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Updated @ 11:30 a.m. EST, Thursday, December 8, 2005.


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SAYING OF THE WEEK: The essence of contrarianism: When everyone you know is bullish, you know they're all full of bull****. --Steven Jon Kaplan

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WELCOME! This is True Contrarian by the same yours truly. I will attempt to create an entertaining, readable viewpoint a few times per month. Each issue will feature my intermediate-term financial outlook, my long-term financial outlook, and a personal reminiscence from my journal. Please write to let me know how you like my new design. Notice that each paragraph now has a lead-in heading.

Recent comments are in boldface. Using an excellent suggestion of Mr. Dmitry Bouzolin, I am labeling each paragraph with the date on which it was written, beginning with my last update.

SELL ALL EQUITIES, INCLUDING GOLD MINING SHARES (December 8, 2005): Liquidity in the financial markets has sharply increased in recent weeks, but a combination of factors is set to significantly reverse this trend. The huge amount of mortgage borrowing in the U.S. is finally slowing as the housing bubble begins to burst; since this borrowing has been the primary driver of consumer spending for the past three years, the inevitable result will be a recession. This is epitomized by the Treasury yield curve, which is a month or two, at most, away from inverting (the 2-year Treasury yield higher than the 10-year Treasury yield). An inverted yield curve has always led to a recession over the subsequent half year. Many measures of investor bearishness are at or near all-time lows, while bullishness toward the stock market is at levels seen at prior major peaks, and bullishness toward gold reached 89% on the Market Vane survey done on November 29, and is likely even higher today. Such high bullishness has only been seen a few times in the past 35 years, and has always led to a substantial pullback over the subsequent several months. Almost all sector groups have become extremely extended to the upside, with gold mining shares no exception. Evidence of this overextension can be seen in all of the following: a sharp increase in insider selling; frequent intraday highs near 10:30 a.m., as is typical of a market set to move lower; a persistent and pronounced increase in brokerage upgrades, which have been especially prevalent in the gold mining sector (after HUI has risen almost 60% since May!), but in the overall market as well; a negative response to good news, such as Texas Instruments moving lower after initially rising on supposedly better than expected earnings; a huge percentage of equities far above their 200-day moving averages, and technically very overbought; and a tendency for equities, and gold mining shares in particular, to peak in early December, as they did exactly four years ago. It is currently unpopular to be bearish on the stock market, and extraordinarily unpopular to be bearish on gold mining shares, but that is all the more reason that it is the only correct course of action.

GOLD SETS NEW HIGHS, WHILE GOLD MINING SHARES CONTINUE TO STRUGGLE (December 3, 2005): On Friday, December 2, 2005, at 3:55:41 a.m. EST, the active February (2006) Comex gold contract traded at 510.8, equivalent to a spot price of $505.50. This is the highest valuation for gold since the April (1983) gold contract traded at 512.1 on February 22, 1983, equivalent to a spot price of $507.00. The post-1981 high was at 522.6 for April (1983) gold, reached on February 15, 1983, and was equivalent to a spot price of $516.50. As gold has continued to set new 23-year highs, HUI, the Amex Goldbugs Index of Unhedged Gold Mining Shares, has not even been able to set a new 2-year high. HUI is, in fact, continuing to form a bearish pattern of lower highs since it set a recent peak of 256.73 at 10:37:44 a.m. on Monday, November 28, 2005. The zenith for HUI two years ago was 258.60 on December 2, 2003. Its current level is 248.04, which is actually below its September 30, 2005 high of 250.33. Since gold was delinked from the U.S. dollar by President Nixon in the early 1970s, whenever gold has extended a rally, but gold mining shares have refused to participate, there was always a subsequent pullback in both gold and its shares of at least several weeks, without exception. My guess is that HUI will bottom in the low 200s and gold itself will fall below $450 an ounce by the spring of 2006. Insider selling persists in gold mining shares, while the intraday trading pattern continues to show gold mining shares displaying most of their strength in the first hour, which is historically bearish for any equity sector. Many gold mining shares, such as Newmont Mining (NEM), have not even been able to exceed their highs of late September, and even those which have been able to set new annual highs have not seen any follow-through on subsequent trading days. The HUI/GLD spread, which is equal to GLD times 10 minus HUI, has moved above 255, near the top end of its multi-year range, strongly suggesting that even gold itself is nearing the end of its upward move. Seasonally, gold and its shares have peaked at this time of year in 2002, 2003, and 2004, so it looks as though we will get four in a row as 2005 continues this pattern.

WHY DID GOLD RALLY SO STRONGLY IN 2005? (December 3, 2005): Many commentators in the financial media have attempted to explain why gold has staged such a strong upward move in 2005. Usually, these explanations are along the lines of a hedge against financial uncertainty, or a search for a safe haven, but worldwide equity markets are strong and investor uncertainty or fear is among the lowest in years. Other explanations talk about the potential for higher inflation, but inflationary indicators have remained well contained. Some explanations deal with the herd effect: as people see gold moving higher, they want to buy it, no matter what the reason. That may be a part of the story, but I do not think it is the primary explanation. To me, the reason for gold's recent strong move higher is simple. Throughout most of the 1980s and 1990s, and in fact until 2001, the U.S. dollar was generally one of the world's strongest currencies, with high real interest rates after subtracting inflation, so international money market investors managing trillions in conservatively managed funds simply kept their assets in U.S. time deposits. After the U.S. dollar began to move lower in 2001, these investors decided as a group that, because of the Bush economic policies and other important worldwide economic trends, the greenback was no longer a reliable store of value, so they switched en masse from U.S. dollar time deposits to European time deposits, especially the euro and Swiss franc. These European currencies moved steadily and reliably higher for 3-1/2 years until the end of 2004, so these conservative investors enjoyed a rising currency along with a modest amount of interest. In 2005, however, the euro suddenly began to trend persistently lower. These investors did not want to return to the U.S. dollar, fully aware of the huge budget and trade deficits in the U.S. However, they could not keep their money in a falling currency, as they would lose clients. The yen, Swiss franc, and even the British pound also lost ground against the U.S. dollar; only gold was holding its own. So, eventually, these investors felt they had no choice but to flood into gold, the yellow metal being the only currency or currency proxy that was rising in value. Recently, the euro and other world currencies have begun to stabilize; as they inevitably begin to move higher agains the U.S. dollar, these international asset allocators will likely pour out of gold, which has become dangerously overvalued in the short run for such conservative managers, and back into their favorite European time deposits, which are paying their highest interest rates in several years. An interesting irony is that most financial commentators think that gold performs best when the U.S. dollar is falling, whereas it can be exactly the opposite. When the U.S. dollar is rising, gold will sometimes stage its most spectacular gains, because it is then the only winning fully liquid currency equivalent.

GOLD EXCEEDS $500; MARKET VANE SHOWS 88% BULLISH (November 28, 2005): Just when you thought life was getting boring, gold moved above $500 an ounce several hours ago, while gold mining shares continue to struggle. HUI, the Amex Goldbugs Index of Unhedged Gold Mining Shares, is almost exactly at the same price as it was two years ago, even though gold has gained almost $100 an ounce since then. Market Vane, among the most respected of financial surveys, showed 88% of investors bullish on gold as of their most recent official weekly survey of Tuesday, November 22. The current number is probably close to 90%. A reading of 88% is among the very highest ever recorded for the yellow metal during the lifetime of this survey, and therefore indicates that the recent upward action likely represents the final stage of gold's surge, rather than a prelude to additional gains. This is confirmed by the refusal of gold mining shares to set new 2-year highs, at least so far. Gold mining shares are more frequently peaking near 10:30 a.m., which is historically bearish; today's high occurred at 10:37:44 a.m., and saw HUI reach 256.73, its highest level since January 2004. Insider selling and institutional block selling in gold mining shares have been steadily increasing. In December 1987, the last time that gold was above $500 an ounce, it retreated in less than half a year to below $450, which I suspect will occur this time as well. Gold peaked in late November or early December in each of the past three calendar years, meaning 2002, 2003, and 2004, so like Lance Armstrong, a repeat performance appears the most probable scenario for 2005. The most important indicator will be how HUI behaves over the next several trading days. If it continues to struggle, as I expect, then gold itself will likely suffer a correction of several months. HUI will probably retreat close to its important 61.8% Fibonacci retracement level, which is almost exactly 200.

MULTI-YEAR EXTREMES OF MANY KINDS INCREASE IN THE FINANCIAL MARKETS (November 27, 2005): In the past few weeks, there have been an unusually high number of extremes in the financial markets, indicating that many asset classes have recently made, or are about to make, major changes of direction that should create new trends which will persist for several months or more. Sentiment toward long-dated U.S. Treasuries was close to an all-time bearish extreme three weeks ago; since then, Treasuries completed an important double bottom on November 4, and have been rallying steadily ever since. The U.S. dollar index had an all-time record commercial net short position as of November 15; the following morning, the U.S. dollar completed a two-year high and appears to be set for a decline that will likely last for several months, and perhaps approach the historic lows of December 2004. Equity mutual funds currently hold only a 3.8% cash position, even lower than the previous record of 4.0% in September 2000. Some measures of investor bearishness are close to an all-time record low, while others are at an all-time record low, indicating virtually no fear of a significant stock market decline. Thus, U.S. equities are set for what will likely be a substantial and sustained pullback which will likely continue until the autumn of 2006. Sentiment toward precious metals, including gold and gold mining shares, is close to its highest levels since the early 1970s. Short-term strength is still possible, but over the next several months, gold mining shares will likely decline an average of 20% from current levels. In real estate, there is all-time record positive sentiment that one's house is the best of all possible investments, even as prices have been declining modestly in the U.S. since June. The collapse of the U.S. real estate market may be the only financial event of the coming decade which is long remembered by almost everyone, just as the stock market collapse of 1929-1932 is virtually the only financial event of that era which is known by the average person today. With so many extremes available, an intelligent contrarian will have established, and continue to build, a diversified position in all of these asset classes, fading the crowd in each case.

IF IT LOOKS LIKE A RECESSION, AND IT SMELLS LIKE A RECESSION, AND IT ACTS LIKE A RECESSION, THEN IT IS PROBABLY A RECESSION (November 20, 2005): There are increasing signs that the U.S. economy is heading for a recession in 2006. The most reliable historic indicator of an upcoming U.S. recession is an inverted U.S. Treasury curve. This is defined as a situation in which the yield of the 2-year U.S. Treasury exceeds the yield of the 10-year U.S. Treasury. At the present time, the 10-year Treasury has an interest rate which is 0.09% higher than the 2-year Treasury, so the curve is not yet inverted. However, it is close to its lowest spread since February 2001, several months before the most recent recession began (in the late summer of 2001). Given that long-dated U.S. Treasuries such as the 10-year are likely to continue to see higher prices, and thus lower yields, while the 2-year is likely to remain stable or rise as the Fed raises short-term interest rates, we will likely have a true inversion within a few months, if not sooner. Historically, an inverted Treasury curve is the single most reliable indicator of a recession approaching within roughly a half year. Thus, if the curve becomes inverted in December 2005, that would indicate that a recession will arrive in the late spring or early summer of 2006. Anothe reliable indicator of an approaching recession is that financial commentators, observing the Treasury curve about to invert, are already coming up with explanations as to why it's different this time. As this recession approaches, the U.S. stock market is likely to begin a decline which should accelerate more sharply. Supporting evidence includes the 4-year stock market cycle, in which U.S. equities make a deep low every four years; the next such nadir is scheduled for the autumn of 2006. Cash levels in U.S. equity mutual funds currently average 3.8%, their lowest level in history, even below their previous all-time record from March 2000. There is also increasing evidence that the housing bubble is beginning to burst in the U.S., including record inventory in many areas, combined with a scheduled enormous amount of new housing that will become available in 2006 and 2007. This is confirmed by the very poor performance of homebuilders, which are the weakest equity sector in the past four months.

WHY I CHOOSE NOT TO PARTY HEARTY WITH GOLD (November 20, 2005): A number of readers have written to ask why I don't "join the gold party" or "swing along" with the gold rally. While I am delighted that some of my readers are so enthusiastic about the holiday season, if perhaps drinking a bit too much egg nog, I try to maintain a sober approach toward investing, if not always toward life itself. When I see that gold continues to set new 18-year highs, while gold mining shares as measured by indices such as HUI cannot even set new 2-month highs, I naturally ask myself why such a negative divergence should exist, and what it implies about precious metals. One interesting observation is that on December 2, 2003, almost exactly two years ago, gold hit $406 while HUI made an intraday peak at 258.60. A month later, on January 6, 2004, gold had risen a few percent, but the high for HUI was 258.02, marking a lower high, and beginning the negative pattern in gold mining shares which has continued ever since. Gold is now $80 an ounce higher than its was two years ago, but gold mining shares are still struggling to maintain those levels. One reason for gold mining shares' recent underperformance is that bullish sentiment has become so pronounced toward gold, that there remain few investors who have not already participated in the rally. This was definitely not the case in the spring of 2005, when even some diehard goldbugs were sitting on the sidelines with substantial cash, waiting for lower or at least stable prices. Now, everyone assumes that gold is going to hit $500 an ounce, and that such an event will automatically cause some kind of super-positive reaction in gold mining shares, so practically everyone who is interested in precious metals has already committed their capital in anticipation of this event. With such high bullish sentiment, the risk/reward ratio is insufficiently favorable for participating at this time. Insider selling is also occurring in gold mining shares. Historically, gold mining shares almost always make either an important high or an important low from mid November through early December. In In both 2000 and 2001, it marked a great buying opportunity in a pessimistic environment; in 2003 and 2004, it marked the top, and is apparently making this seasonal peak for the third consecutive year. After the previous two such highs, gold mining shares made an important bottom the following May (in both 2004 and 2005). That may also happen in 2006, although I suspect that we will get an earlier bottom, in February or March, likely very close to the 61.8% Fibonacci retracement near 200 for HUI.

QUICK MARKET SUMMARY (November 20, 2005): U.S. long-dated Treasuries apparently completed an important double bottom in the afternoon of November 4, and are in the early stages of a rally which will likely continue through March, bringing TLT above 95. The U.S. dollar may have completed a top in the early morning of November 16, and will likely decline for at least the next half year, and possibly as long as an entire year with little interruption. The greenback may complete a double bottom in 2006 with its December 2004 lows. The traders' commitments for the U.S. dollar index just showed an all-time record commercial net short position. BEGBX (American Century International Bond Fund) therefore remains an excellent fund for purchase at this time. U.S. equities appear close to an important peak, a classic head fake in preparation for an extended decline as the stock market completes yet another 4-year low in the autumn of 2006. The Nasdaq will likely reach its 61.8% Fibonacci retracment level near 1515 in the summer of 2006, and some lower level by the autumn. Gold mining shares are close to completing an important seasonal high, and will likely also decline to their 61.8% Fibonacci retracement levels by late winter or early spring, with the HUI making its 2006 low near 200.

A SOBER LOOK AT THE FINANCIAL MARKETS AND INVESTING (November 13, 2005): Periodically, it is useful to take an overview of the financial markets, and to understand what characterizes an ideal investment. Periodically, the financial markets make a major extreme in one asset class or another, due to a combination of factors, some fundamental, but mostly psychological. By taking advantage of such extremes, which are relatively rare, one can profit from a situation in which the downside risk is limited, while the upside potential is substantial. There are always other opportunities available when assets are nowhere close to extremes, but are in a position for purely technical reasons to make a moderate move in one direction or the other. My philosophy has always been to seize the opportunity presented by any asset class which is at an extreme, but to ignore the possibilities of non-extreme assets which are prepared to make technical moves. Therefore, I do substantially less trading than many other financial market participants, since I would rather select only a few excellent investment opportunities per year, than to chase after several dozen which are merely above average.

