change will hopefully be for better rather than for worse, and will ideally not contain make-work programs and other government giveaways. Of course, this is getting a little too far ahead, so let's return back to the sordid present. The euphoria that the election is over will give way very quickly to dread of another four years of government mismanagement of the economy. President Bush cannot be totally blamed, of course; Alan Greenspan's policy of playing with interest rates as a cat plays with a ball of yarn is probably more culpable than Bush both for creating the U.S. financial bubble and then popping it.

GOLD AND REALITY: Gold and gold mining shares often correlate 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 its shares, 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 mining shares 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 2.8% while the anticipated Federal funds rate is about 2.7%, yielding a real rate of return of negative 0.1%. As this is a less negative rate than before, it is logical that gold and silver mining shares have been declining recently in proportion to this lower negative real return. 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, and could even turn slightly positive. Therefore, the prices of most gold mining shares should drop even further, until the point at which additional Fed rate increases appear less likely. 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%. This positive 4.5% rate of return five years ago is the primary reason why gold fell all the way to $252 per troy ounce, not because of some ridiculous manipulation theory.

REAL ESTATE PRICES CAN GO BOTH WAYS: 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 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. The latest housing data shows the first year-over-year decline in U.S. new home prices in a long time. It is especially noteworthy that the headlines accompanying each report tout the volume of sales, rather than the price. This would be like a news headline proclaiming "Nasdaq volume up 15%" without mentioning that the Nasdaq itself was down 1% on the day. It is still early in the year, but REITs are the weakest-performing sector group so far in 2005.

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.

LONG-TERM GOLD OUTLOOK: Gold will continue to make a pattern of higher lows as its strong bull market from a nadir of $254.00 in 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; an important higher low was $371.25 spot in the morning of Monday, May 10, 2004. 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.

YES, GOLD REALLY CAN RISE AGAINST THE EURO: 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. Meanwhile, historic gold coins and collectibles are still selling at unusually low premiums to their melt (intrinsic) values, and therefore merit consideration whenever gold is oversold.

YOUR TYPICAL GARDEN-VARIETY SEVERE BEAR MARKET BOTTOM: U.S. equities in general will continue to decline until the dividend yield on the S&P 500, currently at only 1.75%, is between 7.5% and 10.5%. Great bull excesses are usually followed by equally severe recessions.

REMINISCENCE OF THE WEEK: Recently my wife and I visited Santo Domingo in the Dominican Republic. We went to a club which features traditional Cuban "son" music every night, and on a particular evening the band included several of the world's most famous Cuban musicians, among them a bass player 93 years old, and a marvelous trumpeter in his 80s. It was an amazing performance: the trumpeter walked through the audience for fifteen minutes during one extended set, giving each table the benefit of a personal rendition. During breaks, the club's MC took over as lead singer; unfortunately, the quality of his own performance did not match that of the guest band. True to the spirit of a modern Cuban club, the MC's girlfriend was fourteen years old, and had several of her young teenage pals with her. The MC decided to show off his knowledge by going from table to table and guessing where people were from. He obviously had some experience; at one table, he was not only able to surmise that the guests were Haitian, but also what part of Port-au-Prince they lived in. (Perhaps Haiti does not have too many wealthy neighborhoods.) However, the largest table of all, front and center, completely bedeviled the MC. He guessed over and over, saying that "he'd be back," then made some more wrong tries later on. Finally, he gave up, asking one of the folks yet again "are you sure you aren't from Toronto?" One of them responded, "We're from Dublin. We Irish get around a bit more these days."

REMINISCENCE OF THE WEEK: Last week, one of my co-workers left the company where I am employed as a computer programmer. Whenever this happens, the rest of us quickly descend like vultures on the departed person's desk, to see if there are any goodies worth taking. Sometimes one finds nothing but a few paper clips. Other times, one might find a decent book or a useful computer accessory. As I was going through this man's treasures, I found something I had never seen before in the desk of a fellow programmer: a tabla. For those who are not familiar with Indian music, a tabla is a conical drum carved out of a solid piece of hardwood. It is a real one, too; not some plastic or cheap imitation, and is accompanied by its proper holding stand. I do have some co-workers from India and Pakistan, but the person who left the company is of Italian descent. Naturally, I couldn't resist playing it, which garnered quite a bit of attention from everyone else, who wondered where I got the instrument. Then, a few days later, the person sitting next to me decided to go through the remaining items in this person's cubicle, and found--seriously--a second tabla(!), which he immediately began to play. Now we can perform duets. How someone happened to own--and discard--two of these Indian drums is an interesting mystery. I do have this person's forwarding e-mail, so I can perhaps satisfy my curiosity by finding out the rest of the story.

