A true contrarian look at investing and at life in general.

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Updated @ 3:30 a.m. EDT, Tuesday, June 27, 2006.


  • I am currently offering an e-mail subscription service for $104.50 (U.S. dollars) for one year, or $35 for three months. This service will provide daily e-mails giving specific timely buy/sell recommendations, as well as long-term guidelines for money management. As an example of this service, I sent an e-mail in the morning of Monday, May 22, 2006, recommending that subscribers switch from being short precious metals shares to being short the precious metals funds GLD and SLV. Payment can be made through PayPal, credit card, or check, whichever you prefer. Your e-mail address will not be given to any other person or organization under any circumstances. The price of this subscription will increase the next time that HUI goes below 270, since that is when I will be giving my primary buying recommendations for precious metals shares.

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  • If you have a plan for success, you may or may not succeed. But if you have no plan, you will surely fail. --Steven Jon Kaplan

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    A special thanks to Mr. Don McEachern for designing the beautiful banner at the top of the web site, and a slightly different one seen on the back issue list.

    A sincere note of appreciation to my internet host, DirectNIC, located in downtown New Orleans, for remaining in their offices continuously throughout the disaster, keeping their web sites up and running during almost the entire time of the hurricane and flood. That is service above and beyond the call of duty.

    WELCOME TO TRUE CONTRARIAN! I will attempt to create an entertaining, readable, and hopefully refreshing viewpoint roughly once per week. Each issue will feature my intermediate-term financial outlook, my long-term financial outlook, and a personal reminiscence from my journal.

    Your comments are always welcome, or send an e-mail to sjkaplan@earthlink.net.

    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.

    DISTORTING THE TRUTH ABOUT U.S. RESIDENTIAL HOUSING PRICES (June 27, 2006): The financial media continue to distort the truth about U.S. residential housing prices, which have recently been declining moderately after several years of all-time record increases.

    Consider how Monday's 10 a.m. report on new home sales was reported in the financial media. Almost all stories about this data mentioned that the volume of new home sales rose by 4.6% from April 2006 to May 2006. Half of the stories did not mention price at all! Those that did realize that price might be important to a tiny minority of readers stated that the median sales price for a new home in the U.S. rose by 3.1% from May 2005 to May 2006.

    Now, am I the only person in the world who thinks it's strange that volume is reported in comparison with last month, but price is reported in comparison with last year? This seems very peculiar, to say the least. It would seem to me that, if anything, the data should be reported in reverse. That is to say, volume, which is heavily seasonal since people will be mostly buying new homes when the weather is ideal for house hunting, should be compared on a year-over-year basis, rather than month to month. On the other hand, price, which varies according to the economy, should be compared on a month-over-month basis, since seasonality would appear to be irrelevant. Maybe I'm just crazy, and the rest of the financial media is completely logical.

    Anyhow, let's look at the data when reported from that angle. The volume of new home sales declined--actually FELL--by 5.9% from May 2005 through May 2006. Meanwhile, the median price also declined--meaning FELL--by 4.3% from April 2006 through May 2006, and is currently at a 10-month low.

    As Paul Harvey would say, now you know the rest of the story. Or, to put it more succinctly, now you know the story, period. I have to assume that the financial media will continue to report this data in such a distorted manner for the next several years, or longer. Such is life, I suppose. You don't think for a moment that the media might be doing this on purpose? I honestly don't think they're smart enough to be that devious. Remember, this is the same financial media which sincerely believes that equities and commodities usually move in opposite directions.

    HEAVILY BUY U.S. TREASURIES (June 27, 2006): If there's an investment class which is universally despised at this time, it has to be U.S. Treasuries of all maturities. Everyone is obsessed with the notion that inflation will continue to rise for the indefinite future, and that the Fed will continue to raise interest rates. However, there are increasing signs that recession, rather than inflation, is the most serious threat to the economy. Emerging-market equities have experienced declines usually seen only before a major worldwide slowdown, while the recent sharp peak in commodities prices often coincides with the final leg of a long-term economic expansion.

    The traders' commitments for U.S. Treasury bonds, reported as of Tuesday, June 20, 2006, showed commercials long 509,147, up 30,239; short 337,095, down 42,148. Thus, commercials were net long 172,052, close to an all-time record, and representing a dramatic increase of 72,387 in just a single week. Thus, those most closely connected with the long-term Treasury market have been very heavy buyers even as the financial media have been disparaging them as an investment class. Shorter-term Treasuries also make a compelling buy at this time.

    The U.S. Treasury curve is currently "inverted", meaning that the 2-year yield is higher than the 10-year yield. When this inversion first occurred in December 2005, it was discussed heavily by the media, but dismissed as a fluke, even though it has the most reliable historical record of all indicators in forecasting a recession over the subsequent 1-1/2 year period. When this inversion occurred in recent weeks, it was barely mentioned.

    Thus, one of the most unusual and reliable harbingers of an economic slowdown is not even known by the general public. Such an inversion exists less than 2% of the time, and is thus something that should cause intelligent financial commentators to stand up and take notice. Even with equities and commodities generally performing poorly in the past several weeks, and the reliable Presidential cycle pointing to further weakness in both through late summer or early autumn, investors are choosing to take money out of Treasury funds rather than out of equity and commodity funds. Be a true contrarian and buy Treasuries, such as the exchange-traded fund TLT.