One of the extremes that was recently seen in the financial markets was a depressed valuation in the prices of government bonds of all first-world countries. In the U.S., for instance, the prices of long-dated U.S. Treasuries on Friday, November 4 were slightly above their important lows of March 2005, thus completing a very bullish double bottom, while accompanied by almost universally bearish media commentary on Treasuries, and brokerage analysts tripping over each other to issue revised forecasts of even higher yields for 10-year and 30-year Treasury bonds. The traders' commitments for the 30-year Treasury showed among the greatest commercial net long positions of the past decade. Thus, everything which mattered for this market was lined up simultaneously to create higher prices. That is exactly the kind of investment situation that I like to seize, and which I believe that most readers will benefit from, because the likelihood of profit with so many positive factors is very great, while the possibility of loss is minimized. Treasuries also offer a wide range of volatility options. Those who are conservative can purchase Treasuries directly or through Treasury funds; those who are more aggressive can purchase zero-coupon Treasuries, which move 25% for each 1% change in the interest rate; while the most aggressive readers can trade Treasury futures or their options (not something which I personally recommend), which are very liquid, to obtain a move of several hundred percent for every 1% change in the interest rate.

At this time, a similar opportunity is presenting itself in the U.S. equity market, as well as in the U.S. dollar. One difference is that, unlike Treasuries, these markets have likely not yet completed their change of direction, and may therefore still have some period of time before they make their inevitable move. Some readers are very comfortable with establishing positions early, knowing that when a market turn does occur, it is often very violent and wipes out several weeks of prior progress in the opposite direction. It is instructive to observe, for instance, how rapidly Treasuries have been rallying in recent days, after having declined pretty steadily for several months. Other readers prefer to establish positions only after a market has clearly turned, which is why many readers did not purchase HUI until it had already rebounded from its spring 2005 low of 165.71 to some level above 200. Personally, I always prefer to be early rather than late, as the best opportunities of either panic or euphoria almost always occur before any market has turned, rather than after. Nonetheless, readers should tailor their strategy to fit their personality; thus, if they believe they may feel so uncomfortable about having a position move against them in the short run that they may be tempted to cover such a position, then they should accept the possible loss of some percentage in order to establish the position after it has turned.

If one considers U.S. equities at this juncture, it is clear that investor sentiment has made one of its sharpest short-term changes ever recorded, by moving from a position of moderate bearishness in mid October, to one of very high bullishness at this time, less than one month later. Volatility indices have confirmed this move by collapsing close to major support levels, while other measures of market complacency are at 20-year highs, showing an unusual historic extreme in the lack of fear. There have been several occasions in the past when investors were more bullish on U.S. equities, but virtually none in which investors were less worried about a sharp pullback. The U.S. equity market is also begnning to show increasing negative divergences, such as the number of new lows remaining high relative to the overall behavior of the indices. Insider selling has also risen sharply just in the past several trading days. Sometimes readers will write to ask whether this means that the market "can't go higher". Of course it does not imply such a conclusion, as the market can always move in either direction for any given period of time. However, it does mean that there is an increasing body of evidence that argues for lower prices. Given the fact that U.S. equities have made a deep four-year low for several decades, and the next such low is scheduled for the autumn of 2006, it is likely that the next eleven or twelve months should be very negative for U.S. equities. It should also be considered that, as consumer spending constitutes more than two-thirds of the economy, and most of this spending has been fueled in the past several years by a fivefold surge in total mortgage borrowing, that any modest decline in housing prices or in tighter mortgage standards, or both, will necessarily lead to a sharp contraction in consumer spending, and thus to a potentially large decline in U.S. equities.

A similar argument can be made for the U.S. dollar. The U.S. dollar index is only slightly below its high of May 2004, while some currencies are near two-year lows. At the same time, the traders' commitments for the U.S. dollar index are at an all-time bearish extreme, while media coverage and investor sentiment toward the greenback has reversed from where it was at the end of 2004. As with U.S. equities, it is still possible that there could be a short-term rise in the U.S. dollar, but the overwhelming body of evidence argues forcefully for a falling greenback. The huge U.S. budget and trade deficits have not been improving; in fact, they are getting worse. So you have fundamental factors supporting the psychological situation, creating the setup for another ideal trade.

The precious metals markets present a mixed bag at this time. On the negative side, Market Vane registered 84% bulls on gold on October 11, while the lowest reading recorded since then was 77%, when gold was at $455. Historically, buying into that kind of excitement has not produced particularly rewarding returns, for the simple reason that most investors who are interested in this sector have already committed the majority of their capital to it. Media coverage of precious metals has also been heavily positive in recent months, thus reaching most potential outside participants. Of course, if gold were to reach the round number of $500 an ounce, this might generate enough media coverage to entice the truly uninformed investor, the kind who may have bought the Nasdaq when it went above 5000. Nonetheless, although one can make a short-term technical case for buying precious metals or their shares, one cannot make a compelling case in which all of the key fundamental and psychological factors are lining up simultaneously, as they did this past spring, or in the spring of both 2004 and 2003. The traders' commmitments, above 160 thousand net short at recent lows, are hardly indicative of substantial upside. This is therefore not the kind of investment that I am interested in participating in, or recommending to my readers. Whatever might happen with gold or its shares in the short run, there is no compelling reason to buy gold mining shares at a level averaging more than 40% above their valuations of a half year ago. It will probably be the case that most gold mining shares will be at current price levels several months from now, after having experienced volatility in both directions. Should a compelling extreme on either side present itself during that time, of course it will be worthwhile to seize it. Otherwise, given the fact that there are so many other market extremes currently available, as detailed above, it seems foolish to chase a mediocre opportunity in this sector.

CONTINUE TO PURCHASE GOVERNMENT BONDS OF ALL FIRST-WORLD COUNTRIES (November 7, 2005): Government bonds are out of favor around the world. This is due to many factors, but the most important is sentiment: the more they decline, the more they are unloved. From a fundamental point of view, it is very likely that there will be a worldwide recession beginning in 2006, which will reduce demand for equities, and increase demand for the safest fixed-income securities, especially those issued by the most well-established government entities which are least likely to miss an income payment or have any threat to principal repayment. From a technical point of view, one need only look at a chart of TLT, which looks almost exactly like a chart of HUI in May 2005, completing a very bullish double bottom. In this case, the previous low in U.S. long-dated Treasuries was in March 2005. The traders' commitments for the 30-year U.S. Treasury bond show it to be among its highest commercial net long positions of the past several years. Since the U.S. Treasury market is five times as great in dollar terms as the U.S. equities market, as Treasuries rally, they will slowly but steadily drain money from equities and almost all other investment sectors. My favorite choices include the exchange-traded fund TLT, as well as the mutual fund BEGBX, which invests in government bonds of countries such as England, Japan, France, and Germany. This latter fund, managed by American Century, will also gain from the inevitable decline in the U.S. dollar. The U.S. dollar index has the worst traders' commitments since this index began trading. It is interesting to observe that when the U.S. dollar was bottoming in December 2004, I got flooded with e-mails telling me why the dollar would continue lower; now, I get quite a few e-mails telling me why the dollar will continue higher. (Not quite as many this time; it's likely that many of my readers maintain a strong anti-dollar bias no matter what the situation. Given the greenback's history in the past decade, or even in the past century, this is an understandable and justifiable bias.)

GOLD MINING SHARES, AT LONG LAST, SHOW SOME POSITIVE DIVERGENCES (November 1, 2005): As predicted in Sunday's October 30 update, gold and silver have begun a sharp pullback, as evidenced by the fact that last week's Market Vane showed 83% of participants bullish toward gold, the third consecutive weekly reading of 82% or higher (the exact peak was 84% on October 11, when gold set an 18-year high of $477.20). Historically, readings of this extreme are usually followed by a decline of several weeks, to shake out late-arriving speculators enticed by the recent positive media coverage toward precious metals. GLD is an exchange-traded fund equivalent to exactly one tenth of one troy ounce of gold, while HUI is the Amex Goldbugs Index of Unhedged Gold Mining Shares. The HUI/GLD spread is equal to 10 times GLD minus HUI. This spread had been increasing since the middle of September, when it was 220, and moved slightly above 250 several times last week, but fell sharply yesterday and today, closing today at about 235. This is a classic positive divergence, demonstrating that by dropping 11% during October, gold mining shares were anticipating by one month the November drop in gold itself (and silver). The shares almost always lead the metal both higher and lower. One cannot be sure exactly how low gold will go before it reaches its next low, or when that will be, but a reasonable guess would be that gold will decline to perhaps $433 by early December. If HUI reaches its cheapest level when gold is at, say, $438 (since HUI will likely make its low a couple of weeks ahead of gold tiself), and the HUI/GLD spread at that time is 227 (just a guess), that would put HUI at 211. In any event, HUI is almost certain to make a low above its August 30 nadir of 198.78, to keep intact the bullish pattern of higher lows that has prevailed for five years. Given the sharply contracting HUI/GLD spread, I covered half of my short positions in North American gold mining shares, while maintaining all of my short position in GLD and most of my short positions in South African gold mining shares (see asset allocation halfway down the web site). Usually, South African gold mining shares peak and bottom last, coincident with or slightly ahead of gold itself, while North American shares bottom a few weeks earlier.

NO SURPRISE FROM THE FED MEANS A DECLINING STOCK MARKET (November 1, 2005): As has been the case since June 30, 2004, the U.S. Federal Reserve raised interest rates another quarter point, for the twelfth consecutive time, while retaining language about a continued "measured pace" of such rate increases. My personal belief is that Greenspan will raise rates at each of his two final meetings, thus putting the Federal funds rate at 4.50% by the end of January 2006. By the time that the new Fed chief Ben Bernanke gets to preside over his first decision in March 2006, the U.S. economy will be showing enough signs of a potential recession, coupled with evidence of declining inflation, that will induce him to keep rates unchanged. Within a few months thereafter, evidence of a true recession will force Bernanke to actually begin cutting rates. Therefore, it might not be until 2007 or even 2008 that Bernanke finally gets his opportunity to raise interest rates.

GOLD AND SILVER ARE SET FOR A BRIEF, SHARP PULLBACK (October 30, 2005): HUI is the Amex Goldbugs Index of Unhedged Gold Mining Shares. GLD is an exchange-traded fund equal to exactly one tenth of one troy ounce of gold bullion. The HUI/GLD spread is equal to 10 times GLD minus HUI. This spread, which is the single most useful forecaster of trends in precious metals, was almost exactly 220 as recently as the middle of September, but this week moved slightly above 250 on several occasions before closing at exactly 248, as GLD ended the week at 47.22 (implying spot gold at $472.20) while HUI closed at 224.20. This spread is near the upper end of its historic range, implying that either gold mining shares are set for a sharp increase, or else gold is set for a sharp pullback (or both, meeting somewhere in the middle). In order to determine which end is likely to make the bigger move, it is necessary to look at other indicators in precious metals. Market Vane, a reliable survey of futures traders which has been around for many years, showed 84% of participants bullish on gold at gold's peak of $477.20 on Tuesday, October 11, 2005. Since then, the number has dipped slightly, but remains above 80%. Historically, whenever a bullish reading tops above 80%, it takes several weeks before gold is capable of making a bottom, since late-arriving speculators into such high optimism, especially buyers of short-term call options, are almost always "punished" before the rally can continue. The official Commodity Futures Trading Commission's traders' commitments, a tally of which participants are doing what with gold futures, showed commercial insiders net short over 200 thousand contracts at gold's peak on October 11, and only modest short covering since then. Typically, at a low in a gold bull market, one would expect to see commercials net short only 100 or 110 thousand contracts. Finally, if one observes the striking divergence between gold mining shares and gold itself, one discovers a drop of more than 10% in HUI since it peaked at 250.33 on September 30, whereas gold itself is almost exactly flat over the same period of time. Meanwhile, media coverage of precious metals, which was rather neutral or even somewhat negative as recently as late August, has turned decidedly positive, with significantly more frequent stories, since gold's September rally. An environment of positive media feedback, combined with bullish sentiment above 80%, means that those who have been considering buying gold have now had plenty of opportunity, enticement, and time to do so, as well as an army of forecasters telling them that if they wait too long, gold will be above $500 or even $600 and they will have "missed out on the party". Thus, there is little cash remaining with gold-eager investors to push the price higher. This is the classic setup for a sharp, short-term pullback in the gold price; in any bull market, patient long-term investors continue to profit from a reliable pattern of higher lows and higher highs, while excited short-term options speculators repeatedly lose money by trying to make a killing on all potential upside breakouts. Since the most recent low for HUI was 198.78 on August 30, with gold itself forming a nadir at $428 the same day, expect the upcoming low to be close to those numbers, thus completing a long-term very bullish head-and-shoulders bottom for 2005 as a whole. Historically, a low for gold mining shares is most often seen very close to the American Thanksgiving, which falls this year on November 24, 2005, while gold itself is most likely to reach its cheapest price perhaps two or three weeks later, in the first half of December.

BUY U.S. TREASURIES (October 25, 2005): The exchange-traded synthetic fund TLT, a synthetic 25-year U.S. Treasury, fell below 90 dollars per share again today. This fund is a compelling buy whenever it is below 90, as are most funds of long-dated Treasuries and municipal bonds. There are increasing signs of a slowdown in U.S. consumer spending, especially since the huge volume of mortgage borrowing is beginning to slow, which will depress long-term Treasury yields. As junk bonds' default rates sharply increase, bond investors will be increasingly shifting from corporates into Treasuries, adding to support for long-dated Treasuries such as TLT.

GOLD MINING SHARES COMPLETE A LEFT SHOULDER (October 23, 2005): HUI, the Amex Index of Unhedged Gold Mining Shares, likely completed an important left shoulder on Thursday, October 20, 2005, when it made a short-term low of 214.30. After a likely continued very short-term bounce, gold mining shares are almost certain to make another sharp move lower, until HUI is slightly above its August 30 low of 198.78. Gold mining shares often make an important low just before the American Thanksgiving holiday, which falls this year on November 24. Gold and silver bullion will likely make their own important lows two or three weeks later, which probably means early December. Since a left shoulder, after the plunge to the head, is often matched by a slightly higher corresponding right shoulder, expect HUI to make its final higher low near 215 or 220 in either December 2005 or January 2006, before staging a very sharp upward move in the first half of 2006.

WHY GOLD MINING SHARES HAVE NOT YET BOTTOMED (October 23, 2005): There are several reasons that I am convinced gold mining shares are likely to decline until HUI is close to 200: 1) When gold peaked on October 11 at $477.20, the respected Market Vane survey registered that 84% of traders were bullish on gold. Any historic level above 80% has almost always been followed by a significant decline in the gold price. However, at its lowest recent point on October 20 at $458.30, gold's total decline from its peak was only $18.90, or almost exactly 4%. It is not reasonable that a mere 4% decline could have caused a sufficient drop in investor bullishness to qualify as a support level. 2) I have received a continued high volume of e-mail from readers eager to believe that gold mining shares have bottomed, or else telling me outright that they have bottomed, and that my outlook is too bearish. In the past, such a high volume of such hopeful e-mails indicates that the market has not produced enough fear or resignation to qualify for a low. 3) GLD is an exchange-traded fund equal to exactly one-tenth of a troy ounce of gold. If you take GLD times 10, and subtract HUI, you have the important HUI/GLD spread. Whenever gold makes a true bottom, the HUI/GLD spread contracts sharply thereafter. Instead, this spread has continued to generally widen, and is currently equal to 465.30 - 221.90 or exactly 243.4. When HUI makes an important low, its subsequent rebound will surely see this spread plunge below 240, and probably below 230 (perhaps even below 220). 4) The traders' commitments for gold have shown commercials remaining net short approximately 200 thousand contracts. At a typical higher low in a bull market, this number should be close to 110 or 110 thousand, not 200 thousand. (At a true bottom, such as we had in May, this number is roughly 50 thousand, but a true bottom is not likely in the cards this autumn.) 5) The Nasdaq is still in its own downtrend which began on August 3. This downtrend will likely accelerate, especially given any bad news about housing prices. It will be difficult for any equity groups to move higher if the overall stock market is moving lower. 6) Long-term U.S. Treasuries, such as TLT, are beginning to rally from important lows, accompanied by very bullish traders' commitments. The U.S. Treasury market is five times as large as the U.S. equity market. Thus, when long-dated Treasuries are rallying, as they are likely to do for the next several weeks, they suck in so much investor money that it is very difficult for other asset classes, including commodities, equities, and gold mining shares, to also move in an upward direction. 7) When gold mining shares make an important low, one sees a repeated intraday pattern of HUI declining in the first hour of trading, when amateurs dominate the market, then rebounding thereafter. In the spring of 2005, for instance, HUI moved lower in the first hour more than 80% of the time. Throughout October, the most typical pattern has seen the greatest gains before 10:30 a.m. 8) When gold mining shares bottom, numerous large-block trades are seen at significant low points, indicating accumulation by insiders or institutions such as pension funds. In late August, most of the major gold producers experienced substantial block purchases. Few such large-block trades have occurred in October.