REMINISCENCE OF THE WEEK: In my freshman year in college I drove a very used Plymouth Fury, which looked almost like an ancient, faded blue monster compared with the small Japanese cars that had become popular after oil prices had surged. On one of the first warm days of spring, during the height of the evening weekday rush hour, I became impatient as I had to wait three times for a traffic light to change before finally being able to make a left onto the main road. I screeched my wheels and "burned rubber" as I turned the corner, so even though my speed did not approach the posted limit, a policeman looked dimly upon my driving manner, and flashed his lights as he approached from behind. Even if I had wanted to pull to the side of the road, there was no way to physically do so, as I was already in the rightmost lane. Meanwhile, the traffic cop was four or five cars behind me as all of us moved less than ten miles per hour on a very crowded Charles Street heading downtown. As I signaled for and made a right turn onto University Parkway, the policeman had a bright idea and took a shortcut through the driveway of the corner apartment building in order to catch up to me more quickly. At that point, the traffic became even more intense, so we were going only four or five miles per hour, and I noticed that an amazing event had occurred--the cop was actually four or five cars ahead of me, instead of behind me. Not eager to keep pace, I slowed down to maybe two or three miles per hour, and the cop noticed my maneuver, so he slowed down to match my snail's pace. After another minute, I was almost not moving at all, and he eventually stopped, so I did also. I thought that he would simply get out of his car and walk back on the sidewalk to give me a ticket--something he probably wished later that he had considered--but instead, we remained in a frozen stalemate for another few minutes. Finally, the policeman himself burned rubber and surged across to the opposite side using a short break in the median strip to head the opposite way in an attempt to catch me from the other direction. That was a hopeless idea, however, as the traffic was simply too heavy for even his flashing sirens to have any effect. It was a simple matter for me to keep driving slowly forward as, surrounded by dozens of cars, I was soon unreachable a few blocks away. I kept looking in my rear view mirror for the next several blocks, and still looked even after I had driven a few miles on the rapidly moving Jones Falls Expressway, just in case, but nothing ever happened. I guess the moral is that even the best shortcut has its pitfalls.

REMINISCENCE OF THE WEEK: In January 1987 I had an interview with a company that had offices in both Manhattan and Staten Island. I performed well at the Manhattan meeting, so all that remained to be hired was a brief visit to the Staten Island office. In order to get there, I had to take a subway to downtown Manhattan, board the Staten Island ferry, and finally connect to a bus for a half-hour ride, a total of nearly two hours. After all this traveling, and being a full hour early for the scheduled interview, I noticed some tall cattails growing on the side of the road that were just the right size and color to go nicely into a large basket at my girlfriend's place. Since the temperature was several degrees below freezing, I didn't notice while I was picking them that they have tiny but definitely prickly thorns. My hands began to bleed, but I was oblivious to this, and continued to the site of the interview. I found a place to unobtrusively hide the cattails, and foolishly without going into a bathroom, I headed toward the receptionist. She noticed my hands, which by now were turning a bright crimson, but she didn't say anything about them directly, merely asking me if I was feeling O.K. I responded that I never felt better. I was directed without further ado to the head of the department where I would be working, and that person and myself noticed simultaneously that I looked like Frankenstein after a particularly gory feast. I couldn't even figure out for a moment what had happened, until I realized what should have been obvious. After the interview, I had to carry the cattails onto the bus heading back to the ferry; if you have never tried to fit several pointy nine-foot objects onto a crowded public vehicle, it can be quite a challenge. On the ferry itself, the main difficulty was preventing a strong wind from carrying them into the water. An elderly woman noticed my unusual baggage and made an excellent sketch of my holding them, which cost me several bucks, but was definitely worth it. Then I had to get on a subway and avoid poking anyone's eyes out, and finally walked to my girlfriend's place. Epilogue: She hated the cattails, and I didn't get the job. (Post-epilogue: Two months later, my girlfriend dumped me, but let me keep the cattails. I think I was left with the better end of the bargain.) Moral: If you depart from the usual path, expect more thorns than praise.

REMINISCENCE OF THE WEEK: When I was a kid, once or twice each year, our family would visit my father's father, who lived in a housing project in the Pelham Parkway neighborhood in the Bronx. We also went to see my great uncle, who lived in the same housing project a couple of blocks away. My great uncle loved to tell jokes and do magic tricks, and to talk about the subway; both he and my grandfather worked on the same subway train line, the "Brighton line", from the 1920s through the late 1960s. My grandfather passed away in 1975, but I still visit my great uncle, who will be 100 years old next month. Postscript: my great uncle died last month, two weeks after reaching his 100th birthday.

REMINISCENCE OF THE WEEK: At the Walden School music composition summer camp in 1974, discussed below in another reminiscence, one person was chosen by the faculty to serve as the "secret inspector". This person had the task of carefully examining all dorm rooms to make sure that all beds were made properly, all trash cleaned up, and other standards generally enforced, and to report any violations to the camp staff. It was necessary that the identity of the secret inspector not be revealed, so that we would not attempt to bribe this person, or to otherwise act in a way which would adversely affect his or her duties. Unknown to the rest of us, one of the female campers surprised the secret inspector when she returned unexpectedly to her room one morning and found him there, but she was sworn to secrecy. On the final day of camp, we had to guess who the person was. About three quarters of us, including myself--especially myself--thought that it was Jeff Cohen, since he was a couple of years older than most of us and had known connections among the faculty. Jeff has since gone on to considerable fame as a classical pianist living in Paris. But a contrarian approach would have worked better, as the secret inspector turned out to be none other than my own roommate.

REMINISCENCE OF THE WEEK: Two years ago, I was at work in downtown New York City when the person sitting in the cubicle next to me said his chair was shaking. I thought he was joking, until about a half minute later when my own chair began to rattle and then the apparently solid floor below us began to vibrate. Soon, we could hear books and glasses crashing down all around us. A few people started yelling, and shortly thereafter an announcement was made on the fire system to "please evacuate the building through the stairs". When we gathered on the sidewalk below, a few hundred of us could talk about nothing else but what we figured was the first serious earthquake in Manhattan in history, until we noticed that only people from our building were clustered outside. Everyone else from neighboring offices and down the street was working at their desks as usual, apparently unconcerned. Puzzled, we couldn't figure out what was going on, until a fire department investigation determined the cause of the tremors. An aerobics class of fifty people was entirely responsible for creating resonance and massive vibrations that had affected a dozen floors of a major skyscraper.

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.