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Updated @ 8:00 p.m. EST, Sunday, February 1, 2004.


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SAYING OF THE WEEK: In order to buy low and sell high, first you have to buy low. --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.

WELCOME! This is the brand-new True Contrarian by the same yours truly. Given my recently expanded business responsibilities, I am no longer able to write during weekday trading hours, but will instead attempt to create a more entertaining and readable viewpoint once every weekend. Hopefully this will be a more lasting New Year's resolution than the usual annual commitment to clean up the garage. Each week 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. I will also attempt to restore the humor which was so prevalent on this site in the 1990s, but which appeared to have inexplicably diminished in recent years. I will no longer be able to provide such critical detail as what time of day silver bottomed in March 1993 or the latest reports of gold jewelry buying in the suburbs of Dakar, but those who are interested in such data probably already know where to find it.

Recent comments are in boldface. Early warning: there is only a 50/50 chance of an update on February 15, but February 22 will definitely resume as normally.

INTERMEDIATE-TERM FINANCIAL OUTLOOK: Gold and gold mining shares are now technically oversold on a very short-term basis, while the recent one-sixth decline in HUI represents about half the total percent drop that I have been anticipating in gold shares. Since it is unlikely that gold or its shares will bottom in February, due to seasonal patterns, gold will bounce sooner or later for a week or two, so that it can make its first 2004 bottom in March or April. Gold has fallen from $431 on January 6 to $402 on January 30, while HUI dropped from 258.02 (vs. 258.60 on December 2, 2003, thus completing a very bearish double top) to 215.63 as of Friday's close, marking a decline of 16.4% in the past 3-1/2 weeks. This represents about a one-sixth decline in total market capitalization, while South African shares have fallen by about one eighth. The U.S. dollar, which has modestly rebounded in the past two weeks, is likely to have a more significant rally from mid-February through April, which will likely pressure most world commodities including the precious metals. It is taken for granted that the greenback is hopeless, which increases the likelihood of a bounce averaging probably about 12% against most currencies from current levels. Gold will make its first 2004 bottom between $350 and $380, probably in the early spring, and then its second 2004 bottom in the summer, probably between $340 and $370, perhaps just before the Presidential conventions.

FIBONACCI LIVES (and so does WD Gann)!: I have found the Fibonacci retracements to be quite accurate in predicting retracement levels within the context of long-term bull and bear markets. If one takes the Fibonacci sequence 1, 1, 2, 3, 5, 8, 13, 21, 34, etc. (each number represents the sum of the two previous numbers), one finds that the ratio of these numbers eventually approaches almost exactly .618. Similarly, in the financial markets, if any financial instrument in a long-term trend has a retracement in the opposite direction of that trend, most often .618 of the most recent previous gain is surrendered during such a retracement. (There are other retracement levels that apply in certain situations, but the .618 level is the key for most multi-month studies.) Now, let's put this theory to work. Gold shares as measured by HUI bottomed at 112.61 in the morning of March 13, 2003, its lowest level that year. HUI peaked at 258.60 on December 2, 2003. If one assumes that HUI is currently giving up 61.8% of this gain, then its bottom later this year will be 168.38. Gold itself rose from $319.10 on April 7, 2003 to $431.25 on January 6, 2004, so that would signal an upcoming 2004 nadir of almost exactly $362.00. For the Nasdaq, the post-bubble intraday low was 1108.49 on October 10, 2002; the recovery peak on January 26, 2004 was 2153.83. Assuming the January peak is not exceeded in the near future, if 61.8% of the gain is retraced, then the bottom for the Nasdaq later this year, perhaps just before the Presidential conventions, will be 1507.81. Be sure to save these numbers for future reference, so you can either congratulate me (or Fibonacci, a monk who lived in the twelfth century; they had gold back then, but not the Nasdaq), or else curse the both of us if "we" are wrong. To give credit where credit is due, this observation was first discussed in detail by W. D. Gann (1878-1955). Since the late great Gann had only a slide rule, not a calculator, he used the 5/8 level, which is .625, and almost exactly matches .618.

In many ways, there is an important analogy of January 2004 to August 1987. In August 1987, gold mining shares began a correction from all-time peaks which would cause them to decline 40% by November. The Nasdaq also dropped around 40% over the same period of time. Both then had a modest bounce thereafter. The major difference between these two groups was that gold shares continued generally downward for another 13 years, whereas the Nasdaq had suffered only a brief correction in a bull market which would last another 13 years. Now we are probably at the opposite juncture. The Nasdaq's upcoming correction will probably be followed by a downturn which could last for perhaps a decade, while the likely correction in gold shares over the next several months will be merely a typical pullback in the context of a long-term strong bull market which could continue for another decade or more.