WHAT ABOUT PURCHASING OIL SHARES? (October 16, 2005): A number of readers have observed the sharp drop in oil share prices over the past few weeks, and are curious if they should buy at prices which are averaging about 20% below their recent peaks. My answer is a definite NO! Readers who participated in the sharp 3-year rally in gold mining shares from November 2000 through December 2003, and who did not sell their shares at that time, had to suffer through 17-1/2 months of a subsequent downtrend. That is because any sector group, once it becomes too popular, is burdened with an infusion of speculative "hot" money and a lot of just plain "dumb" money from those who always arrive too late at the party. This is even more true with oil shares today, after its recent 3-year runup, than it was with gold mining shares in December 2003, since the energy group has gotten an incredible saturation of positive media attention for many months. No matter where in the world you live, there are morons on your block who bought energy shares this past summer, and there is no way that these late-arriving, stupid, trend-chasing folks are going to profit. Therefore, the recent pullback is likely to be followed by at least one more year of a substantial downtrend in oil share prices. If you want to participate in this sector, be patient, be patient, and be patient, and wait until October 2006 at the earliest to buy these shares. Fundamentals aside, it is almost impossible for any sector group to outperform for four years consecutively. The fourth year is definitely not the charm.

WHAT ABOUT THE GOLD/OIL RATIO? (October 9, 2005): There has been a sharp increase in media attention to the gold/oil ratio, with the usual conclusion that since this ratio is much smaller than is usual historically, that the price of gold must necessarily rise to $600 an ounce or thereabouts. It is true that, in the financial markets, ratios which have maintained a narrow range for a long period of time, and which suddenly move outside of that range, usually eventually return to the previous narrow range. However, the specifics of the future relationship between the gold price and the price of oil are difficult to ascertain. It is likely that the oil price is currently close to its historic peak, adjusted for inflation, while the gold price is still in the middle of its multi-year recovery from a historic bottom five years ago. Going forward a full decade, therefore, gold is likely to outperform oil, as it continues to rebound, often sharply, whereas the oil price finds it more difficult to set new highs by more than modest percentages. If there is a worldwide recession, which in my opinion is increasingly likely, gold will probably be generally rising in price, while oil is generally falling (at least in euro terms). However, these price movements may well take a decade or more to be fully realized. Thus, the currently small gold/oil ratio probably does mean that gold will outperform oil, but only over the very long term; it has no implications for what will happen in the next month, or over any other reasonably short period of time. Anyone who tries to exploit this ratio by placing an actual trade is certain to be disappointed.

MORE AGGRESSIVELY SELL GOLD MINING SHARES (October 2, 2005): Even as gold bullion and gold share indices are setting new, important highs, negative divergences are sharply increasing in the sector, indicating that the top has likely been seen, and the next two months will experience a significant pullback. On Thursday, September 29, 2005, at 10:23 a.m. EDT, spot gold as measured by GLD touched $472.25, its highest level since it reached $474 on June 3, 1988. The peak for that multi-year cycle was $509 on December 14, 1987. Meanwhile, on Friday, September 30, 2005, at 9:38:28 a.m. Eastern time, HUI, the Amex Index of Unhedged Gold Mining Shares, touched 250.33, its highest level since it reached 251.00 on January 9, 2004. The peak for HUI for that multi-year cycle was the double top of 258.60 on December 2, 2003, followed by 258.02 on January 6, 2004. Thus, even with the new 17-year high in gold, gold mining shares have not even set new 2-year highs. More significantly, in the past week, in spite of new 52-week highs for gold and HUI, almost no individual gold mining shares set new 52-week highs. This is a classic negative divergence that almost always leads to a substantial decline over the subsequent several weeks. In addition, intraday trading is more and more frequently seeing gold mining shares demonstrate their greatest strength in the first hour (between 9:30 a.m. and 10:30 a.m. Eastern time), when amateurs constitute the highest percentage of trading volume. The HUI/GLD spread is contracting, which is constructive, but may be indicating that the U.S. dollar is set for a meaningful decline, rather than any positive implications for gold or its shares. The traders' commmitments and investor sentiment appear to indicate that gold, silver, and the U.S. dollar will all decline simultaneously over the next several weeks, which is relatively unusual. However, throughout the month of September 2005, gold and the U.S. dollar were generally rising together, so it should not be that surprising that they can fall together as well. Gold mining shares often make an important low shortly before the American Thanksgiving holiday, which falls this year on November 24, 2005. Since the previous low for HUI was 198.78 on August 30, 2005, and the pattern of higher lows for HUI is likely to remain intact, it is most probable that the November low will be in the low 200s, perhaps near 206.

CONTINUE TO SELL GOLD MINING SHARES AND OTHER COMMODITY EQUITIES, AS WELL AS EQUITIES IN GENERAL (September 28, 2005): Looking at a chart of HUI, the Amex Index of Unhedged Gold Mining Shares, it has a very bullish long-term series of higher lows dating back to November 2000, not to mention a rise of nearly 600% ($1 invested in gold mining shares at the absolute low in November 2000 would be worth roughly $7 today). However, since December 2003, HUI has been making a reliably bearish series of lower highs. This "triangle pattern" will eventually resolve itself as an upside breakout, probably in the first half of 2006. However, in the short run, the bearish pattern of lower highs will almost surely prevail, as gold mining shares therefore decline over the next several weeks. HUI has made three important lower highs just since Monday, September 19, with the behavior on Monday, September 26 especially bearish, since an attempt to break the previous week's peak was met by aggressive block-trade selling by institutions and insiders, as often happens before a sharp short-term decline in gold mining shares. In addition to the pattern of lower highs in HUI, the historic seasonality for gold mining shares almost always signals either a high or a low in November. Given the recent behavior of precious metals, November 2005 will most likely be a low. Since the long-term pattern of higher lows is intact, the November 2005 lows for most gold mining shares should be above their late August 2005 lows, while HUI completes a bottom in November above its August 30, 2005 nadir at 198.78, probably near 206. Many commodity shares, including oil and other energy producers, appear to be completing their own bearish topping patterns, as the entire group of commodity-producing equities should see marked weakness over the next two months. The financial media has evinced especially egregious ebullient commentary toward most commodity producers during the past two weeks, which is almost always acutely accurately coincident with a short-term peak. Meanwhile, as U.S. equity indices continue their gentle bear market which began on August 2, 2005, overall market breadth has been deteriorating significantly over the past several weeks, with almost no media attention to this fact. This is a classic precursor to an accelerated short-term decline in U.S. equities.

THE HUI/GLD SPREAD MAKES A DRAMATIC TURN HIGHER, TRIGGERING A SHORT-TERM SELL SIGNAL FOR PRECIOUS METALS AND THEIR SHARES (September 20, 2005): HUI is the Amex Goldbugs Index of Unhedged Gold Mining Shares, the most useful index of how gold mining shares are performing. It is updated frequently from 9:30 a.m. to 4:00 p.m. Eastern time like any other index, such as the Nasdaq Composite. GLD is an exchange-traded fund which is equal to exactly one-tenth of an ounce of spot gold, and is actively traded during the same hours. The HUI/GLD spread is equal to 10 times GLD minus HUI. In trading on Monday, September 19, 2005, in the first hour after the market opened in the U.S., the HUI/GLD spread continued to contract, as HUI rose nearly 7 points, while the price of gold was initially higher by less than 5 dollars an ounce. However, for the remainder of the trading day, this spread began to move progressively and dramatically higher, eventually expanding by more than 5% from its first-hour peak to its closing value. HUI itself made a very bearish pattern of successively lower highs throughout the trading day. Therefore, this was a short-term sell signal for gold mining shares. Investors who were closely tracking this spread should have already begun to either sell their gold mining shares, or sell covered calls against their positions, in anticipation of a period of weakness. Given historical precedent, in which precious metals and their shares often make either an important high or low in November, and given that it is likely to be a low in 2005, rather than a high (it was a high in November 2004), November 2005 is likely to signal the next higher low for HUI in the bullish series of higher lows that this index has experienced since May 16, 2005. Keep in mind that the long-term bull market in gold mining shares remains absolutely intact; this is only a short-term sell signal, not a major peak. Given that the most recent low for HUI was 198.78 on August 30 (less than three weeks ago!), and that HUI is making a reliable pattern of higher lows, my guess is that in November we will see another higher low for HUI within a few percent of 206, which would mark roughly a 13% additional decline for HUI over the next two months. As the old saying goes, your friends may buy gold for Christmas, but you should buy gold for Thanksgiving (the fourth Thursday of November in the U.S.; my apologies to Canadians who celebrate their own version on the second Monday of October). Far too many gold analysts, in many cases the same ones who were bearish on gold four months ago when it was below $420 an ounce, have suddenly "found religion" and turned bullish just in the past week, reaching almost a unanimous consensus that gold will soon reach $500 an ounce. Historically, this has been a reliable confirmation of a short-term peak in gold mining share prices.

GOLD FINALLY BEGINS A TRUE BULL MARKET (September 18, 2005): You're probably saying, wait a minute, gold has been rising for more than four years. Doesn't that count as a true bull market? Well, gold has increased sharply in value in U.S. dollar terms since April 2001 at an annualized pace of roughly 15% per year, but has made modest gains averaging only about 5% annually in terms of most other world currencies over the same period of time. Thus, gold has been useful for U.S. investors as a means of diversification, but for most investors living in England, France, Germany, Japan, and elsewhere, gold has only slightly outperformed ordinary time deposits located in those countries, with significantly greater volatility, and has therefore generated limited attention as a compelling worldwide investment alternative. In the past week, however, gold gained substantially in terms of all world currencies. In several instances with precious metals producers, share gains in the past three trading days alone exceeded the entire gain from the low of May 16 through this past Tuesday, September 13. This past Friday, September 16, 2005, gold reached an all-time high against the euro, a young currency, as well as at its highest point against the U.S. dollar since it reached $474 an ounce in June 1988. This has caused mining shares which had previously underperformed, especially South African shares, to make a sharp surge higher just in the past three trading days. On Friday, silver began finally to rally from its nearly fixed position of $7 per ounce, helping the shares of Hecla Mining (HL) and Coeur D'Alene (CDE) to be the second-best and fourth-best performing shares on the NYSE on Friday, gaining 13.6% and 9.2% respectively. Harmony Gold Mines of South Africa (HMY) rose 9.1%, while its somewhat larger "rival" GoldFields of South Africa (GFI) completed one of its greatest three-day surges in its history. Stillwater Mining (SWC), which produces mainly palladium, and Placer Dome (PDG), which produces silver in addition to gold, saw one-day gains of 6.7% and 6.6% respectively. More significantly, the HUI/GLD spread, equal to 10 times GLD minus HUI, continued to contract, signaling that the rally is not yet over for precious metals and their shares. As a rule, when this spread expands on three or more consecutive trading days, especially when the gold price is rising, it signals a short-term peak. Therefore, the peak for this cycle is still some indeterminate distance away; keep an eye on this spread to recognize when it has arrived. (September 20, 2005) Given the behavior of the HUI/GLD spread on Monday, September 19, 2005, in which this spread contracted in the first hour of trading, but then expanded progressively and dramatically by more than 5% for the remainder of the trading day, this was a short-term sell signal for gold mining shares. Below is a chart of this spread going back five years, followed by a chart of the spread over the past one year.

FIRST HURRICANE KATRINA CAUSES A FLOOD, THEN THE FEDERAL RESERVE CAUSES ITS OWN FLOOD, LEADING TO A FLOOD OF MORTGAGE LOANS THAT WILL NEVER BE REPAID (September 12, 2005): In its attempt to soften the economic blow of Hurricane Katrina, the Federal Reserve has suddenly flooded the financial system with liquidity. It is trying to grow the money supply at the same time that it is raising short-term interest rates, which has the effect of injecting the banking system with money, but making it increasingly difficult for banks to make loans. With more money than ever to lend, but with fewer commercial loans that can be arranged because of the highest short-term rates in a few years, the inevitable result will be a final orgy of lending in the only game still open for business, interest-rate-only negative-amortization mortgages, no matter what the likelihood of the borrower being able to make payments in the future. The current all-time record ratios of housing prices to rents--more than 2.5 times the normal ratio in many "hot" U.S. markets--means that the economic impossibility of making money as a landlord will force prices lower, even as millions of Americans have convinced themselves that real estate prices can only go higher. After they recover from the shock of the initial price decline, speculative buyers will almost completely disappear from the housing market, thus causing the housing price decline to rapidly accelerate. Housing prices in those U.S. cities which have seen prices double in the past four years are likely to see them drop by half in the next several years, thus leaving millions of buyers near the peak left holding the bag. More importantly, since most of these buyers will have purchased their property on nothing down, they will never be able to pay their growing mortgage balance, so those who lent to them will be forced to foreclose on assets that have lost half their value, with zero collateral to soften the blow. Thus, house buyers will suffer from negative equity or bankruptcy, but the lenders to those consumers will suffer just as badly, if not worse. Those who are skeptical that banks and mortgage companies could suffer so much from bad residential real estate loans might want to examine what happened in Japan from 1990-2002. The increasing likelihood of this scenario has been recognized by the currency and precious metals markets, as the U.S. dollar has rapidly given back half of its gains of the first half of 2005, while gold is only 2% below its 17-year peak of late 2004, and silver has begun to rebound sharply from its August 30 multi-month low of $6.63. U.S. equities have made a knee-jerk rebound in response to the lower greenback, but the eventual economic slowdown caused by falling housing prices will cause a sharp reversal lower in the stock market. Meanwhile, the Federal Reserve will probably raise interest rates for the eleventh consecutive time at its September 20 meeting, but if the economy slows substantially thereafter, as is likely, it may be the last Fed rate increase for a couple of years, if not longer.

KEEP AN EYE ON THE HUI/GLD SPREAD (September 12, 2005): Investors in gold mining shares have probably noticed that the HUI/GLD spread has been falling sharply in recent days. When this is occurring simultaneously with a gold price rise, it represents a positive divergence, indicating that a continued move higher for both gold and its shares should be expected. Should this spread stop declining, and begin to move progressively higher, it will signal that a short-term decline in both gold and its shares is closely approaching. It is also interesting to observe that, even though gold's traders' commitments show commercials heavily net short, they are covering their short position rapidly on each price drop, while adding to it less aggressively on each equivalent price rise. This is typical bull market behavior, indicating that the net neutral price for gold has been steadily rising. Silver, which showed its best traders' commitments in two years in the previous week (August 30), outperformed gold handily in the past week, and is likely to continue its outperformance until its traders' commitments no longer represent a compelling undervaluation.

