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Updated @ 10:55 p.m. EDT, Sunday, September 23, 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.

Those who fret the most about missing a bull market in anything inevitably suffer the greatest losses from its ensuing bear market. --Steven Jon Kaplan

THE HATED U.S. DOLLAR IS ABOUT TO STAGE ITS BIGGEST RALLY IN SEVEN YEARS (September 23, 2007): If there is any asset which is currently reviled by nearly all analysts around the world, it has to be the U.S. dollar. Not only is there nearly a unanimous consensus that the greenback will decline, but people are going out of their way to say how badly it will inevitably plunge, how the U.S. Federal Reserve is ensuring its collapse, and so on, ad infinitum, ad absurdum. Perhaps my response would be clearer in pig Latin: onay ayway!

We all know the U.S. dollar is unbelievably unpopular. Hey, even the worst garbage rock band has its own web site--the U.S. dollar, incredibly, does not. Reliable surveys show that the percentage of those bullish on the U.S. dollar today is very close to an all-time low. Any virtually unanimous consensus in the financial markets has always been wrong, and this is not going to be the first exception to the rule. As shown by the traders' commitments and other reliable indicators, commercials such as corporate treasurers, who are the most knowledgeable participants in the financial markets, have rarely been more heavily long the U.S. dollar. Speculators, especially small speculators like Japanese housewives, have never been more heavily short, to the tune of more than a trillion dollars. In this case, central banks are heavily on the side of the commercials. Do you think that these housewives will be right, while multinational corporate treasurers and central banks will be wrong? Dream on.

Here is a one-sentence reason why the greenback will rise substantially: the U.S. dollar will rally because expectations of growth outside the U.S. will suffer a significantly greater disappointment than anticipated growth within the U.S.

The U.S. dollar index currently stands just above its all-time low of 78.19 from September 2, 1992. Over the past three decades, critical support has been tested several times, and has held strongly each time. Every global economic slowdown since the U.S. dollar was delinked from gold in 1971 has been accompanied by a rising U.S. dollar, without exception.

For those who think that the Fed rate cuts are negative for the greenback, check out the historic record. About 80% of the time, when the Fed begins to cut interest rates, the U.S. dollar rises for a period of roughly between six and twelve months. More importantly, when the Fed begins to cut rates and the U.S. dollar is not far above its long-term support level, the U.S. dollar has always rallied for a period of at least six months, and usually by a substantial percentage.

As the U.S. dollar rallies, while global economic growth slows, this will have a profound negative impact on virtually all equities and commodities. Most notably, gold mining shares will plunge to retest their lows from December 2005, when HUI was well below 300. Remember that as recently as August 16, which was less than six weeks ago, HUI touched a low of 284.85. On Friday, September 21, 2007, HUI touched a high of 402.27, thus almost exactly matching its 401.69 peak from May 11, 2006.

Volatility cuts both ways. What goes up must come down, and for exactly the same reasons--corporate insiders are always selling to eagerly buying amateurs at the top, and buying from panicked amateurs at the bottom. Notice that recently, commodity shares have almost always performed best in the first hour of trading--this is when most amateurs participate, while professionals as a rule generally wait until the markets have been open at least one hour before taking action.

There has been a lot of speculation about when--not if--gold will reach $1000 an ounce, and even $2000 an ounce. This kind of talk is always a sure sign of a peak for any asset class.

Meanwhile, the price of oil will similarly stage a sharp pullback, and will likely retest January's bottom below $50 per barrel. Top executives of both gold mining companies and energy companies have been heavily selling to the excited public in recent days.

Do you think that the public will be right this time, and the CEOs will be wrong? No wonder you think the commercials and central banks will also be wrong. Dream on!

As Lieutenant Columbo used to say, just one more thing: what might be the world's largest-ever gold deposit was just announced by BHP Billiton as having been discovered at its Olympic Dam mine in South Australia. What do you think the reaction was by other gold mining companies who have no rights to this huge deposit? Give yourself full credit if you guessed that their share prices also rose. Are investors acting emotionally or rationally? Hint: is a huge discovery of any commodity bullish or bearish for that commodity?

  • Overview of Gold Mining Shares (updated September 23, 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.

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    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.

    CURRENT ASSET ALLOCATION (September 23, 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%; 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, 2.5%.

    REMINISCENCE OF THE WEEK (September 23, 2007): In February 1984, I was scanning the advertisement section of a local Baltimore newspaper when I noticed that some historic sheet music was for sale. I called the number listed in the ad, and made an appointment to visit a house in an old section of town, owned by a woman named Hoffman. When I arrived, this woman told me that she had music from songs which had made the "Hit Parade" back in the forties and fifties. I saw a grand piano in the room, and asked if I could try sightreading some of the music to see if I liked it. As I did so, her brother George showed up, and told me the piano was for sale along with the music--so I ended up buying both. After arranging to pick up the piano a week later, George asked me: "Do you have a little more time? Let's try some of these." He played and sang for about ten minutes, then got up for a moment. I immediately sat down on the bench and cheerfully offered, "That's wonderful, now let me try a few." We went back and forth for four or five hours, until finally George told me, "I'm tired. Let's do that some more when you pick up the piano next week."

    Just before I left, I noticed a bass in the corner of the room. I inquired politely, "Does anyone play that?" He responded with a chuckle, "Oh, sure, I have fun sometimes when no one is really listening." When I returned a week later with the moving people, the sister was very agitated. She told me, "George just passed away this morning after riding his bicycle. He collapsed right after he got back and died instantly. I hope you like the piano. Meanwhile, my brother's burial will be tomorrow," and she gave me the address. I hardly knew what to say. When I showed up at the funeral home, I was startled to see a full jazz band performing tunes just as they famously do in New Orleans when a well-known musician dies. I asked someone, "Is this the funeral for George Hoffman"? "Yes, of course," this person responded, "didn't you know that at one time he was the best-known jazz bassist on the East Coast?" I was stunned, and responded honestly, "No, I didn't realize that. I've only heard him singing and doing Hit Parade tunes on the piano." The other person glared at me as though I must be crazy.

  • Best of Previous Reminiscences
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