As gold shares drop, the Nasdaq will decline more or less in tandem. This may finally be starting; the price action in the past week in the Nasdaq is very typical of a top. Notice the following behavior: QQQ made its final peak at the open on January 20, a historically traditional day for an important high (gold made its all-time peak on January 20, 1980). The Nasdaq reached a higher zenith at the close on January 26, but the QQQ failed to confirm this new high; the same bearish divergence for technology shares was seen in December 2001/January 2002, just before the Nasdaq fell more than 40%. Tuesday's volume exceeded Monday's in the past week, while the magnitude of its decline surpassed Monday's gains; this is also typical topping behavior. Given their very close correlation over the past few years, the Nasdaq will most likely soon follow gold to the downside. To be fair, I had not anticipated correctly that the Nasdaq would almost double from its October 2002 bottom. Like an 18-wheel truck wanting to go in the opposite direction, perhaps it cannot shift from 70 miles per hour north to 70 miles per hour south without a slow turning process. It should be kept in mind that an investor in Paris or Rome or Dubai or Johannesburg or Toronto has been generally unimpressed with the rallies in U.S. equities and in gold. Gold has actually been flat in terms of most world currencies since the summer of 2001, while the U.S. financial markets, although certainly higher in U.S. dollar terms, are little changed in terms of most world currencies. Therefore, as the U.S. dollar stages a typical seasonal rebound, made more likely by a nearly unanimous consensus that the greenback is hopeless, the U.S. financial markets will continue to remain flat in terms of other currencies, which means that they will decline in nominal U.S. dollar terms. U.S. Treasuries will likely be one of the greatest beneficiaries of a rising dollar and money exiting equities; the near consensus bearishness toward bonds is likely to be fooled, at least in the short run.

LONG-TERM FINANCIAL OUTLOOK: Gold will continue to make a pattern of higher lows as its strong bull market from April 2001 to the present continues throughout the next 10 or 15 years. The most recent major low was at $319.10 on April 7, 2003, so the next low will likely be between $340 and $370 an ounce later this year, perhaps in a double bottom in the spring and summer. Gold has surpassed $400 per ounce in many years in the past dating back to 1979, but has gone above $440 per ounce in only a few years, so that barrier has apparently reasserted itself once again. Inevitably gold will go above $500 per ounce, perhaps even as early as 2005, 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.

Meanwhile, gold mining shares will make a similar pattern of higher lows, although given their current P/E ratios, gold itself most likely offers a superior alternative to gold mining shares, given that gold has only about one third the potential percentage downturn of the shares, with roughly the same upside percentage potential. 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. 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, the European central bank and Japan's central bank and Canada's central bank and Australia's central bank are going to depreciate their currencies aggressively, and given that their short-term rates are generally far above those of the U.S., they can depreciate more aggressively and more impressively than the U.S. can, given that the U.S. has basically exhausted nearly all of its interest-rate cutting potential already. This process of competitive devaluation will help gold to rise even without cooperation from a falling U.S. dollar. For that reason, gold producers in South Africa, which have been suffering from the price of gold actually declining in South African rand terms while wages have been rising at about 10% per year, will see far improved profits relative to most other producers. Therefore, those who are currently invested in gold producers primarily outside of South Africa should consider progressively selling at this time, and then reinvesting in South African producers as these shares bottom later in 2004, as well as in physical gold itself and gold coins and collectibles, which as a rule are still selling at historically low premiums to their melt (intrinsic) values. Already South African gold mining shares are outperforming on the downside, although the real sign of their strength will be their surprising ability to show greater percentage increases on the upside beginning later this year and likely continuing throughout 2005 and 2006.

U.S. equities in general will continue to decline until the dividend yield on the S&P 500 is between 7.5% and 9.5%. Great bull excesses are usually followed by equally severe recessions.

REMINISCENCE OF THE WEEK: When I spent my final year in Baltimore in 1984-1985, I hated to drive through the snow, since the near-freezing temperatures guaranteed a thin layer of ice on the top, and Baltimore drivers are notoriously bad at driving in the white stuff. Therefore, I would take the bus to work on those days when snow had fallen or was predicted. The bus ran only once per hour, so I always took it at the same time of day. On my return trip home during the first of these bus rides, I met a friendly older black man named Sunny, who offered me a half-opened, half-drunk can of Budweiser beer right on the bus (luckily we were sitting near the back). I felt it would be impolite to decline, so I accepted and we ended up chatting for over half an hour. After that, we saw each other frequently; he enjoyed my giving him dark chocolate, whereas he preferred sharing with me his favorite Budweiser. After late February, it didn't snow for several weeks and we didn't see each other, but then there was a freak early morning storm in early April as Sunny and I talked about the meaning of life for the final time.

REMINISCENCE OF THE WEEK: In the cold winter of early 1979, I was asked by my freshman class at Johns Hopkins to perform some songs on the piano for a special event called "Gold Rush Days". The idea was to recreate the lively atmosphere of an old California saloon. I found a few unusual books in the library about songs that were song by the gold rush pioneers, usually set to popular songs of the day. (I still remember the words of one song done to the tune of Stephen Foster's "Old Dog Trey": The happy days have passed, the mines have failed at last, the canyons and gulches no longer will pay; there's nothing left for me, I'll never ever see, my happy happy home far away . . . .) After playing a few tunes, more and more 18-year-olds gathered around the grand piano where I was performing, beers in hand (it was legal then). Finally, about a dozen people were leaning against the piano, when in the middle of a lively tune, I heard a loud crack and the legs fell down, one by one, as I barely escaped being crushed by the piano's collapse. After recovering from the shock, somehow we were able to prop it back up just enough to continue with the show.

(c) 1996-2004 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. Those who do not like my opinions can feel free to stuff it up their respective butts.


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