THE REAL AFTERMATH OF HURRICANE KATRINA (September 5, 2005): The media has done an excellent job of portraying the enormous physical and psychological devastation of Hurricane Katrina. However, it has done a poor job in explaining both the short-term and long-term financial consequences of the hurricane, obsessing solely with the effect of high gasoline prices, which are virtually certain to decline given the all-time record high ratio of the price of unleaded gasoline to the price of crude oil. Already, the U.S. dollar has seen a sharp fall in value against almost all major world currencies since the hurricane, although the media has almost entirely ignored the greenback's collapse. Given the necessary increased Federal borrowing in order to deal with the aftermath of Hurricane Katrina, combined with increasing signs of a significant economic slowdown in the U.S., it is likely that the recent steady pattern of interest-rate increases by the Fed will soon come to an end. The Chicago Purchasing Managers' Index showed the greatest decline in new orders in history. The Fed will be unable to fight inflation, and may even feel compelled to lower interest rates in the near future, because of the risk of otherwise exacerbating the upcoming recession. This will cause the real interest rate to become increasingly less positive, and possibly even negative, over the next year. The result of increased Federal borrowing, combined with the inablility of the Fed to raise short-term interest rates, means that long-term interest rates, including mortgage rates, will begin to choppily rise, and likely reach multi-year highs within the next year. The U.S. housing market, already dealing with falling condominium and new home prices, as well as total inventory at the highest level in more than seventeen years, will have to handle a potentially significant rise in mortgage rates, as well as a slowing economy, and an all-time record ratio of housing prices to rental values. Consumer spending, which constitutes two-thirds of the U.S. economy, has been almost entirely driven by mortgage-related borrowing in recent years. Once housing prices begin to decline, banks, already saddled with the highest ratio of mortgage debt to total credit in history (as detailed in the previous week's Barron's), will be much less eager to lend to those of limited means, who recently have enjoyed essentially unlimited mortgage borrowing ability. As many speculators in the housing market experience their first ever lifetime shock of seeing real estate prices decline, speculative buying will suddenly stop almost completely. Thus, real estate speculators will stop buying just as lenders are tightening their lending standards, thus creating far fewer buyers for each potential seller, and causing prices to accelerate their collapse. Over the longer run, the inevitable surge in foreclosures from borrowers who cannot meet their mortgage payments, or who choose not to do so because the amount owed on the mortgage substantially exceeds the asset value of the property, will cause bank liquidation sales into an already weak market. Whoever the successor is as Fed chairman as of January 31, 2006, when Alan Greenspan's term is complete and cannot be extended, will likely be tempted to try to solve this problem by massively flooding the system with liquidity, just as Japan did in the early 1990s when their real-estate bubble burst. Those who observed what happened in Japan from 1990-2002 will see almost exactly the same scenario played out in the U.S.: massive bank failures from mortgage defaults, persistently and artificially low short-term interest rates (meaning a negative real rate of interest, thus causing a huge surge in precious metals prices), a 60% average nationwide decline in real estate prices (more than 70% in coastal U.S. cities), a 70% drop in equities valuations, and most significantly, a prolonged recession that lasts for over a decade. The best way for investors to prepare for the next year is to gradually sell all real estate, stocks, and bonds, purchase precious metals and their shares, and to diversify into non-U.S. currencies as much as possible.

PRECIOUS METALS BEGIN A MASSIVE RALLY; HI HO SILVER! (September 5, 2005): On Tuesday, August 30, 2005, HUI touched an important low of 198.78, marking yet another higher low in a long sequence of higher lows dating back to May 16. On the same day, silver briefly touched a nadir of $6.63, its lowest level since January 10, before rebounding sharply to close slightly above $7 an ounce on Friday, just three days later. Gold's traders' commitments improved substantially in the past week, but are still worse than historic norms, while silver's traders' commitments showed the smallest (most bullish) commercial net short position in two years. When combined with the fact that silver is usually one of the best investments whenever there is an increased likelihood of a worldwide economic slowdown, as well as the existence of an above-average ratio of gold to silver at this time, silver is likely to significantly outperform gold in percentage terms over the next year or two.

WATCH THE PRICE OF UNLEADED GASOLINE COLLAPSE (September 5, 2005): Here's a bold prediction: the price of retail unleaded gasoline in the U.S, currently averaging $3.45 per gallon nationwide, will plunge by more than $1.00 per gallon over the next few months. This would not even require any drop in the price of crude oil, although that is likely to happen also, given normal seasonality patterns and a recent surge in supply combined with gradually falling demand. The ratio between the price of unleaded gasoline and the price of crude oil is at a record high, by far. As this spread inevitably returns to normal levels, even a modest drop in the price of crude to $63 per barrel would result in an average retail price of $2.42. If crude reaches $55 per barrel, that would put unleaded gasoline at $2.12. My guess is that we will actually see prices below $2 per gallon in some states before the drop is over. Recessions and falling gasoline prices usually go hand in hand. (September 18, 2005) This gasoline price collapse, expected by so few just two weeks ago, is already well under way, with the wholesale price for crude oil more than a dollar per barrel below the level it had reached before Hurricane Katrina first came into existence. The retail price of gasoline will likely continue to fall sharply for about another two months. (November 13, 2005) I rest my case.

DO YOU KNOW WHAT IT MEANS TO MISS NEW ORLEANS? (September 5, 2005): Those who have any emotional attachment to New Orleans should start making plans now to visit the city as soon as possible, once the rebuilding has sufficiently progressed so that tourists are once again welcome. The current surge of public aid is likely to subside once the process of draining water and establishing order has been completed, while the media will almost completely stop covering the story by November, if not sooner. The historic French Quarter and Garden District, both slightly above sea level, survived relatively intact, and visitors will be sorely needed by the city. The cool late autumn and winter months, as well as early spring, are the best times to visit New Orleans, and also southern Mississippi and Alabama, so be sure to save your vacation time and plan to spend at least several days, if not longer. Conventioners' and other visitors' money has supported New Orleans for decades, and the Crescent City has a unique legacy of culture, music, art, and architecture well worth preserving. Revitalizing the mostly small businesses in New Orleans will be the real key to its long-term survival.

WATCH HOUSING PRICES FLIP--INTO REVERSE (August 22, 2005): As reported by Elliott Wave International, three new television series have debuted in the U.S. in the past two months: "Property Ladder", "Flip This House", and "Flip That House" (seriously!). If this doesn't immediately trigger memories of the Nasdaq in early 2000, then nothing will. Whenever the working class heavily participates in any kind of investment, it inevitably collapses; this has been true for centuries. Although oil has been getting most of the headlines in recent months, it will be the collapse of the real-estate bubble that will be by far the strongest lasting legacy of the coming decade. Returning to gold mining shares, they are completing their next higher low somewhere above the previous week's nadir of 200.98, with a likely final target near 206. Historically, gold and its shares often make a seasonal low about one week before the end of August. Silver is an especially good buy, being below $7 an ounce (currently near $6.95), and providing its final lifetime opportunity for purchase at such a low valuation. Many gold mining shares are already showing the kind of behavior which is seen just before a major rally. The U.S. dollar is completing the right shoulder in its head-and-shoulders peak, in preparation for a likely collapse below its 34-year support level in 2006. The Nasdaq and other major U.S. equity indices are continuing their pattern of lower highs that began on August 2. Oil prices have also begun their decline, as they move toward $50 a barrel by November. U.S. Treasuries are in the midst of what will likely be their final rally of 2005; after another month or two of gains as money flees equities, Treasuries are likely to reverse sharply in response to the collapsing U.S. dollar, and decline toward an important intermediate-term low in the spring or summer of 2006. Mortgage-backed securities of all kinds will suffer their worst collapse in history over the next few years.

HUI COMPLETES YET ANOTHER HIGHER LOW (August 15, 2005): On Tuesday, August 9, 2005, HUI completed yet another higher low since its nadir of May 16, touching 200.98. This completes the chart symmetry with January 6, 2005, when HUI made its first 2005 low at 200.30. A few negative divergences are starting to appear as gold mining shares begin to correlate less closely with each other, while the traders' commitments showed commercials net short approximately 151 thousand contracts this past Tuesday. The traders' commitments for the Swiss franc and British pound remain solidly bullish, while those for the U.S. dollar index remain strongly negative, those for the euro are modestly bullish, and other currency commitments are neutral or negative. Thus, a potential short-term top for HUI may be formed over the next several weeks. Should HUI rally to around 240 or 250 over the next few months, thus closely approaching its two-year peak of 258.60 from December 2003, while displaying increasing negative divergences at that time, it would likely signal a typical short-term pullback. (October 2, 2005) We have, indeed, seen exactly this kind of strong rally in HUI from August 30 through September 30, and are equally likely to see exactly this kind of substantial pullback between now and November 30. The more signs of economic weakness are evident in the next few weeks, the stronger that HUI is likely to rally before its next pullback. Given that a worldwide recession is almost inevitable over the next half year, this should push gold well above $500 and HUI above 300 in 2006. In the very short run, gold may experience a brief correction, although HUI will likely remain significantly above last week's nadir of 200.98 as it continues to build its pattern of higher lows that began on May 16.

WATCH CRUDE OIL AND GASOLINE PRICES DECLINE ALONG WITH THE STOCK MARKET (August 15, 2005): There is a popular myth that the price of crude oil correlates negatively with the U.S. stock market. Looking at a long-term chart of U.S. equities, this is obviously ridiculous, as they move in tandem about 80% of the time. For example, crude oil bottomed in November 2002 near $25 per barrel, while U.S. equities bottomed in October 2002, and both have rallied substantially since then. Both U.S. equities and crude oil are likely to complete their respective peaks in August 2005. (Notice that U.S. equities usually peak or bottom ahead of crude oil by a matter of a few weeks.) The traders' commitments for oil and its products, especially gasoline, have been deteriorating noticeably in recent weeks, and are now at levels typical of previous highs. Media coverage toward oil and its shares has become amazingly bullish and pervasive, with even non-financial radio stations frequently quoting the price of oil or interviewing "average folks" at gasoline stations about "how high the price will go", and a few financial commentators talking seriously about the possibility of crude oil at $100 per barrel. Therefore, the price of oil is likely to drop along with U.S. equities over the next 14 months. As the Nasdaq moves toward its cycle low in October 2006, expect the combination of reduced energy demand from the worldwide recession, along with a a sharp increase in supply as newly drilled wells begin to produce next year, to result in the price of oil below $50 per barrel in October 2006. In terms of most other world currencies, such as euros, yen, British pounds, or Swiss francs, the drop in the price of crude oil between now and October 2006 will be even more dramatic in percentage terms, as the U.S. dollar is likely to decline substantially over the next year. Even in the short run, it is likely that oil will decline to around $50 per barrel by November or December 2005.

U.S. RESIDENTIAL REAL ESTATE, AT LONG LAST, BEGINS ITS GREAT COLLAPSE IN DRAMATIC FASHION (August 8, 2005): The most important development in the U.S. financial markets passed almost unnoticed by most investors last week, at least before the Barron's cover article on Saturday, which was that companies connected with real estate suffered their largest two-day percentage declines on Thursday-Friday since August 1990, or in some cases, their largest two-day collapses ever. The carnage was across the board: in REITs such as HME, as well as REIT indices such as IYR and RWR; in mortgage-related companies including CFC, which had already been declining for a few weeks; in homebuilders, such as TOL, HOV, and LEN, along with their indices such as HGX; and in companies that provide home furnishings or are otherwise closely connected with the U.S. housing bubble. The only actual negative news was a report from Toll Brothers (TOL) that the housing market in Washington, D.C., was "beginning to soften" (translation: residential housing prices in the national's capital stopped rising). This should not be particularly surprising, given the fact that residential housing prices had already begun to decline in other world markets such as the U.K. and Australia, and given the inordinate popular obsession with the topic, as evidenced by "Extreme Home Makeover", "This Old House", the popularity of Trump (who was also a key player just before the 1990 peak), and the number of commercials touting how you, too, can get wealthy buying properties you have never seen, with the intention of never seeing them. This weekend I heard a radio commercial touting the purchase of raw land in all kinds of obscure places at some kind of auction. A personal note: where I work in Manhattan is the building where the New York City real-estate license exam is held each week. Five years ago, one or two people each week might arrive to take the test; I would help them to find the correct floor. The past few months, the line to take the real estate exam has extended from the front desk, out the door, down the entire block, around the corner, down that entire block, and around the next corner. An extra security guard has been hired just for the extra identity badges and associated paperwork to keep track of these people each week, and to make sure the crowd does not get unruly, as I already saw happen on two separate occasions. Even the Barron's cover story, excellent as it is, does not give enough emphasis to the potential long-term collapse of real-estate prices, given how much they have risen relative to incomes in the past several years, as well as the very real danger to the entire U.S. economy of such a decline, given that so many people, even those who bought their homes years ago, have borrowed money against the value of their houses. There are three major negative implications from the collapse of the real estate bubble: 1) banks will stop lending to anyone who wants to borrow, thus curtailing the consumer spending that has kept the U.S. economy out of recession the past few years; 2) those who have already borrowed money will have to repay thier loans, thus diverting a large percentage of money from more worthwhile expenditures or savings; and 3) if real estate prices decline to their 2001 levels, or lower, many borrowers will have a mortgage which substantially exceeds the value of their houses, thus encouraging massive nationwide abandonment, and eventual foreclosures. In the first phase of the decline, as real estate prices fall, speculative buyers will suddenly disappear, realizing to their amazement that, just like the stock market, real estate prices go both up and down. This first phase will probably take only a few years, but will likely see real-estate prices experience roughly half of their total eventual pullback. In the second phase of the drop, as banks are eventually saddled with millions of foreclosed properties, their eagerness to sell these properties will put additional downward pressure on the real-estate market as their selling will compete with both speculators selling and the usual sellers who wish to relocate, or whose owners have died, or who simply want to move. This second phase will be a more gradual drop than the first, but will likely last for several years. Since many major banks will likely suffer large losses from these sales, they will be subject to severe financial difficulties and potential bank failures, thus putting additional pressure on the overall financial markets. The Nasdaq may therefore end up declining as much in percentage terms as real estate itself, and perhaps more quickly. Look for the following typical "60 Minutes" coverage of the real-estate collapse in 2006: "Housing prices in Denver fell 15% in the past few months, in Las Vegas, 20%. In tiny Santa Fe, they collapsed 25%. Will your town be next?" Eventually, the trendiness of renting will hit the Styles section of the Sunday New York Times, in a cover article by Guy Trebay sometime in 2008: "Twenty-somethings Christie and Shelby decided to rent an apartment in Greenwich Village this year, rather than buying. 'Buying an apartment is like so three years ago', said Christie. 'Anyone who is not totally lost in the past is renting these days, since everyone knows prices will be lower next year. What's the point of throwing away your money on a stupid mortgage, like my older sister did?' Shelby chimed in, 'Your sister, my brother. Why go broke with nothing to show for it? If I spend all my money, it's gonna be on a really great mega-party that people will remember for years, not on some dumb old co-op that the bank is going to end up owning anyhow.'"

CIBC MAKES A BAD CALL (August 8, 2005): The brokerage firm CIBC announced on Thursday morning, August 4, 2005, that since the gold ETF caused gold mining shares to decline after its introduction late last year, that the upcoming silver ETF will cause the shares of companies which mine silver to similarly decline. They also stated that the price of silver would likely remain unchanged for the next two years or more. Let's consider both of these claims. First of all, the issuance of the gold ETF did not either cause the gold price to drop, or gold mining shares to decline, any more than the issuance of the first general equity closed-end funds in 1929 caused the U.S. stock market to fall later that year. More than one gold ETF had been planned for several years before the issuance of two such funds in late 2004, and both of them were further delayed for many months. Finally, the pressure from a sharply rising gold market caused the gold ETFs to make their debut at almost exactly the top of the market. This is no different from the introduction of new technology funds that always seems to happen at Nasdaq peaks, or the introduction of new municipal bond funds at peaks in that market. Gold fell in the first half of 2005 not because of the gold ETF, but because public sentiment toward the U.S. dollar had become so pervasively negative that even Newsweek, a non-financial publication, had a headline about "the incredible shrinking dollar". Gold mining shares declined not because of competition from the gold ETF, but because a double top in HUI, as is the case with almost any double top in a major index (such as the recent very bearish double top in QQQQ), is profoundly negative, and caused disappointed speculators to abandon these shares in the first 4-1/2 months of 2005. The silver ETF, on the other hand, is not being issued at the top of the silver market. It is likely to debut as silver is just beginning to recover from its own very bullish double bottom. It is therefore likely that CIBC will have both of their silver theories disproven: as the U.S. dollar continues its recent decline, gold and silver are likely to continue their recent rallies. These moves higher will be choppy with frequent pullbacks, of course, as they always are, but will likely see gold above $500 and silver above $9 or even $10 an ounce as early as 2006. Far from putting pressure on shares of companies which mine silver, the silver ETF will sharply increase physical demand for silver, especially as this ETF begins to outperform most other financial assets (including even the gold ETF, as silver is usually more volatile in percentage terms on both the up and down side). As the physical demand for silver increases, the incremental demand for it from new shares of the silver ETF will push its price even higher than it would have been without the silver ETF, which will therefore improve the profit picture for many silver producers, and sharply increase their share prices, rather than causing them to decline. Take advantage of the recent pullback by purchasing the shares of those companies which mine silver and were downgraded by CIBC. Some of these shares have already begun to bounce back a few percent from their deeply oversold early Friday afternoon nadirs.

