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Updated @ 5:00 a.m. EDT, Tuesday, April 25, 2006.


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  • SAYING OF THE WEEK: It may be that the race is not always to the swift, nor the battle to the strong--but that is the way to bet. --Damon Runyon

    Jewelry Auction-Live Bullion Quotes ==>

    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.

    THE EXTREMES ARE FAR MORE EXTREME THAN USUAL, THUS MAKING THEM FAR MORE SIGNIFICANT THAN USUAL (April 25, 2006): In the financial markets, we have recently seen an unusual number of extremes that occur roughly only once every two decades. Let us consider the most important ones:

    First, the traders' commitments for long-dated U.S. Treasuries are close to their all-time bullish extreme. As of last week, commercials were long 513,496, up 24,722, and short 308,448, down 2,815, for a total net long of 205,048. This is far above the 99th percentile for this reading. As a rule, traders' commitments are many times more significant when they are at such extremes, than when they are not. Therefore, there is going to be some kind of "surprise" economic news that indicates unexpected weakness in the U.S. economy. Investors can participate by purchasing long-dated U.S. Treasuries directly, or via a fund such as TLT, which pays more than 0.4% interest each month. TLT, which recently has spent time below 85, is likely to regain its support level of 88 within the next several weeks.

    Coincident with this extreme is an equally rare extreme seen in recent sentiment surveys by the respected Market Vane. Last week, this survey showed 97% of traders bullish on silver, and 96% bullish on copper. 90% were bullish on gold, matching the high from February 1, 2006, just before the previous decline in this sector. A reading of 97% bullish on anything--commodity, currency, or otherwise--was only seen once previously in the entire history of Market Vane. These kinds of extremes are never resolved with a brief pullback of a few trading days, but usually require about a half year to shake out recent excited participants who do not realize that volatility cuts both ways.

    The percentage of energy producers, as a percentage of the total market capitalization of the S&P 500, is at its highest level since the early 1980s. This coincides with the heaviest insider selling and secondary share issuance by oil producers and other energy providers since the early 1980s. Metals producers are seeing their heaviest insider selling and secondary share issuance since the summer of 1987.

    Thus, we are close to a major bottom for long-dated U.S. Treasuries, and a simultaneous major peak for metals and energy prices. One logical explanation is that the world has nearly universally accepted the thesis of rising inflation, whereas declining inflation is probably a much more likely outcome. Whether it is because of U.S. housing prices--already down 5% from their highs of last summer [see details below]--accelerating their decline, or some other factors, a major shift in inflationary expectations is already underway. The respected ECRI survey has confirmed that inflation in the U.S. is decelerating, even as the media talks incessantly of how it is accelerating. Just as with the housing bubble's peak several months ago, these kinds of critical changes in the worldwide economy usually do not become apparent to most of its observers until they have already been underway for several months.

    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%.

    REAL-ESTATE UPDATE (March 5, 2006): You would hardly know it from the mainstream media, but U.S. residential real estate prices have been declining for months, and are now down 5% from their peak of August 2005. Below are the official figures for median existing U.S. home prices from the National Association of Realtors, dating back to January 2005:

    February 2006: $209,000.

    January 2006: $211,000.

    December 2005: $211,000.

    November 2005: $215,000.

    October 2005: $218,000.

    September 2005: $212,000.

    August 2005: $220,000.

    July 2005: $218,000.

    June 2005: $219,000.

    May 2005: $207,000.

    April 2005: $203,800.

    March 2005: $195,000.

    February 2005: $190,000.

    January 2005: $189,000.

    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. However, all but three 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 0.68%), 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. Therefore, I am adding FSAGX to my recommended list.

    CURRENT ASSET ALLOCATION (April 25, 2006): My own personal funds are currently allocated as follows: LONG POSITIONS: stable value fund (retirement fund with stable principal paying variable interest, currently 4.75%), 33%; BEGBX (American Century International Bond Fund), 4.5%; other U.S. and municipal government bonds, including TLT, MYJ, and inflation-protected, 18%; MRK, 0.5%; gold and silver coins and related metals collectibles, 6%; other collectibles, 0.5%; cash and cash equivalents, negative 31.5%; SHORT POSITIONS: Nasdaq-equivalent (QQQQ, NDX) and related shorts, including SMH and CFC, 50%; net short gold mining shares, 19%.

    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. (April 3, 2006) At the current time, inflation is about 3.10% while the anticipated Federal funds rate is approximately 5.10%, yielding a real rate of return of positive 2.00%, its highest positive level in 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 1.86%, is between 6.5% and 10.5%. Great bull excesses are usually followed by equally severe recessions.

    REMINISCENCE OF THE WEEK: TORONTO, PART 1 (April 12, 2006): I have family all over the world, but the greatest concentration of my relatives live in Toronto. In 1976, we had our biggest-ever family reunion in that city, and I met some of my cousins for the first time. I still keep in touch with most of them. While we were there, we went to the Ontario Science Center, which I still rank as the best of its kind. In the center (or, should I say, "centre") of the complex, visible from any of the other rooms, was a huge contraption going all the way from the floor to the ceiling. It was patterned after the inside of a computer chip, in which wires conducting electricity go through a series of Boolean "gates". Each gate has two inputs, each of which can be either on or off; each gate has one output, which is either on or off depending upon the values of the two inputs. The gates were arranged in a complex cascading pattern going from the ceiling to the floor. Anyone who wanted to be the next victim of this contraption voluntarily ascended a staircase to a central area in which this person could set the values of all of the inputs to the uppermost gates, those closest to the ceiling. The remaining gates would be triggered deterministically depending upon the results of the outputs of the other gates. An enormous bell on the side of the room was apparently set to ring if someone correctly set all of the inputs in the exact sequence necessary to trigger a positive output from the bottommost gate. Over the course of the few hours that we were in the science center, the bell did not ring even once. An amazing parade of folks gave it their best shot, but inevitably failed. I didn't see anyone under the age of twenty attempt to figure it out. Suddenly, my nine-year-old brother ascended the steps, which caused a ripple of laughter and a lot of fingerpointing. On his first try, the bell loudly rang. They didn't realize they were looking at a future science professor.

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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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