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Updated @ 11:45 p.m. EDT, Sunday, September 9, 2007.


WELCOME TO TRUE CONTRARIAN! I will attempt to create an entertaining, readable, and hopefully refreshing viewpoint a few times each month. Each issue will feature my intermediate-term financial outlook, my long-term financial outlook, and a personal reminiscence.

The stock market is NOT going to be all bright sunshine and chocolate cookies for the rest of the year. --Steven Jon Kaplan

FOOL ME ONCE, SHAME ON YOU; FOOL ME TWICE, SHAME ON ME; FOOL ME SIX TIMES, CALL ME AN EXCITED INVESTOR IN GOLD MINING SHARES (September 9, 2007): It always astounds me how so many promoters of gold funds believe that the public is completely gullible--so naive, in fact, that they will only be interested in buying their wares when their prices are setting new multi-year highs. Isn't there anyone who is marketing to the person looking for a real bargain? Obviously not in the gold sector, since every time that HUI (the Amex Index of Unhedged Gold Mining Shares) has moved above 360 since September 2006, which is six times overall, the gold share bulls have come out of the woodwork to scream "HUI is making an upside breakout!" However, whenever HUI has actually been low enough to justify purchase, as it was less than a month ago, these folks have crawled back into their shells and made barely a peep.

So far, these calls for a breakout have been wrong five times in a row, as HUI was unable to reach 375 on either of these five occasions. On Friday, September 7, 2007, HUI once again moved above 360 (see "Overview of Gold Mining Shares" link below).

So, is this the real thing? What do you think?

Top executives of gold mining companies such as Royal Gold (RGLD) and U.S. Gold (USG) have been selling their shares in recent days. The gold share market has also experiencing exactly the kind of momentum exhaustion, early intraday strength followed by late weakness, and similar classic signs that signal a pending reversal.

To assist you in making this tough decision, notice that the global equity market began a correction on July 19 which has now failed to regain its previous highs, and has begun its next downward wave. Historically, whenever the stock market in general is falling sharply, all sector groups including gold mining shares will participate equally in the decline. When people sell in a panic, they don't calmly say "sell my tech shares, and buy more gold shares". They shout "get me out of everything now!"

If you still can't make up your mind, then consider that the U.S. dollar is at a 16-year low, and is just above a support level which has held repeatedly for the past three decades. Either 1) this 30-year support level will finally be broken for the first time ever; or 2) it will hold to the upside once again, as it has always done for the past 30 years.

Most analysts are bearish on the U.S. dollar because they believe that the U.S. economy will contract and may possibly enter a recession, while the rest of the world continues to expand. However, historically it has always been the case that when the U.S. begins to experience a slowdown, most other parts of the world suffer an even more severe reduction in their anticipated rates of growth. This will cause the U.S. dollar to rally over the next several months relative to these other currencies [with the exception of those which are artificially pegged, of course], rather than plunging to new all-time lows.

Hey, it could be different this time. Maybe Dick Cheney will finally switch to the Democratic Party--but then again, probably not. What happened with gold mining shares on the five previous occasions will happen yet again. Both leopards and gold mining shares rarely change their stripes.

  • Overview of Gold Mining Shares (updated September 9, 2007)
  • Learn more about Steven Jon Kaplan and watch a live interview on MarketWatch.
  • I am currently offering a daily e-mail subscription service for $110.50 (U.S. dollars) for one year, or $37 for three months. Under this service, I will send you an e-mail every business day, and a special weekly review on Sunday, giving specific timely buy/sell recommendations, as well as long-term guidelines for money management. I will also respond to all e-mail questions that you may have regarding my daily updates. 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 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 it will be most timely to purchase gold funds.

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    IS THE WORLDWIDE STOCK MARKET CORRECTION OVER? NO WAY! (August 25, 2007): A number of those in the mainstream media have concluded that the global equity correction which began in the third week of July ended in the middle of August. However, this is completely absurd--because there remain incredibly extended asset classes wherever you look.