AN IMPORTANT COMMENT ON THE RECENT SHARP INCREASE IN MEDIA COVERAGE OF THE U.S. RESIDENTIAL HOUSING BUBBLE (July 17, 2005): In recent weeks, there have been considerably more articles than usual about the so-called residential housing bubble in the U.S., even in non-financial publications. Some people have contended that a preponderance of such articles has positive contrary implications for housing prices. However, I believe that the current situation is much more like the unusually high media coverage of the Nasdaq in early 2000, rather than the preponderance of bearish articles about U.S. equities in late 2002, when they made an important low. Here's why: in 2002, almost all articles that discussed the Nasdaq near its multi-year low gave varying bearish price targets, such as 700, 500, etc. In addition, they gave advice as to which funds to purchase to profit from the Nasdaq decline, and which shares to sell short. They detailed how much each of these shares was likely to drop, and why. On the contrary, when there was a lot of talk about the Nasdaq bubble in 2000, almost none of the media coverage gave downside targets, or gave advice as to how to benefit from the upcoming decline. Instead, almost all financial articles in 2000 quoted some professor or other authority about how, at worst, the Nasdaq might fall to 4000, and why a sideways move was the most likely negative scenario. The media coverage of the real estate bubble today is very similar to the Nasdaq coverage of 2000, rather than the Nasdaq coverage of 2002. Most of the recent articles about real estate accurately detail specific instances of incredible price increases in specific regions in the past few years, but very few of them state that "real estate will fall by 25%" (or more), and none that I have seen give specific downside targets for various cities. The most negative commentators hint that a small drop is possible, or that a sideways move is the worst likely scenario. None of the articles that I have seen, and I do mean none, give advice as to how to profit from the collapse. They don't even suggest that one should sell one's vacation home or investment properties, much less that one should sell one's primary residence. Therefore, as with the Nasdaq bubble articles in 2000, the more intense media coverage of real estate today does not signify a bearish tilt by the press. It is the exact opposite: a typical attempt at a market peak by the media to comfort those who are nervous about recent sharp price increases, and to provide ample assurance that a serious price decline is not going to happen.

GOLD MINING SHARES CONTINUE TO COMPLETE THEIR HEAD-AND-SHOULDERS BOTTOM OF 2005, WHILE GOLD IS COMPLETING ITS THIRD HIGHER LOW OF 2005 (July 17, 2005): HUI, the Amex Goldbugs Index of Unhedged Gold Mining Shares, is completing its extended head-and-shoulders bottom of 2005. The left shoulder saw a low of 190.45 on February 8, so it is possible that this level will be visited one last time over the next few weeks. (July 25, 2005) The actual low for HUI was 191.62 on Tuesday, July 19, 2005. Gold itself made its 2005 bottom on the same day, February 8, at $410.75, and its second higher low on May 31 at $412.75. Last week, gold touched $417.00 on Friday morning, July 15, 2005. Gold is likely making its third higher low of 2005, so if it breaks below Friday's bottom, it will do so by less than one percent. The U.S. dollar appears to have already completed its counter-rally of 2005, as detailed in last week's update, while silver had also previously finished its bullish double bottom at $6.81, and currently stands at $6.95. Therefore, with less than one percent possible upside in the greenback, and less than two percent potential downside in both gold and silver, this week will provide a very good buying opportunity for gold mining shares. Physical silver should be purchased eagerly at any price below $7 an ounce, as such a buying opportunity will likely not be seen again, ever. (July 25, 2005) This statement already appears to be true, as silver has rebounded to $7.10. Physical gold should continue to be bought at any price below $425, which is also a final call on the yellow metal at such a low price. In addition to gold mining shares, many gold and silver coins and collectibles, even rarities, continue to trade only a few percent or less above their melt value. At some point in the future, this premium is likely to increase substantially, as it did in the late 1970s when gold became trendy. Palladium also completed a bullish double bottom at $170.

GOLD MINING SHARES CONTINUE THEIR UPTREND, EVEN AS GOLD RETREATS (July 10, 2005): Gold mining shares continued their uptrend which began on May 16. On Monday, July 5, 2005, HUI, the Amex Goldbugs Index of Unhedged Gold Mining Shares, touched an intraday low (196.24) exactly one cent below its previous trading day's low (196.25 on Friday, July 1). Thereafter, it continued in its two-month pattern of higher lows. It is interesting to observe that since bottoming on May 16, the price of gold itself has risen by only 1.2%, whereas HUI has gained 20.6%, indicating that when sentiment is extremely bearish toward anything, it is almost always worth buying, no matter what the fundamentals. If you have been kept in captivity without internet access for the past two months, be sure to complete your buying of gold mining shares as soon as possible. Gold appears to have made its third higher low of 2005 just above $420 an ounce, while silver retouched $6.81, which had served as support earlier this year. Palladium also appeared to complete a double bottom at $170. Continue to purchase gold, silver, and palladium, each of which have much greater upside than downside potential over the next year.

SY JACOBS EXPLAINS THE HOUSING BUBBLE BEST (July 4, 2005): I was going to make a remark about the absurd U.S. housing bubble, but in this week's Barron's, there is an interview with Sy Jacobs, a respected Manhattan money manager. The article is accompanied by a photo of one of my favorite small streets in New York City, located one block north of Washington Square Park in Manhattan. I will therefore simply quote directly from Mr. Jacobs: "In a letter to my investors recently, I looked back over the last 10 years and talked a bit about what I expect the next 10 years to be like. In addition to rates being a headwind, I said I suspect, timing aside, the bursting of the housing bubble to be a dominant theme for investing in financial stocks in the next decade. There will be major implications for financial stocks. We have gone through largely 10 years where the credit quality of lenders has been getting better. A lot of that has been driven by rising collateral prices. It's hard to lose when the price of the underlying collateral is going up. A change in the value of the collateral is going to be a second headwind in the face of financial stocks. Also, competition for making loans has increased because everybody feels good about making mortgage loans and real estate loans and it's human nature to loosen credit standards to maintain or grow market share, and that has been going on. During the next 10 years, we are going to be dealing with worsening, perhaps dramatically worsening, credit at some point. From a sociological point of view, housing feels so much like 1999 and the Nasdaq. Somebody showed me a Website today called condoflip.com that teaches how to flip condos. It made me feel like the end is near. There is a lot of speculation coming front and center, and it reminds me of a proverb, "What the wise man does in the beginning, the fool does in the end." Personally, I just sold my loft and I'm renting a townhouse. So it's clear how I feel. I'm trying to stay out of trouble and looking for situations on the short side where companies are exposed to housing, and where the market seems to be mistaking their recent growth for long-term growth, and where there's a lack of understanding of the cyclicality of the underlying business. In other words, where investors are mistaking the past for the future." Thank you, Mr. Jacobs. I definitely couldn't have said it better myself.

A COMMENT ON REAL ESTATE, HAVES VERSUS HAVE-NOTS (June 26, 2005): It should be remembered that as recently as early 2000, the general opinion about U.S. equities was that there were two groups of people: the "haves", who owned U.S. equities and had profited from their enormous runup in the late 1990s, and the "have nots", who had no money in technology and similar shares. As it turned out just a couple of years later, there were indeed the "haves" and "have nots", but the "haves" were those who had either purchased U.S. equities before 1995, or had not purchased equities at all (!), whereas the "have nots" were those who had purchased equities close to the peak, and had therefore lost half or more of their money after the 2000-2002 collapse. The same is going to be true with real estate. The media is currently portraying the "haves" as anyone who owns real estate (many so-called owners have only title and zero equity, but that's a story for another day), and the "have nots" as those who have remained renters. But, a decade or less from now, the "haves" will be clearly seen as those who either purchased real estate before 2000, or who never purchased real estate, whereas the "have nots" will be the huge army of unfortunates who purchased real estate between 2000 and 2006, especially those who bought in 2005, and who thereafter lost half or more of their huge, foolish "investment".

THE LONG-TERM OUTLOOK FOR GOLD MINING SHARES REMAINS VERY FAVORABLE, BUT A SHORT-TERM PULLBACK HAS BECOME INCREASINGLY LIKELY (June 19, 2005): Perusing my favorite gold chat and advice sites, it appears that the gold share bulls have suddenly taken over just in the past few days, with the first talk about an "upside breakout" in several months. Combined with the fact that many gold mining shares made their highs of the day at the open on Friday, and with HUI just below a minor resistance level, this supports the likelihood that gold mining shares will be relatively weak in the short run, perhaps returning close to their 38.2% Fibonacci retracement level of 189.73. Gold itself has become overbought in the short run, and since $423 was key resistance for gold in many years including 1989, 1990, 1991, 1993, 1994, and 1996, it is probable that there will be a final retest of $423, which is now key support, before gold moves toward and above $500 next year. With the Nasdaq set for a sharp decline, weakness in equities in general is likely to carry over into gold mining shares, as the two usually correlate with each other in the short run. Instead of selling gold or gold mining shares, however, it is recommended that readers add to their short positions in Nasdaq- and semiconductor-related indices such as QQQQ and SMH. In typical equity bear markets, such as we had in 2001-2002, or 1973-1974, and which we are likely to have in 2005-2006, gold mining shares and equities will move together in the short run, but when gold mining shares are rising sharply, the Nasdaq will rise only modestly (as in late May and early June of this year); when the Nasdaq is falling sharply, gold mining shares will decline only modestly (as we are likely about to experience). Therefore, investors who have a roughly equal percentage of their assets allocated to being long gold mining shares and short the Nasdaq will enjoy overall net gains for the vast majority of trading days. Very conservative investors might want to have 80% of their assets in stable value funds and similar safe investments, 10% long gold mining shares, and 10% short the Nasdaq; more aggressive investors might want to have about one third in each (as I do), while the most aggressive investors might keep only 20% in stable value funds, 40% long gold shares, and 40% short the Nasdaq. If any readers of this web site have still not completed their gold share buying--perhaps you were on an aboriginal deserted island without internet access in May--wait for HUI to retreat below 195 before making additional gold mining share and fund purchases.

KEEP ON BUYING GOLD MINING SHARES INTO ALL PULLBACKS (June 15, 2005): HUI, the Amex Index of Unhedged Gold Mining Shares, continued its very bullish pattern of higher lows by making a new higher low of 181.67 on Thursday, June 9, 2005, just above its May 31 low of 181.29. Another higher low for HUI is likely later in June, possibly near 187. Use all dips in your favorite gold mining shares and gold funds and gold itself as buying opportunities. With silver, very poor traders' commitments suggest that one more sharp pullback is likely, so be more patient. The traders' commitments remain excellent for gold, with only light commercial selling into the recent modest price increase. The euro continues to decline versus the U.S. dollar, while the U.S. dollar index saw a new all-time record commercial short position on the New York Board of Trade, thus providing an excellent opportunity to sell short the greenback. Either short the U.S. dollar index directly, or else purchase shares of a fund which correlates inversely with the U.S. dollar; my personal favorite, described in my last update, is the American Century International Bond Fund, or BEGBX, which currently stands at its lowest level in several months. I am receiving no compensation from American Century for this or any other recommendation (nor do they probably have any idea that I even exist).

CONTINUE TO CAREFULLY PURCHASE GOLD MINING SHARES INTO DECLINES (June 5, 2005): Gold mining shares are in the late stages of the bottoming pattern of 2005, in preparation for a doubling from their recent lows through the spring or summer of 2006. As is typical of late bottoming action, fewer if any new lows will be set over the next several weeks, while minor support levels from the left shoulders in April and early May are likely to be seen more frequently as right shoulder support levels in June. Looking at HUI, the Amex Index of Unhedged Gold Mining Shares, this index had a left shoulder just above 180, a second left shoulder just above 175, a head at 165.71 on May 16, 2005, and then a right shoulder just above 181. If the right shoulder behaves similarly to the left, HUI should make a higher low than 181 over the next few weeks. This will be the last very good buying opportunity for these shares in 2005. (June 15, 2005) New readers should be warned that my predictions are not always going to be this accurate. Seasonality remains unfavorable for precious metals, but most other factors have turned from unfavorable to favorable just in the past month, and therefore will provide substantial support. The traders' commitments for gold and for most currencies have continued to show a marked improvement in recent weeks, and in some cases are especially noteworthy. The most recent commitments data for the U.S. dollar index showed commercials long 4,933, short 22,426, an all-time record short position by commercials for this (New York Board of Trade) futures contract. Gold's own traders' commitments showed commercials net short just below 53 thousand contracts when gold was at $417 per ounce on May 31, indicating that the net neutral price for gold is now probably at $411 per ounce. Gold touched $412.75 in the early morning of Tuesday, May 31, 2005, and $413.75 in the early morning of Wednesday, June 1, 2005. Gold's previous low of 2005 was $410.75 in the early morning of February 8, so this may be indicating a pattern of higher lows. If gold has a pullback over the next few weeks, it is possible that $410 may be broken to the downside by a few dollars, but it is more likely that the upcoming low will be slightly higher, such as $414.40. It was predicted on this web site that the euro would bottom at 1.2150 U.S.; an hour after the Dutch "no" vote this past Wednesday (June 1) on the EU constitution, the euro touched a low of 1.2157.

PATIENTLY AND SELECTIVELY PURCHASE GOLD MINING SHARES ON ALL PULLBACKS (May 30, 2005): Now that HUI has increased by 12-2/3% since its nadir of 165.71 on May 16--just two weeks ago--the ideal bargain-basement buying opportunities in gold mining shares have come and gone. As usual, it is best to act when almost everyone is telling you why you should not do so. Nevertheless, as long as HUI is below 190, it is a relatively good time to add to long positions, since it will soon become clear that the recent Fed rate hikes, combined with other negative economic factors that are usually seen in the first half of any U.S. Presidential term, are going to cause the U.S. economy, and most other world economies, to go into recession in early 2006. The anticipation of a worldwide recession, and its accompanying economic deterioration, is almost always positive historically for precious metals and their shares, even as it is usually negative for most other equity groups. This was most clearly seen in the period from November 2001 through early June 2002, as the previous Bush recession appeared and intensified, and gold mining shares had one of their sharpest half-year rallies in history. This time, the percentage gain will likely be less, while the duration will be somewhat greater, but it is still reasonable to assume that from its May 16 nadir, HUI will more than double by the time it reaches its next important peak in the spring or summer of 2006. It is interesting to note that, even as HUI has risen by 21 points in the past two weeks, the price of gold itself has dropped by one dollar, so the entire gain in gold mining shares has been a result of the sharp contraction of the HUI/GLD spread. This pattern is likely to continue for the next several weeks, especially since seasonal and trend factors are not likely to turn positive for gold and silver bullion until late June or early July. Those who read too many fools' gold web sites and were afraid to buy gold mining shares at the recent lows, or who did so only tentatively and still have substantial funds sitting in cash, should be disciplined and set a ladder of limit orders, as there will be occasional sharp pullbacks over the next several weeks, while the unfavorable seasonality makes it unlikely that there will be a runaway gold rally in the near future (although occasional sharp up days are likely). Here is one strategy for those who have not yet finished their buying: as often occurs during a recovery from an important low, there is likely to be a period when gold mining shares decline for three consecutive days. When that happens, purchase some gold mining shares early in the morning on the third down day. (June 15, 2005) Give yourself full credit if you bought on Wednesday or Thursday of last week, June 8 or June 9.