    HUI CORRECTIONS IN THE PAST 4 YEARS (February 5, 2006): HUI, the Amex Goldbugs Index of Unhedged Gold Mining Shares, has experienced four corrections averaging more than 1/3 in magnitude in the past four years. Here are the precise dates and figures of each such pullback:

    2002: 154.99 on June 4, 2002 to 92.82 on July 26, 2002: 40.1%.

    2003: 154.92 on January 6, 2003 to 112.61 on March 13, 2003: 27.3%.

    2003-2004: 258.60 on December 2, 2003 to 163.81 on May 10, 2004: 36.7%.

    2004-2005: 248.18 on November 17, 2004 to 165.71 on May 16, 2005: 33.2%.

    2006: 401.69 on May 11, 2006 to ???.?? on ??? ??, ????: ??.?% [I'm guessing the eventual low will be near 248, a decline of 38%].

    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. (May 29, 2006) As of May 22, 2006, there is a new exchange-traded fund of gold mining shares called GDX, which is intended to track the Amex-listed index GDM. More information on GDX can be found at http://www.vaneck.com/gdx. The management fee for GDX is currently only 0.55%, which may be increased to 0.79% in another year. Since GDX has the lowest fee of all true gold funds, and can be traded intraday, it is currently my favorite gold fund. ASA is a closed-end fund of precious metals shares, heavily weighted in South Africa. Since the management fee is currently 1.15%, I do not heavily favor it, but it does trade intraday, and so may be worth buying in small quantities whenever its discount to net asset value exceeds 15%, which happens occasionally. All but three of the open-end gold funds charge more than 1.2% 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 the most reasonable fees are BGEIX, the American Century Global Gold Fund (current annual expense ratio 0.67%), and VGPMX, the Vanguard Precious Metals and Mining Fund (current ratio 0.48%). 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 0.89% 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). Once it is appropriate to sell gold mining shares, it is also usually advantageous to do so at 10 a.m., when they generally peak during the formation of market tops.

    CURRENT ASSET ALLOCATION (June 27, 2006, marked to market): My own personal funds are currently allocated as follows: LONG POSITIONS: stable value fund (retirement fund with stable principal paying variable interest, currently 5.00%), 32%; long-dated U.S. Treasuries and their funds, and long-dated municipal government bonds, including TLT and MYJ, 24%; gold and silver coins and related metals collectibles, 6%; other collectibles, 0.5%; cash and cash equivalents including a long position in VMSXX, negative 29%; SHORT POSITIONS: Nasdaq-equivalent (QQQQ, NDX) and related shorts, including short SMH, 43.5%; short CFC, 3%; short GLD, 20%.

    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. (June 27, 2006) At the current time, inflation is about 3.25% while the anticipated Federal funds rate is approximately 5.40%, yielding a real rate of return of positive 2.15%, its highest positive level in more than five years. Since gold and silver strongly prefer a negative real interest rate to a positive one, this is bearish for precious metals. Investors in gold appear to have entirely forgotten its important negative correlation with the real rate of return, making it that much more important at this time. 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 is the primary reason why gold fell all the way to $252 per troy ounce, not because of some ridiculous manipulation theory.

    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. (February 5, 2006) Amazingly, Jeremy Grantham, in the February 6, 2006 edition of Barron's, makes the exact same timewise prediction: U.S. equities will achieve their deepest nadir in 2010. His logic is that any asset class typically takes about one decade to go from top to bottom (U.S. equities peaked in March 2000). U.S. residential real estate lovers, take heed: the peak in August 2005 [National Association of Realtors] implies that the bottom for U.S. housing prices will occur near 2015.

    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 decade or so. Important higher lows included $319.10 on April 7, 2003; $371.25 in the morning of Monday, May 10, 2004; $410.75 on February 8, 2005; and $428.00 on August 30, 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 1.95%, is between 6.5% and 10.5%. Great bull excesses are usually followed by equally severe recessions.

    REMINISCENCE OF THE WEEK (June 27, 2006): When I was seventeen, I played golf for the first time with an acquaintance from high school, on a private course located just across from the island of Chincoteague, Virginia (yes, the same one as in the book about the horses). I was completely unfamiliar with the sport, only having seen it a few times on TV, and not having any friends or family members who played. When I showed up to meet my school buddy, he asked me in puzzlement, "Where are your clubs?" I responded that I didn't have any, and figured I could rent them the same way I rented my bowling shoes at the duckpin bowling alley. Unfortunately, there were no left-handed clubs available in the clubhouse, so he let me borrow his. I also didn't have any golf balls, and due to my horrendously curving swing, kept losing my buddy's balls in everything from high grass to sand traps to water hazards. In order to make up for the lost balls, I began to search around for balls that other golfers had left behind, and soon discovered that the water hazards had plenty of balls that people just didn't want to take the trouble to retrieve. By the time we were done with just four holes--my score was close to 50 for the four--I was thoroughly muddied up to the waist, but was proud of myself, since I had located several dozen balls of all kinds, some of which had been lost for months (or years). When we finally got back to the clubhouse, the club owner forced me to take a shower, so I took the balls in with me, in order that they would be cleaned also. I have not played since.

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  • (c) 1996-2006 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, music composer, 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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