    Chinese equities currently stand at more than five times their level of June 6, 2005. That is a euphoric extreme which rivals the South Sea Bubble in London from 1720, and is far more dangerous and exaggerated than anything experienced in any major country over the past three centuries during previous peak equity years such as 1929 or 2000.

    Meanwhile, check out an auction of Christie's or Sotheby's and compare the prices with what they had been a decade ago, or at any time in the past. The word "ridiculous" is one of the kinder ones which comes to mind.

    It is hardly necessary to mention what has happened with real-estate prices around the world, and what will happen in the United States now that many homebuyers have to make a 20% down payment instead of 0%. Do you think that most Americans will be able to pay 20% as easily as they paid 0%? If so, then I'll find some swampland in still-overvalued Florida that hopefully I can still sell short, if you are an interested buyer.

    It has hardly been mentioned even briefly in the financial media, but long-dated U.S. Treasuries and funds such as TLT just touched their highest levels since May 15. Whenever Treasuries are setting new highs, it is just a matter of time before equities and commodities decline. U.S. Treasuries are an important vanguard of economic behavior, since they are held primarily by institutions, and therefore experience much less of the emotional behavior which characterizes trading in most other asset classes. If you look back at previous times when U.S. Treasuries were setting new highs, it has almost always been the case that increasingly clear signs of a global economic slowdown soon emerged, which eventually led to lower prices for almost all equities and commodities.

    Many observers believe that the U.S. dollar will decline because of falling U.S. real-estate prices and a slowing U.S. economy. But this ignores the critical fact that the rest of the world will experience an even bigger drop in housing prices, and a more severe cutback in anticipated growth. That is especially true in emerging markets, where many analysts are still talking about double-digit growth rates for the next several years. An actual growth rate of 4% will be a huge disappointment if one is expecting 10%-14%, and therefore the U.S. dollar and U.S. Treasuries will be among the few beneficiaries of a global economic contraction.

    The bottom line is this: it's not different this time. Those who still think that it is will suffer the same disappointing results as they experienced last time--and that they will unfortunately also go through again the next time.

    CURRENT ASSET ALLOCATION (September 9, 2007): 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%), 1.5%; long-dated U.S. Treasuries and their funds, and long-dated municipal government bonds, including TLT and MYJ, 35%; Treasuries between 2 and 10 years in duration, such as IEI and IEF, 12.5%; TOC, 0.5% (bought at a 15% discount); gold and silver coins and related metals collectibles, 6%; other collectibles, 0.5%; cash and cash equivalents including a long position in VMSXX, negative 30.5%; SHORT POSITIONS: Nasdaq-equivalent (QQQQ, SMH, NDX, GOOG, in that order) and related shorts, 52%; short CFC, 3%; short GLD, 17.5%; short GDX, 2%.

    REMINISCENCE OF THE WEEK (September 9, 2007): I have a brother named Dan who is 6-1/2 years younger than I am, and is much more intelligent than myself. When Dan was a kid, he always wanted to learn new games. In the spring of 1970, I broke my arm, so I stayed inside for most of my summer vacation that year. My brother was usually around, and kept pestering me to teach him something more interesting. I finally surrendered and told him, "I'm going to show you a simple game called chess which I'm sure that you will enjoy." I figured that Dan would soon give up due to the difficulty, but amazingly he quickly grasped even the most obscure rules. Over the course of the summer, he improved so much that I told my dad that Dan knew how to play chess. My dad laughed, until they played against each other and my brother easily won. When American Bobby Fischer contested the world championship versus Russian Boris Spassky in Reykjavik in 1972, and the whole country wanted to learn the game, Dan taught his five-year-old friends how to play. After joining the chess club at his high school, which consistently won state championships, my brother at the age of fourteen was able to beat me routinely without much of a challenge. At the age of sixteen, Dan won a citywide tournament, brought home a huge trophy, and--just as world champions Bobby Fischer and Paul Morphy had done before him--announced at the peak of his accomplishments that he was permanently retiring from the game.

  • Best of Previous Reminiscences
  • (c) 1996-2007 Steven Jon Kaplan Your comments are always welcome.

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