THE COMMITMENTS HAVE MADE AN INCREDIBLE IMPROVEMENT (May 30, 2005): The traders' commitments for those assets which correlate most closely with the price of gold have shown an incredible improvement just in the past month. Gold itself has seen commercials cover their net short position at a rate of about twelve thousand contracts per each one-dollar drop in the gold price, a rate not seen since the first half of 2003. COMEX gold commercials are currently net short just under 60.5 thousand contracts. Even if they temper their enthusiasm and only cover at half that rate from now on, which would be six thousand contracts per one-dollar drop, that would make commercials net neutral at $408 per ounce, the first time since the late 1980s that commercials were net neutral above $400 an ounce. Although this is fundamentally (but not technically) very bullish for gold and gold mining shares, many gold analysts--the same ones who were bullish when gold was above $440--have recently lowered their gold price targets. I am therefore going to be a true contrarian and raise my own price target: instead of a nadir of $396 for 2005, I am raising this by $10 to $406. Assuming that the HUI/GLD spread will contract to 218 if gold reaches $406, that would put HUI at 188, less than one percent above its current level. Thus, even if gold mining shares are volatile in the coming month, they are likely to see little overall net change until after gold has rebounded from its eventual low.

CONTINUE TO ADD TO LONG POSITIONS IN GOLD MINING SHARES ON DIPS (May 23, 2005): It is likely that the final 2005 low for HUI, the Amex index of unhedged gold mining shares, was seen on Monday, May 16, 2005, when it touched an intraday nadir of 165.71, its most depressed level since it made its 2004 bottom of 163.81 on May 10, 2004. On May 16, I received a record number of bearish e-mails on gold mining shares, including one person who sent me three on the same day after the close. There remains a small chance that HUI will make a very slightly lower low close to 165, but for that to happen, gold will have to rapidly decline, since the HUI/spot spread has been zooming lower in recent days after having been 257 a few weeks ago and 254 as recently as one week ago, while it is now down to 239. Thus, as the gold price has fallen five dollars in the past week, HUI has risen 10 points. This spread is likely to contract to around 216 within a month or so as gold continues to move lower, while gold mining shares continue to move higher. Almost all of the developments in this equity sector have been positive; in addition to the rapidly contracting spread, which will continue to put upward pressure on gold mining shares even as the gold price declines, the traders' commitments for gold have been improving at their most rapid pace since the first half of 2003. It is likely that the spot price for gold at which commercials are net neutral (neither net short nor net long) is above $400 an ounce for the first time since 1988. Thus, gold may not even reach $400 an ounce. If it does, and it is probably still a greater than 50/50 chance that it will go below $400 an ounce in June, it will likely be only slightly below $400, and for a very brief period of time, such as a rapid dip to $396 to clear out the stale speculator longs, followed by a complete recovery above $400 within a few days. The traders' commitments for currencies have also been improving considerably, with very bullish postures seen in the Swiss franc, the Canadian dollar, and the euro, with a great improvement in the British pound, the Australian dollar, and the most bearish position in the U.S. dollar index since the summer of 2004. This does not mean that the U.S. dollar has completed its rally, but it does mean that any continued gains will be met by heavy commercial accumulation of currencies, and that the euro is currently only about four or five cents away from its final low of 2005, as the euro bottoms near $1.2150, probably this summer. As Warren Buffett has been adding heavily to his short dollar positions--don't believe those ridiculous rumors that he has closed any of it out--his groupies have been covering their short positions in a panic. If there are "no" votes from any of the European union countries toward ratifying a common constitution, this may provide a convenient excuse for a final push higher in the greenback. If so, and if gold and silver react negatively, it would mark an ideal time to either buy currencies or else gold and silver bullion itself. Gold mining shares traditionally bottom about two to three months before a peak in the greenback, so a dollar high in July or August would coincide nicely with the probable HUI low that was seen on May 16. If this analysis proves to be correct, it will imply that HUI completed a double bottom of 163.81 in 2004 and 165.71 (or a slightly lower level) in 2005. A double bottom is classically the most bullish chart pattern known to exist, and will likely lead to HUI reaching approximately 340, or more than twice its recent low, in 2006.

OBSERVE THE LEMMINGS, HOW THEY LOVE TO SELL LOW AND BUY HIGH (May 23, 2005): As mentioned last week, there are thousands, perhaps tens of thousands, of investors who sold their gold mining shares earlier this month with HUI near 170 or so, confident that they would be able to repurchase them near 155, or 150, or even lower, and encouraged in this action by a whole army of phony analysts on certain web sites (you know who you are). These people would rather be pummeled into unconsciousness by all of the members of the Sopranos' extended mafia family than to miss out on a gold mining share rally. Therefore, once they realize that HUI is not going to reach 155, or even 165, they are going to watch with increasing nervousness as it moves to 180, then 190. Finally, they won't be able to stand it any more, and will be buying heavily when HUI reaches 200, (June 19, 2005) as we saw on Friday morning, June 17, when HUI touched 204.52, or 220, or 240 . . . . The greatest fuel for the buying power in 2005 will be goldbugs who are killing themselves since they sold at 170. The greatest fuel for the buying power in 2006 will be the public who begin to buy gold mining shares once the media trumpets the "incredible" news that gold has reached $500 an ounce for the first time in almost two decades.

ADD AGGRESSIVELY TO POSITIONS IN GOLD MINING SHARES (May 15, 2005): HUI is now only a few percent above its lowest point of 2004, which was 163.81. Even those who are supposedly bullish on gold mining shares in the long run are afraid to buy them now. This means that there is a huge amount of cash held by goldbugs--who hate more than anything in the world to miss out on any rally in these shares--that will come pouring into them as soon as they make their next sharp upward move. On a week when gold rose 20 cents in the active June contract from Tuesday, May 3 to Tuesday, May 10, commercials covered 29 thousand contracts of their net short position, indicating that commercials are eager to eliminate the heavy short positions that they have held for months. This is an extremely unusual and bullish stance for commercials, who generally buy only into dips, and indicates that those most familiar with the gold market want to position themselves for a significant move higher that is likely to begin in June. It also means that even if gold goes below $400 an ounce, which is probably still more likely than not, it has very little chance of going below $390 an ounce. If gold bottoms at $396, and the HUI/spot spread contracts to 228, that would put HUI at 168, thus matching its current level. Gold mining shares usually bottom a few weeks before the metal itself, indicating that the bottoming process is already underway. Even if the absolute nadir for some of the gold share indices is not reached until May 25 or thereabouts, a moderate number of gold mining shares have likely already made their final bottom, and others are about to make their final lows which might hold for two or three years, if not longer. In 2006, HUI is very likely to go above 300, so worrying about whether the final bottom for HUI is at 168 or 164, or even 157, is going to appear to be a very petty argument several months from now. When I recommended selling gold mining shares as HUI went above 235, many pointed out that I was "wrong", since HUI went above 245, in fact touched 251. Well, perhaps, but I think those that sold HUI at 235 are pretty happy now, and those who are buying HUI when it is below 170 are getting a rare opportunity, no matter what happens in the short run. (June 19, 2005) Rare opportunities only come along rarely, as Yogi Berra might have said, but didn't; I said it. Not since March 2003, when I recommended buying gold mining shares "with both hands and both feet," did I receive so much e-mail in just one week telling me that I had no idea what I was talking about. Usually my predictions are most correct when the greatest number of people believe them to be the most idiotic.

GOLD MINING SHARES REMAIN ATTRACTIVE; CONTINUE TO PURCHASE THEM INTO DIPS (May 8, 2005): Obviously gold mining shares are not quite as good a bargain as when I did my last update, but should continue to be purchased into all pullbacks, especially early in the day, and whenever HUI is below 180. Gold mining shares are much more frequently making lows in the early morning, and then recovering as the day progresses, as is typical of the final stages of an intermediate-term correction. If the recent HUI low of 175.32 on Thursday, April 28, 2005 was not "the" bottom of 2005, the upcoming nadir (probably in May or June) will be only slightly lower than that point. After having reached an all-time high of 257 on Friday, April 29, 2005, the spread between HUI and spot gold, which can be defined as GLD times 10 minus HUI, contracted sharply in the past week to less than 241, marking a sharp weekly contraction of 6%. This spread, which historically averages 200, is likely to continue to contract substantially over the next several weeks. A sharply contracting spread is historically the precursor toward a major rally in both gold and gold mining shares, although such a move higher in gold itself is not likely to begin until its current correction has run its course. The traders' commitments improved significantly over the past week, indicating that gold is unlikely to go below $388 per ounce, although a move below $400 is still more likely than not, probably in June. Keep in mind that even if gold bottoms at, say, $396 per ounce, an HUI/spot spread of 210 would imply a corresponding low for HUI at 186, which is slightly above its current level. Thus, a falling gold price is not a significant threat to lower gold mining share prices, unless gold goes substantially below $390 per ounce, which the traders' commitments indicate is very unlikely. After going slightly below $400 an ounce within the next few months, gold is likely to move above $500 an ounce in 2006, with HUI moving above 300. If you are interested in physical gold or silver, be patient and wait until the U.S. dollar has finished its current rally. The greenback remains technically powerful, as it continues to recover convincingly from all setbacks. In addition, until it becomes apparent that the recent Fed rate hikes will cause another recession, the current perception is that U.S. real interest rates are positive and likely to become even more positive in the near future. A rising positive real interest rate increases interest in U.S. dollar-denominated time deposits, thus decreasing interest in non-interest-bearing hard assets such as gold and many other commodities. Many market funds and bank CDs are paying their highest returns in more than two years. Meanwhile, U.S. equities, which have been modestly rebounding in recent weeks, are likely approaching yet another lower high for 2005, which will provide an excellent opportunity to add to short Nasdaq positions. One more sharp up day may occur before such a peak is reached.

CONTINUE TO CONSISTENTLY AND VERY AGGRESSIVELY PURCHASE GOLD MINING SHARES (May 2, 2005): Reading a number of well-known gold chat sites, such as http://kitco.com and http://321gold.com, it strikes me that there are an unusually high number of so-called "analysts" who are proclaiming that gold mining shares are a great long-term investment, but don't buy them yet, since they're going lower in the short run. These "analysts" (let's call them bozos, for clarity and accuracy) are primarily folks whom I call technical geeks, since they know or care nothing about historical trends, or about what is happening in the world economy. Their prose style is usually barely coherent, and populated with enough useless data to sink the Titanic without the aid of an iceberg. They blindly follow idiotic charting techniques from Economics 101, talk out of both sides of their mouth simultaneously, show their emotions and biases on their sleeves, and show zero comprehension of basic investment philosophy or psychology. However, no matter how dumb these geniuses are, the importance of these bozos in the market is significant, since the average investor does not trade gold mining shares, so those who read these web sites probably constitute a substantial portion of the total investors in gold mining shares. Therefore, there is likely to be a huge contingent of goldbugs who are currently less invested than normal in gold mining shares, or in some cases are perhaps not invested at all. Now, the one thing that a goldbug most fears is that a gold share rally happens when he is not fully invested. A goldbug would rather have his wife sleep with three different guys--all at once, even--than miss out on a gold rally without being fully invested. (No doubt there are female goldbugs, too, although they are still far outnumbered by the Y-chromosome set.) So there is a huge cash hoard of buying power ready to pile into gold mining shares as soon as these folks realize that, once again, they've been led down the primrose path by these bozos. As these goldbugs wake up and realize that the 4-1/2 year pattern of higher lows in these shares remains intact, they will be tripping over each other to buy, no matter how rapidly these share prices are increasing, or whatever else may be happening in the financial markets. Do the exact opposite of these bozos' advice. Assume that there will be a significant SHORT-TERM rally in gold mining shares, and let the long term take care of itself.

BULLISH DIVERGENCES CONTINUE TO ACCUMULATE RAPIDLY IN THE GOLD SHARE MARKET (May 2, 2005): The HUI has made a pattern of three consecutive similar lows; whenever three or more days see a closely matching bottom for any financial asset, a short-term rally usually follows. On Friday, April 29, 2005, the spread between HUI and spot gold, which can be defined as GLD times ten minus HUI, touched an all-time record high of 257. On Monday, May 2, 2005, this spread contracted sharply and progressively throughout the day, and ended at just about exactly 251. If this spread continues to reverse and move lower, as is most likely, it could reach 225 or even less within a few weeks, and 210 within a couple of months. Keep in mind that even if gold plunges to $396, which is possible given its bearish traders' commitments, a spread of 210 would put HUI at 186, which is almost six percent above its current level. So gold could fall sharply while gold mining shares experience a net gain. Each day, even as gold mining share indices make roughly matching lows, fewer gold mining shares have set new lows. The South African producer GoldFields (GFI) was the first major producer to positively diverge, by gaining ground several days ago after early intraday losses; since then, Harmony (HMY), Golden Star Resources (GSS), and other producers have joined GoldFields in completing an important bottoming pattern. Of course, it is quite possible that the recent low in HUI will turn out to have been a left shoulder rather than "the" bottom, but if there is a lower low for HUI in its future, it is likely to be only a few percent or less below the recent nadir, and even if that happens, a significant number of gold mining shares have likely already seen their final lows of the year, and possibly for the next few years as well. Gold mining shares, especially on days when the gold price itself is down, are more consistently showing early weakness and later strength, as is typical of any financial asset making an important bottom. Keep in mind that a gold share bottom is a process, not an event. Different shares will make lows on different days, rather than all at once, so opportunistically take advantage of temporary weakness in your favorite names to add to your long positions in them.

CONTINUE TO AGGRESSIVELY PURCHASE GOLD MINING SHARES, BUT DO NOT BUY GOLD (April 27, 2005): When my last update was written, HUI was slightly above 180. Currently it is just below 179, down almost 1% from the last update. There is very strong support for gold mining shares just a few percent below current levels from the lows of 2004 as well as from the 38.2% Fibonacci retracement of the entire gain in HUI from its all-time low on November 15-16, 2000 (35.31) through its peak on December 2, 2003 (258.60). Investor sentiment toward gold mining shares is even more pessimistic than it had been at last year's bottom, while valuations of many shares are forming very bullish double bottoms with lows from previous years. Be sure to buy aggressively in the early morning, as gold mining shares are likely to show more consistently reliable bounces from early intraday lows, in some cases leading to a gain of several percent by buying early in the day rather than later. As the U.S. dollar generally rises over the next two months, the prices of gold and silver are likely to continue to fall, occasionally sharply, thus creating emotional panics that should be capitalized upon by using ladders of GTC limit buy orders on gold shares. HUI will probably complete its bottoming pattern ahead of the June 30, 2005 Federal Reserve meeting, at which time Greenspan & Co. are likely to announce that, because of increased evidence of a pending recession, they are going to slow down their pace of interest-rate hikes. (No such "favorable" message, if one considers a recession to be favorable, is likely to emanate from the upcoming May 3, 2005 Fed meeting, however.) Do not buy gold or silver bullion or collectibles until the HUI/spot spread moves below 220, since the risk of a sharp collapse in the metals themselves is still far too great.

CONSIDER FUNDS FIRST: Most readers will probably be interested in purchasing gold funds for the majority of their investment, either not having a brokerage account or not wishing to assume the increased risk and volatility of owning shares of individual companies. There are several dozen gold funds. However, all but three charge more than 1.5% percent of the total assets each year as a management fee, in some cases two or three percent annually. Some of these funds even charge significant upfront or redemption fees. If you feel that a particular fund manager has a track record which justifies such a high expense ratio, then please continue to invest in such a fund. However, it is possible that such a manager may not continue his winning streak, or that his success may encourage him to leave for another company or to start his own hedge fund, and the subsequent management will not necessarily be as competent, and may charge a significant fee for switching out of the fund. Caveat emptor. The two funds which charge a reasonable fee are BGEIX, the American Century Global Gold Fund (current annual expense ratio 0.68%), and VGPMX, the Vanguard Precious Metals and Mining Fund (current ratio 0.55%). I have money invested in both of these mutual fund holding companies. However, I have a strong preference for BGEIX over VGPMX, for the following reasons: 1) BGEIX charges a redemption fee of 1% only if the shares are held for less than 60 calendar days. VGPMX charges a 1% fee if the shares are held for less than a year. 2) BGEIX contains all pure gold mining companies. VGPMX contains several energy and base metal producers. If there is a fear of a recession, or similar economic developments, energy and base metal producers will likely underperform ordinary gold mining shares. Besides, I do not want diversification if I am purchasing a gold fund; I want gold mining shares, period. 3) BGEIX has always been open for new investment. VGPMX sometimes is closed for new investment, even if one has a considerable current holding in the fund. Appendix (May 30, 2005): One of my readers, Mr. Alan Sorin, pointed out that FSAGX, the Fidelity Select Gold Fund, has an expense ratio of 1.00% and a short-term trading fee of 0.75% for shares held less than 30 days. While this is not as low a fee as BGEIX, there is one big advantage: FSAGX is priced every hour on the hour, beginning at 10 a.m. New York time, rather than only at 4 p.m. As readers who have been tracking gold mining shares for many years already know, being able to buy and sell at 10 a.m. is worth a lot, since it is around this time of day that gold mining shares usually make their lows when they are forming an important bottom. Sometimes HUI will rise several percent between 10 a.m. and 4 p.m., as it did on May 10, 2004 (when HUI made its nadir of 163.81 last year). Once it is appropriate to sell gold mining shares--probably in the summer of 2006--again it is usually advantageous to do so at 10 a.m., when they generally peak during the formation of market tops. Therefore, I am adding FSAGX to my recommended list.

