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Updated @ 11:00 p.m. EST, Thursday, December 21, 2006.


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.

A study of economics usually reveals that the best time to buy anything is last year. --Marty Allen

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    On January 1, 2007, I will increase the subscription rate to $110.50 for one year and $37 for three months. The price of this subscription will increase again to $119.50 for one year and $40 for three months the next time that HUI goes below its weak triple bottom of 270, since that is when I will be giving my primary buying recommendations for gold mining and other precious metals shares.

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    Happy birthday Dan!

    BASE METALS LEAD THE WAY FOR THE WORLDWIDE EQUITY MARKETS (December 21, 2006): The most important development in the financial markets in the past two months has been the progressive deterioration of base metals prices. Beginning in mid-October, copper began to decline; it has since fallen to its lowest level in several months, with almost zero media coverage of this event.

    After hitting new daily highs so frequently that it became almost boring, nickel and zinc--which had each experienced incredible percentage gains in 2006--have begun to stage a moderate pullback. Other base metals have grudgingly begun to follow them lower. Nickel and zinc still have an incredibly long way to decline before they reach anything resembling support levels.

    When base metals are falling progressively in price, this means that the actual rate of worldwide economic growth is going to be significantly lower than most observers have been anticipating. Thus, the recent decline in copper, nickel, and zinc will soon translate into a corresponding pullback for worldwide equity indices.

    Very quietly, even with the headlines about new Dow highs being broadcast practically every day, major exchange-traded funds such as QQQQ have recently touched their lowest levels in several weeks. The number of new daily highs on all major exchanges has been systematically contracting. Meanwhile, according to Bloomberg, the dollar ratio of top executives' selling to buying recently touched 63.18, the highest such ratio recorded since at least 1987. The question is not whether equity indices will decline sharply worldwide, but exactly how much and when.

    GO GREENBACK GO (December 8, 2006): There are currently many differences of opinion in the financial markets. Some, like myself, believe that equities have completed a major peak in advance of a significant correction; others have given optimistic forecasts for a much higher stock market in 2007. There are many diverse opinions on interest rates and commodities. However, one thing on which everyone seems to agree is that the U.S. dollar will decline. The Economist is so certain of this that they made it a feature story last week.

    As far as I know, although the U.S. dollar is the world's foremost reserve currency, it has no web site. There are no greenback chat sites. There is no U.S. dollar fan club, and there is not even one U.S. dollar guru to quote on those days when the dollar is higher, to tell you why it will continue to rise in value. The U.S. government may spend billions on defense and has literally an army of employees on its payroll worldwide, but it hasn't spent a penny to promote its own currency.

    Nonetheless, even without a PR man (or woman) to pump (or should I say pimp?) the U.S. dollar, it will gain substantially in value over the next half year or more. The U.S. has the highest rates on time deposits in the developed world. With a Democratically-controlled House of Representatives and a Republican President, there will be much less spending and higher taxes, which means a lower budget deficit and therefore a stronger greenback. The U.S. dollar also has a history of gaining in value in advance of a recession, as was seen in 1980, 1990, and 2000.

    Most importantly, however, is the sentiment itself. When there is a virtually unanimous consensus on anything in the financial markets, the opposite inevitably occurs. It's not different this time. As everyone is waiting for the U.S. dollar to collapse, it will stage a strong rally that will likely bring the U.S. dollar index close to 90.

    As the dollar rises, most equities and commodities will decline. If you want to know when to buy gold and silver, just turn on your TV. No, don't waste your time watching CNN or CNBC. Look at the travel shows instead. When they tell you that because of the strong dollar it's a great bargain to visit Europe, that will be your signal to purchase precious metals and their shares.

    GOLD MINING SHARES ARE HEADING AT LEAST 25% LOWER (November 12, 2006): Gold mining share indices and funds attempted to break and hold above their 200-day moving averages in the past week. This false "breakout" will soon be reversed sharply to the downside. As the financial markets slowly but surely realize that U.S. political gridlock means substantially less spending and higher taxes, and therefore a significantly lower budget deficit, the U.S. dollar will progressively strengthen, which will depress the prices of precious metals and their shares. Simultaneously, the Congress will tilt toward stricter environmental regulations, which will erode the profit margins of all hard-asset producers. Most importantly, equities worldwide will be experiencing a sharp decline in price-earnings ratios as we experience a global economic slowdown, which means lower prices for all equity sector groups, including gold mining shares. I am still expecting HUI, the Amex Index of Unhedged Gold Mining Shares, to reach 248, probably by the spring of 2007. This week's intraday peak for HUI was 341.31 and its closing price was 332.39.

    HOW LOW WILL HUI GO? (September 10, 2006): HUI is the Amex Index of Unhedged Gold Mining Shares. How low will HUI eventually go, exactly, over the next several months? One very useful guide is to observe that on December 2, 2003, HUI reached a peak of 258.60 which was not exceeded for about two years. (November 28, 2006) As a rule, during its bull market which began on November 25-26, 2000, HUI has gone modestly below each such high-water mark during each subsequent extended correction. Another guide is found by measuring the entire gain in HUI from its May 16, 2005 bottom of 165.71 to its May 11, 2006 peak of 401.69. If HUI surrenders exactly 61.8% of this increase--known as the key Fibonacci retracement--it would put HUI at 255.85. It's no coincidence that these two numbers are so close. If history is any guide--which it almost always is--then HUI should move a few percent below each of these numbers, and bottom near 248.

    CURRENT ASSET ALLOCATION (December 21, 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 5.25%), 10%; long-dated U.S. Treasuries and their funds, and long-dated municipal government bonds, including TLT and MYJ, 31%; Treasuries between 2 and 10 years in duration, such as IEF, 10%; TOC, 2%; gold and silver coins and related metals collectibles, 6%; other collectibles, 0.5%; cash and cash equivalents including a long position in VMSXX, negative 29.5%; SHORT POSITIONS: Nasdaq-equivalent (QQQQ, SMH, NDX, GOOG) and related shorts, 47.5%; short CFC, 3%; short GLD, 17.5%; short GDX, 2%.

  • Overview of Gold Mining Shares (updated December 10, 2006)
  • REMINISCENCE OF THE WEEK (December 21, 2006): When I was a student at Johns Hopkins, I had an excellent economics professor named Dr. Carl F. Christ. By the way, his last name rhymes with "grist", not with that guy whose birthday is being celebrated next Monday. Each winter, the sophomores and juniors from my alma mater who are getting a minor in business visit New York City for one week, to learn about potential employment opportunities. I have been attending these gatherings for several years. Last year, I received an unexpected surprise when Dr. Christ showed up along with the students, and was deservedly given a special honor. I was even more surprised--and, frankly, a bit disappointed--when I discovered that Dr. Christ already knew all of the economists' jokes that I had learned from the internet. My favorite of these jokes is about a student who visits his favorite economics professor 25 years after graduation, and arrives on the day of the final exam. The student says to the professor, "I can't believe you're still asking exactly the same questions, word for word! I'll bet I could still get an A if I took this test today." "I'm sorry, but you'd fail," responds the professor. "The questions are exactly the same, but the correct answers are completely different."

  • Best of Previous Reminiscences
  • Learn more about Steven Jon Kaplan and watch a live interview on MarketWatch.
  • (c) 1996-2006 Steven Jon Kaplan Your comments are always welcome.

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