GIVE A CLOSE LOOK TO SOUTH AFRICA: The shares of the big three South African mining companies (AU, GFI, HMY) are below their highs of spring 2002, and have thus provided little or no profit over the past three years except with good market timing. The primary reason for this underperformance has been the very strong rand, which increased from 13.5 to the dollar at the end of 2001 to 5.7 to the dollar a month ago. The current exchange rate is about 6.2 South African rand to one U.S. dollar. Therefore, local costs, especially union wages denominated in rand and negotiated to rise an average of 9% annually in rand terms, have increased enormously in dollar terms in the past three years. Thus, even with the higher gold price in U.S. dollars, profit margins have in many cases actually decreased. This is due to a number of factors, including the weak U.S. dollar, but also reflecting artificially high short-term interest rates in South Africa relative to their domestic inflation, as well as the general boom in commodities that has caused a sharp rise in the currencies of nearly all economies which are heavily based upon commodity production. It is likely that the South African central bank will gradually ease its short-term rates to assist with exports, which are a significant percentage of their GDP. Thus, even if the U.S. dollar is generally weak over the next several years, the rand will likely rise only modestly relative to the greenback, and may well fall versus the euro, the yen, and many other currencies. On Thursday, March 24, 2005, there was news of a strike at Harmony, with rumors of its potentially spreading to the other producers. The subsequent substantial price decline in South African gold mining shares in response to this news caused these shares to surrender a significant portion of the gains that they have enjoyed since early February, and thus makes them once again a prime candidate for purchase. (October 2, 2005) Notice that while HUI rallied 25.5% from August 30, 2005 through September 30, 2005, South African mining shares gained an average of 44.4% over the same period of time. As a rule, South African shares perform best when the gold price is rising, but the U.S. dollar is NOT falling significantly, or actually gains in value against most major world currencies, as was the case during September. I am gradually buying these as they form likely double bottoms with their corresponding early February nadirs. There is a closed-end mutual fund called ASA which invests in all of the above shares, heavily favoring GFI and AU, in that order, in addition to platinum miners and a small percentage in other diversified South African mines, as well as other worldwide gold mines. ASA's current discount to net asset value is slightly above average, but puzzlingly did not decline much on Thursday, in spite of the sharp fall in its primary components. The expense ratio of ASA has risen somewhat in recent months, and is now 1.03%. ASA is still a viable alternative to open-end funds such as BGEIX, since open-end funds only permit purchase at restricted times of the day (such as the close), whereas ASA can be traded intraday. This is advantageous given the historic pattern of gold mining shares to rebound sharply from early intraday lows when they are forming a true bottom. (May 30, 2005) Notice that ASA, like HUI, made a slightly higher bottom in 2005 than it did in 2004, thus continuing its very bullish pattern of higher lows that has existed since 1998. Since there is no ETF of gold mining shares yet listed in the U.S., this is your next-best choice. Meanwhile, if you have family or friends who are in charge of starting ETFs, tell them to get their heads out of the clouds and start a gold-mining-share ETF as soon as possible! (June 5, 2005) Followup: Several Canadian readers wrote to point out that there is a gold-share ETF in Canada with the ticker symbol XGD. There is no equivalent in the U.S. market. Hopefully, it won't take as long for the U.S. to follow Canada's lead in this matter as it is taking for the U.S. to follow Canada in adopting the metric system, establishing stricter gun control, and cleaning the streets.

THE CRIME AND PUNISHMENT OF JOE AND JANE DUMBO: The next decade is likely to be the most painful for the "Joe and Jane Dumbo" folks of this world. These are the people who bought U.S. equities heavily in the late 1990s, "since stocks sometimes drop a little, but pretty soon hit new all-time highs". By and large, they have held most of these shares throughout the volatility of the past several years, and figure that they will do fine "in the long run". Recently, these folks have been buying second and/or third homes for speculation, on almost nothing down and perhaps with an interest-only, adjustable-rate, no-cap mortgage, "because real estate never goes down". As both equities and real estate collapse in tandem, these folks will go into the red on both fronts, thus creating a negative wealth effect that will sharply curtail consumer spending, and likely cause a worldwide recession. Joe and Jane Dumbo are looking dumb, dumber, and dumbest as the weeks pass in 2005, and will prove to be virtually complete bozos by late 2006.

CURRENT ASSET ALLOCATION: My own personal funds are currently allocated as follows: LONG POSITIONS: stable value fund (retirement fund with stable principal paying variable interest, currently 4.75%), 32%; BEGBX (American Century International Bond Fund), 11.5%; other U.S. and municipal government bonds, including TLT, MYJ, and inflation-protected, 12.5%; MRK, 2%; gold and silver coins and related metals collectibles, 6%; other collectibles, 0.5%; cash and cash equivalents, negative 21.5%; SHORT POSITIONS: Nasdaq-equivalent (QQQQ, NDX) and related shorts, including SMH and CFC, 49%; net short gold mining shares, 8%.

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%. (May 30, 2005) At the current time, inflation is about 3.20% while the anticipated Federal funds rate is approximately 4.50%, yielding a real rate of return of positive 1.30%, its highest positive level in almost four years. Since gold and silver strongly prefer a negative real interest rate to a positive one, this is bearish for precious metals. 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. (September 5, 2005) In the aftermath of Hurricane Katrina, combined with increasing signs of a significant slowdown in the U.S., it is likely that the recent steady pattern of interest-rate increases by the Fed will soon come to an end. The Fed will be unable to fight inflation, and may even feel compelled to lower interest rates in the near future, because of the risk of otherwise exacerbating the upcoming recession. This will cause the real interest rate to become increasingly less positive, and possibly even negative, over the next year.

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 below 400 in 2010, more than doubling sometime thereafter, and then making a final double-bottom retreat to below 550 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. Important higher lows included $319.10 on April 7, 2003; $371.25 spot in the morning of Monday, May 10, 2004; and $410.75 on February 8, 2005. Inevitably gold will go above $500 per ounce, perhaps even as early as 2005, although the spring of 2006 is a more likely time for gold to break above $500, 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. (June 5, 2005) Followup: In recent weeks, notice that gold is rallying in terms of almost all world currencies, especially including the euro. This is the typical historic pattern; expect gold's outperformance to intensify over the next 12 to 18 months as the likelihood of a worldwide recession becomes increasingly evident in late 2005 and early 2006. (June 15, 2005) Gold is continuing to rally against the euro and against most other world currencies. (June 19, 2005) Gold recently touched a new all-time high versus the euro. 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, central banks around the world are going to depreciate their currencies aggressively. 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. (September 20, 2005) The past week has demonstrated that, under the right circumstances, precious metals can rally dramatically even when the U.S. dollar is rising. Over the next decade or more, with periodic pullbacks following bouts of investor euphoria, gold and especially silver are likely to rise substantially more in percentage terms than the U.S. dollar will decline in percentage terms. (October 2, 2005) The month of September 2005 demonstrated convincingly that gold can perform very strongly even when the U.S. dollar is rising in value. The converse is that gold can decline even when the U.S. dollar is falling; expect to see this behavior in October 2005.

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 1.78%, is between 6.5% and 10.5%. Great bull excesses are usually followed by equally severe recessions.

REMINISCENCE OF THE WEEK (December 4, 2005): For the past nine years, I have lived across the street from a man named Roy. I don't even know his last name, but he was the first person other than the landlord to say hello, and had the most interesting stories about growing up in Scotland and how he studied piano from a young age. I invited him over to hear me perform some of my songs, and soon we became good friends. After listening to his brogue for several months, I decided to try to imitate it--when he wasn't around, of course. I eventually wrote a Scottish whaling song in Roy's honor and had the privilege of performing it for him before anyone else could hear it, including intentionally attempting to mimic his thick accent. He was totally silent for a full minute, then chuckled that "it sounds like the kind of tune we used to listen to around the fireplace when I was a kid". Roy then added, "Were you trying to sound like me, or did I just imagine that?" I continued to practice imitating his voice, but never got it precisely right. Roy loved to tell stories about "the good old days". He was always outside, chatting with neighbors, playing soccer with kids that happened to be walking past, or working on his house--if he would finish remodeling it, he immediately ripped it apart again, so that he could do it better the next time, and the next. Roy passed away this past Wednesday.

REMINISCENCE OF THE WEEK (November 22, 2005): I studied music for ten years at the Peabody Preparatory Institute in downtown Baltimore. The main building in those days looked very much the same as when it was first constructed, with almost everything decades old, including the ornate contraptions needed to get drinking water, the long, narrow benches on each floor, the elevators which had to be operated by a live person, and even the light switches, which were of the small black pushbutton variety not seen in most other buildings in the U.S. since the 1920s. One room even had a telephone dating back that far; although it no longer functioned, it still had its phone number imprinted (only six digits!). One day, I was sitting on the bench in front of the main elevator on the basement level, with my music books spread out along with my lunch, as I tried to eat while studying Mozart's 20th piano concerto. I always loved the basement floor the most, as I could hear distant sounds of many different instruments coming from all directions, mingled with the muted shouts of the ballet teacher barking directions to her students at the far end of the hall. A friend of mine boarded the elevator, telling me he was going to the fourth floor, the topmost one in the building. Feeling somewhat mischevious, and knowing that it would take a few minutes for the elevator man to stop at each of the floors along the way to let people out and in, I gathered together my books, my drink, and my food, put them quickly in my bag, raced up the marble steps to the fourth floor, unpacked everything, and arranged it as similarly as possible on an identical-looking bench in front of the same elevator. When my friend walked into the hallway, he stared at me for a few moments, then turned back into the elevator, wondering why he had ended up where he started. The elevator man had to explain to him that he really had changed floors. Finally, after another half minute, he broke out laughing, and kept on laughing for an unusually long time.

REMINISCENCE OF THE WEEK (November 1, 2005): In junior high school, I had a very unusual teacher of social studies for eighth and ninth grade. He was a charismatic man, but somewhat vain, and always eager to have the last word. On occasion, he would ask one of the students to make a paper crown. He would take his chair, place it on top of one of the tables, put the crown on his head, and declare himself king of the class. He gave each student a nickname, and called each of us by that name, rather than by our true name. I was "eighty-eights" because I played the piano, which has 88 keys. When the class would get too rowdy, he would inevitably shout, "All right, babies, sit down!" He had a previous career as a magician, and when we least expected it, he'd pull something out of a student's ear, or something equally whimsical. To his credit, he always made the class lively and informative, and was well prepared for each lesson. The other teachers considered him something of a freak, and did not always include him in their social gatherings. Once, we were studying the California gold rush, and he asked me to sing a few songs that were in the textbook. I'll never forget the first line of one of the tunes: "The happy days have passed, the mines have failed at last . . . ." For a teachers' talent show, he was the hit of the evening, performing incredible magic illusions. His greatest ability was to make even the most boring topic seem exciting.

REMINISCENCE OF THE WEEK (October 25, 2005): Three decades ago, my family took a car trip to the Outer Banks of North Carolina. My father decided that we should visit the starkly beautiful Bodie Lighthouse, which would have been an excellent idea, except that there was a sharp nail located in one of the parking spots in the lot, which our automobile naturally drove directly over, making the right rear tire immediately very flat. Given the somewhat remote location, we were stuck at the lighthouse for five hours. Bodie Lighthouse is located on a tiny island, and the opportunities for exploring it by foot are limited, especially as most of the small "land" area is below sea level, quite marshy, and not really walkable, even if you have thick waterproof boots, which we did not. There was a ten-minute film on the second floor introducing visitors to the history of the lighthouse. There was also an aquarium on the first floor that featured two healthy goldfish, one very sick goldfish, and one small, young crab. Well, there you have it. My brother and sister each watched the film, and watched it again . . . about 25 times altogether. After seeing it once, I concluded it wasn't going to win any Academy awards, so I went downstairs to see if the crab could catch the sick goldfish. After more than four hours, and about a hundred attempts, the crab finally succeeded. That was my cue to finally go to the bathroom. Oddly, when I look back on the trip, the Bodie Lighthouse is always the first thing that comes to mind, even 30 years later.

REMINISCENCE OF THE WEEK (October 16, 2005): When I was at Johns Hopkins, I joined the chess club, which met every Saturday night at 8 p.m., and was run by a real chess aficionado named Steven Immitt. There was no rule about who could join, but only guys did. The only space large enough to hold the dozen or so chess games that were typically played simultaneously was a room in the basement of the Student Union building. The same basement was host to the university's Rathskeller, a place where students would party hearty every night of the week, but especially boisterously on Saturday evenings. This was in the days when the drinking age was 18, beer was cheap, and disco dancing a la "Saturday Night Fever" was king, so it was common to have well-dressed, but very drunk students saunter, or more accurately stumble, from the Rathskeller into the chess club, and challenge one of us to a game. We had a grandmaster in our group, who loved to challenge these overdressed inebriated strangers, and who refused to play anyone unless there was a stake of at least a quarter. The rest of us usually witnessed at least a few speed-chess contests between this genius and some sorry drunk frat boy, the latter who soon proceeded to lose a few bucks, and then would usually turn either somewhat violent or occasionally break down in tears. The campus security had to be called in at least once per month when the situation would get out of hand, especially if the player had a few pals with him. A general melee sometimes ensued, with chess pieces, clocks, and/or a few bodies flying, and a lot more excitement than you usually associate with that usually sober, intellectual board game. On rare occasions, a female student wanting a break from the Rathskeller noise would wander into the club, leading sometimes to even more interesting situations to be described (perhaps) in another reminiscence.

REMINISCENCE OF THE WEEK (September 28, 2005): In 1969, my hometown Baltimore Orioles were set to play against the New York Mets in baseball's World Series. At my elementary school, the vice principal arranged a contest to see who could most accurately predict the outcome of the championship, which would be given to the first team to win four games. In addition to guessing how many times each team would prevail, the score of each of each contest would be counted toward choosing the victor. The Orioles were very heavily favored by the national sports media. Out of several hundred students and teachers who participated, only one teacher, a native New Yorker from the Bronx, picked the Mets to win the Series, and was roundly criticized for such poor judgment. He conservatively estimated that the series would require the maximum seven games. After the Mets lost the first game, they went on to win the next four in a row in dramatic fashion. At the age of nine, I thus learned the power of contrarian thinking.

REMINISCENCE OF THE WEEK (September 20, 2005): For ten years I studied piano and music composition at Peabody Preparatory in downtown Baltimore. I soon discovered a marvelous quiet sanctuary only a few blocks from the music school, which was the main branch of the Baltimore Public "Enoch Pratt" Library. Upon entering the massive old building, the main hall had incredibly high ceilings, with dozens of the old-fashioned card catalogs arrayed in a few dozen rows in the center. Paintings of Baltimore's entire founding Calvert family, including distant cousins, hung along the walls, as though one had entered the home of a wealthy and very eccentric surviving member of that family. If one continued in a straight line, one entered an even more unusual inner room, with a loft level of ancient books that appeared to rise into the sky, and which was apparently entirely inaccessible by normal human means, unless one had developed the ability to fly, since it was more than fifteen feet up, with no obvious staircase or ladder. The room contained a massive globe that the public was permitted to use and explore closely, as well as the library's primary collection of up-to-date reference volumes. On other floors were complex labyrinths of all kinds of books, including some very old ones, as well as the most modern, and an entire room of the collected works of Edgar Allan Poe. Walking into the building was like entering a temple; exiting, like returning to reality after a strange dream. Once, when I was nine years old and departed by the main entrance, I was immediately approached by a street bum who begged me for a quarter. That was an even more startling return to the real world than I had bargained for.

REMINISCENCE OF THE WEEK (September 12, 2005): When I was in elementary school in Baltimore, we had a special school fair each year on the weekend as a fund raiser. There would be games such as throwing balloons filled with water at a teacher, throwing a soft ball to knock something off a teacher's head, a foot race with a member of the administration, and similar activities that humorously humiliated the staff, while simultaneously earning necessary money. On the Friday immediately before the fair, we were told to bring in fresh lemons. The school purchased peppermint sticks that were mostly hollow. Each lemon was cut in half, and a peppermint stick was inserted into each lemon half. These would be sold as a kind of soft drink; you would suck the lemon through the peppermint stick. It sounds strange, but it tasted delicious. The most popular fund raiser was selling raffle tickets for a dollar apiece, each of which would be attached to a balloon. On a regular school day a week or two after the fair, we had a special "balloon ascension day" in which the entire school body would go outside and simultaneously release two or three thousand balloons. Each balloon had a ticket attached with the telephone number of the school, advising those who retrieved the balloons to please contact the school and state where they found the balloons. The person whose ticket traveled the greatest distance would be the winner, and would receive a cash prize. It was astonishing how many thousands of miles some of the balloons traveled before they were found.

REMINISCENCE OF THE WEEK (August 15, 2005): When I was in junior high and high school, I had a friend whose father was a jazz musician named Jack. Jack had later left the music business to become a salesman, but continued to closely follow the jazz music scene. As my own music knowledge, which began with classical piano, gradually evolved into a broader appreciation of all kinds of music, Jack served as a teacher of jazz, going with me to see whom he considered the best performers of the 1980s, whether or not they were famous. We went together to nightclubs, to outdoor pavilions, to concerts in local universities where some of the greatest unheralded players sometimes had an audience of only 40 or 50, and even to shopping malls. In some cases, it was years later before I realized how special and unusual was this musical journey. On one occasion, we drove early on a Sunday morning for 1-1/2 hours to visit a friend of Jack who lived in a tiny town in western Maryland. His friend was also a former musician, and he had five kids still living at home, all of whom played different instruments. I ended up accompanying each of them in turn on the piano as they played everything from a Mozart violin concerto to a modern jazz clarinet improvisation. Although they had never seen me before, or even heard of me, they all treated me like part of the family and fed both of us a marvelous supper, after which more music followed. It was an unexpected day that I will never forget.

REMINISCENCE OF THE WEEK (July 10, 2005): A number of years ago, I used to live in Weehawken less than a half block from a road overlooking the Hudson River, and each day I would take the ferry both ways to downtown Manhattan. Usually, I would see exactly the same commuters each time, since the boat made the trip only once per hour. Once or twice a month, there would be a group of people who were obviously not familiar with New York City, and who would marvel at each landmark that we passed. I would try to guess where the tourists were from, and would then approach them to see how close I was to their actual point of origin. Of course, if I could understand a few words of a foreign language, that would make it easier. On one occasion, there was a larger crowd than usual who clearly had no familarity with the scenery, and had apparently never even ridden on a ferry before, since every little wave caused them to lose their balance as they posed for an endless series of photographs to send the folks back home. They spoke English quite well, although with a slight accent that I couldn't quite identify. I finally approached one of them and said, "I'll bet that you're taking this ride for the first time." "That's right, it's really amazing how the city looks from the Hudson River." "Let me guess," I continued, "you're from northern California, am I correct?" "No, try again." "Chicago?" "No." "My last guess: southern Florida." "We're from the Upper West Side of Manhattan. For years we've talked about making this trip and finally we went ahead and did it." [A slightly different version of this story won me a one-month pass on the ferry, worth about $200, a decade ago.]

REMINISCENCE OF THE WEEK (July 4, 2005): When I first moved to New York City, I interviewed with many companies before finally deciding where I wanted to work. One of these interviews was at a bank on a very cold early December morning in 1985. I had been preparing to purchase a new overcoat since the previous winter, but had continued to procrastinate about making the purchase, so I was stuck that day having to wear an old navy blue sailor's pea coat with threads literally hanging off the sides, and with a few noticeable holes in various places. When I arrived at the interview, I naturally did not want the person meeting me to see the coat under any circumstances, and got a lucky break: the interview was on a high floor of the building, so when I arrived at the lobby, there was a closet with coat rack right there, near the elevator. I asked the doorman if I could use the coat rack, and he said to go right ahead. By the time I arrived at the interview, I looked professionally appropriate. After meeting with several people, and having what I thought had been a very successful afternoon, the last person interviewing me, a vice president, decided for whatever reason to accompany me all the way down to the lobby, as he was leaving for the day. When we arrived at the ground level, the doorman immediately understood what was happening, and did not attempt to retrieve my hopeless garbage from the closet. However, as we went to go outside, the vice president realized that I was going into the 20-degree evening without an overcoat. He inquired, "Aren't you going to be a bit uncomfortable outside?" I didn't know what to respond, so I said in a cheerful voice, "Well, it's just a short walk to the subway, and the wind has died down quite a bit." He called my bluff, and I had to stop from shivering as we went together to the #2 train downtown, and headed to Brooklyn, continuing the interview informally. He finally departed at the Atlantic Avenue stop to catch a commuter train, about a 15-minute ride from the bank. I waved goodbye, discreetly returned to a train going the other way, and returned to the interview building. Unfortunately, another person who had interviewed me was leaving just as I was about to take my coat out of the closet, so I had to whirl around, say a few pleasantries, and again go outside in the cold for a minute to wish him a proper farewell. I returned once again, and finally was able to get my coat in quiet and peace. Before returning home, I went out one final time in the chilly evening to purchase a proper winter coat. After all that, I didn't get a job offer from the company, for reasons unknown.

REMINISCENCE OF THE WEEK (June 19, 2005): When I was near the end of my junior year in high school, we were offered the unusual opportunity to take a class in computer programming the following year (1977-1978). The reason was that the county where I lived, Baltimore County, Maryland, obtained its very first computer for use by students. (They previously had other computers for government use only.) Because one computer had to be shared by all high schools in the county, a strict timesharing arragement was necessary; every second Monday at 10:30 a.m., we would arrive by school bus at Loch Raven Senior High School, and enjoy the use of the computer for exactly 1-1/2 hours. If this was not enough time to complete our assignments, we were permitted to optionally share private carpools to attend the school between 3:30 p.m. and 5:00 p.m. on Wednesday afternoons. Since there were not enough keypunch machines for the Hollerith cards that we had to use, we were given Sharpee black markers to manually mark the cards; if one minor error was made on any card, it had to be thrown away. Inevitably, once or twice each hour, one of the students would make an error on the card and request a full page between each line sent to the printer, rather than a single line; this caused paper to come flying out wildly, the printer to become jammed, the computer supervisor to become enraged, and a screaming tirade to follow. Ah, the joys that today's kids will never experience.

REMINISCENCE OF THE WEEK (June 5, 2005): Whenever I visit my parents in northwest Baltimore, I enjoy taking a long morning run through the neighborhood just north of where they live, where there are a lot of horse farms and private tennis courts and swimming pools, and the scenery is spectacular. From time to time, I was sure that I spotted one or two buffalos along one section of the run. I thought perhaps that I was imagining it, but I found out from a family friend that a somewhat quirky guy had been keeping buffalos on his property for several years, and enjoyed showing them off. I conjured up a fantasy whereby the buffalos would somehow get free, and terrorize the tony neighbors. Each morning, on my commute to downtown Manhattan, I pick up "Metro", one of the free newspapers that are handed out each morning to New York City area train commuters. On the front page of the April 27, 2005 edition was a huge photo with this story: "An American bison tramples through a makeshift barrier of lawn chairs and netting, knocking down a police officer on a tennis court at Greene Tree gated community yesterday in Pikesville, Md. A herd of American bison escaped from Buzz Berg's Stevenson, Md., farm, and police corralled the nine buffalo into the courts . . . ."

REMINISCENCE OF THE WEEK (May 30, 2005): In the summer of 1983, I worked with an interesting man named Bill Knox who lived in Rockville, Maryland. One Friday afternoon he asked me, "Would you like to go flying tomorrow?" I didn't know exactly what he had in mind, but I met him just after dawn at a tiny airport only a ten-minute drive from where I lived, and soon we were airborne in his twin-engine four-seater Cessna. He flew the tiny plane along roads that I had only seen while driving and we covered parts of four states altogether (MD, VA, WV, PA). After about half an hour in the air, I asked him, "What are these controls doing on my side of the airplane?" He said, "You can fly this baby equally well from either seat; let's see how you do on your side," and proceeded in a few seconds to remove his hands from the steering wheel, push a button, and give me full control over our destiny. After recovering from the sudden surprise of what had happened, I was able to guide us pretty well for the next half hour; of course, all I did was make minor adjustments to our speed and make a few slow, easy turns, but it was the first time that I had been a pilot, and was a real thrill. As we approached our destination, Bill took over in order to land the vehicle, and I thought that would be our adventure for the day, until he said he wanted to take a glider around some particularly challenging and partially uncharted peaks in the Appalachian Mountains. That was too risky for me; while he went up in the glider to happily flirt with the fine line between life and death, I hiked alone up the highest ski trail in the area, enjoying the wildflowers and being on solid ground. He returned safely, after which we flew in the Cessna back to our original point of departure. Bill and I got together a week later to see Mose Alison perform in a small club in Georgetown, D.C.; it was a fabulous evening. A week later, Bill suddenly took a job in another town, while I simultaneously moved to a new neighborhood in Baltimore; in the confusion, we lost touch with one another and have not been in communication since. P.S. If you haven't crashed your plane yet and you're still out there somewhere, please contact me.

REMINISCENCE OF THE WEEK (May 23, 2005): I usually pride myself in being able to find my way back to wherever I want to be, even when I am thousands of miles away from home. Once, however, I got lost less than a mile from the house where I spent most of my childhood. My sister and I were visiting our parents several years ago, when we decided to go jogging together. We started out toward our former high school, then took a familiar path through the woods. We thought we were following along a well-marked stream trail, but soon found it became increasingly overgrown, and after making a turn toward what we thought was the main road, found ourselves surrounded by a thicket of thorny brambles with no obvious way out. Our only clue was the sound of heavy, fast traffic nearby, indicating that we were only a hundred yards or so from the Baltimore Beltway. We spent several minutes trying to find our way back to the original trail, or else some alternative path to a known area. We were almost ready to give up and run painfully through the sharp thorns toward the sound of the traffic, hoping to hitchhike a ride from a passing motorist on the highway, but we finally saw some trampled twigs where we must have entered originally, and rediscovered the main passage without getting too badly scratched. The moral of the story is that even the most familiar path can sometimes lead to utter confusion.

REMINISCENCE OF THE WEEK (May 15, 2005): About a decade ago, I went to Philadelphia with some friends. They didn't want to take Amtrak, since they said it was too expensive, so we took a PATH train--basically a subway--to Jersey City, where we switched to another PATH train to Newark, and then at Newark, switched yet again to a New Jersey Transit train to Trenton. Once in Trenton, we had to purchase tickets for the Philadelphia transit system, known as SEPTA (not to be confused with a septic tank). The train in Trenton was only a few minutes away from departing, and it is a long walk up a staircase to get to the human ticket sellers, so most people were buying their tickets from a machine on the train level. My ticket cost $3.20, but I didn't have anything other than a few $20 bills that I had recently gotten from an ATM machine, so I put in one bill and hoped for the best. On the PATH system, often the change from a large bill in those days arrived in the form of clunky dollar coins from 1979. I was prepared for that, but I guess that near Philadelphia they had run out of those coins, and they don't like to give away their quarters so easily, either, so after a brief pause, the machine gleefully spit out 168 dimes. It was like winning the jackpot in Vegas, except that the dimes were bouncing all over each other and rolling around the platform, and meanwhile about a dozen people behind me in line were impatiently waiting for me to pick up my "winnings". The total trip to Philadelphia took about 1-1/2 hours more than the Amtrak train, so the actual savings was questionable. I got a slight measure of revenge on the return trip when I paid for my New Jersey transit ticket, and for those of my companions, entirely from those dimes, but it took a few weeks to disgorge my coat pockets of all of the ten-cent pieces. The worst part: not a single one of the 168 was a silver (pre-1965) dime.

REMINISCENCE OF THE WEEK--A MOTHERS' DAY TALE (May 8, 2005): The most physically painful experience of my life occurred when I was just 3-1/2 years old. I was going to preschool as a part of a carpool. The driver that day, who was the mother of one of the other kids, was slightly impatient when I was leaving the car, and did not check carefully enough to ensure that my entire body was out. She slammed the door on my left ring (fourth) finger, almost severing it in half. To her credit, she quickly rushed me to the hospital, and the surgeon was able to sew it rapidly and efficiently enough so that, even though there is still a visible scar, it does not adversely affect even the most difficult piano playing. Perhaps that is not the most upbeat story, so here is another: my great-grandmother (my mother's mother's mother) always loved to prepare special food and a lively atmosphere whenever I visited her house, and tried to encourage me in whatever I was doing, such as learning to play the piano. Her greatest lesson to me was to keep pursuing your dream, no matter how difficult it may seem.

REMINISCENCE OF THE WEEK (April 27, 2005): When I was a kid, our family joined the local swimming pool, called the Colonial Village Swimming Club. One of my favorite activities, after leaving the water, was to walk dripping to the snack bar to buy little codfish cakes served between two Saltine crackers and lavishly dabbed with sharp mustard--all for just 15 cents apiece. A good friend of mine lived down the block from me; for many years, we invented our own song-and-dance routines that we performed for our parents and for whoever else was unlucky enough to be around at the time. I was visiting my friend and his mother several months ago, and we spent some time talking with his mother's friend, an older gentleman who was interested in telling tales from the past. He asked me what I remembered of Baltimore in the olden days, and I told him my fond memories of the codfish cakes. "Do you know what they were called?" he asked me. "No, I forgot", I admitted. "They were called Cohen's Coddies," he replied. "Oh, yes, that's right. How do you remember such a detail?" "I'm the Cohen who started Cohen's Coddies."

REMINISCENCE OF THE WEEK: I enjoy eating Haas avocados, which are an especially tasty variety with a black craterlike skin. After I eat one, I take the hard central pit, which is inedible, and put it into whatever pot of dirt is most conveniently nearby. About 80% of these pits just sit there and slowly decompose, but the rest, after taking several weeks to germinate, can surge rapidly to a height of ten feet or more. My wife eventually got weary of seeing yet another avocado plant, so I began to take the pits to work to plant them next to the usual boring office greenery that one finds in any professional building. Nothing happened with the first few pits, but finally an avocado tree arose close to the staircase leading down to the next floor. It soon towered above all the other plants nearby, so more and more people began to notice it. I pointed it out to a few of my co-workers, one of whom started calling me "Farmer Steve". Then, one late evening--as I found out second hand the next day--someone from another department brought in a large pot of dirt, carefully dug up the tree, and transplanted it into their own pot, so they could bring it home. Imagine that, an avocado tree thief right in my own building. I'm still eating avocados and still planting them, so sooner or later, another creation will arise to take its place. Perhaps I'll have to hire an armed guard for the next one.

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: 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.

(c) 1996-2005 Steven Jon Kaplan Your comments are always welcome.

AUTOBIOGRAPHICAL SKETCH: I was born and raised in Baltimore, Maryland, U.S.A., and was graduated from the Johns Hopkins University with a Bachelor of Engineering Science degree in May 1982. I have been studying the precious metals markets since the 1970s, and began this web site in August 1996. I have been writing music and short stories since the mid-1960s. I maintain a fiercely independent stand toward the financial markets and toward everything else in life, and am not compensated for my writings by any person or organization with the exception of the advertising banners posted on this site. I am also a pianist, computer programmer, bridge player, and runner, and enjoy world travel. I appreciate all those who have quoted the various sayings on my web site over the years, which have wound up in some pretty interesting collections.


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