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May 12, 2008

Neither A Borrower Nor A Lender Be
by Captain Hook

The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Friday, April 25th, 2008.

And most certainly, don't be a gold producer, as the deck is definitively stacked against you here too. We will get back to this subject in just a minute. But first, let's expand on that title, as it's a beauty given global monetary conditions appear to be progressing into a state of hyperinflation. Neither a borrower nor a lender be - is a line first penned by Shakespeare in reference to important lessons in life, which more recently has morphed into a forgotten mores rooted in lessons learned during hard times - or should I say 'honest money times.' Honest money times - what the heck are 'honest money times'? Such a terminology implies government and monetary authorities are attempting to pull a fast one in that they are issuing 'dishonest money'. How can this be when foreigners accept our currency for manufactured 'hard items', on top of the fact everybody has access to the information concerning currency debasement policies of the present day governing regime?

The answer to this question is based in the understanding that even in hard times, when people pay closer attention to such matters, a majority of the population would be hard pressed to define the term 'money' in a proper and full context. And once 'easy money policies' have been in place long enough, the living gets so good just about everybody forgets what honest money (money that holds value) is all about. That is to say unlike today, where fiat currencies are printed around the world in an increasingly unbridled fashion, money creation was previously retrained by a gold standard that prevented unfretted currency creation, and this in turn kept the rate at which humans were exploiting natural resources in check. Now unfortunately, because monetary authorities lack any semblance of discipline, we are using up our resources too quickly to remain a sustainable condition, causing huge price fluctuations, and making business increasingly difficult for all.

There is a solution to this problem of course, which involves pricing increasing percentages of people out of markets they require for survival, which as alluded to above, is exactly what is happening. Here, in an attempt to survive (and more), greedy bankers print increasing amounts of fiat currency to mask the vulgarities associated with past practice, which eventually leads to hyperinflation. This is of course theoretically good for borrowers, as debts are inflated away, at least in the earlier stages of the cycle. Problems do arise as the numbers get bigger however; which is part of the reason attempts are made to hide the inflation. How do they do this most effectively? Answer: Central planners suppress the main inflation indicator. This of course means they suppress the gold price by any means, going so far as to suppress silver prices as well given its association with gold, combined with the fact that up until more recently it's been easy to manage due to various factors, not the least of which was abundant supply.

So you see it's no mistake that even though precious metals prices have risen since millennium, mining companies cannot make a profit against rapidly rising input costs. And this is where the title for this study is rooted, in the observation that at present, neither soft (banks are going bust) or hard (gold and silver) money manufacture is profitable? But this is set to change, as paper market derived schemes to suppress the price of precious metals are becoming increasingly less effective, with the present day banking establishment about to meet its nemesis - that being the very same exploding money supply they sponsor gobbling up increasingly diminished physical supply. The irony is profound here - no?

You bet the irony is profound, as implications associated with gold breaking up through the $1,000 mark carry an important message. If gold can go through the four-digit hurdle, and hold, theory suggests it can go to the next four-digit interval ($2,000), and then the next, and the next. So in relation to the theme of this piece, while it appears it's not a good idea to be a borrower or lender anymore, it does appear remaining (becoming) a gold owner will be looked back on as being a stroke of genius if it progresses as described in this manner. Notice I use the terminology 'gold owner' here, because by anchoring one's wealth in gold, you are neither a borrower nor a lender, but an owner of lasting wealth that transcends the fiat currency world.

Of course near-term prospects for gold appear precarious given it's overbought from a technical perspective, and fiat currency trends appear set for a correction. But as discussed in our last meeting, and an argument that is substantially fortified in the above understandings, such considerations will not matter in the end, as all fiat currencies are being revalued against the commodities we humans need to survive on a secular basis. And the sheer numbers involved, combined with our greed, ensures this trend's continuation no matter which fiat currency is rising or falling against another. More specifically, and in terms of the dollar ($) because it's reserve currency status has theoretically been driving reciprocal debasement rates up until now, whether the States is debasing the ($) faster than the Euro (or any other fiat currency) does not matter in the end, because the point is all fiat currencies will eventually be worthless against commodities if this process continues, with the only question being which one(s) collapse first. (i.e. hence the catchphrase 'the race to zero'.)

But people are big on game theory, and games are played in order to confuse and keep the weak minded from participating in the secular trend. Such is the nature of cyclical interruptions in pricing mechanisms (local currencies) to make it not only appear confusing, but to call into question the very existence of a secular trend. This is what is currently happening to gold, where central planners have hit the wall in terms of the easy way out (allowing the $ to depreciate), and now they must at least threaten to allow for a cyclical correction in the US Dollar Index ($) even though it's arguable the equity complex can't handle it. That is to say, both the US consumer and global economy remain weakened by a secular reversal in the credit cycle, weakened to the point that if continued relief is not maintained, consumption will fall even faster than is currently being experienced. Here, we should remember the consumer is two / thirds of the economy, and therefore if consumption continues to slow, this condition will spread to other sectors of the economy, which of course is already happening.

Naturally then, or perhaps I should say 'unnaturally', as there is nothing natural about inflation, this is why central planners feel they have license to continue debasing our currencies / economies at accelerating rates in attempting to thwart the natural process of unwinding a human condition in excess, attempting to maintain access to precious commodities required for survival. And when paper economies are gaining on gold, this means central planners are winning the battle in this respect, with the most widely followed measure being the Dow / Gold Ratio. Here, although the secular trend remains in tact, we are currently entering a period that has historically provided relief from a cyclical perspective. (i.e. note that time lines are suggestive up to a two-year period of cyclical strength in paper assets lies directly ahead.) This is that unseen force (cycles) that confounds traders / investors unable to understand why stocks can rally while the news is still terrible, which of course is the situation at present.

And as you undoubtedly know, this is also the reason we are correspondingly enjoying a cyclically based correction in precious metals as well, where I say 'enjoying' because we are using it to position for the big run higher later this year, and next. How can we be so sure gold is still engulfed in a secular bull market past our fundamentally derived suspicions? By looking at the charts of course. Here's the rub however. One must be looking at the right charts, where for example simply looking at a gold chart would tell most people nothing other than it appears a top is in place, and prices are heading lower. And prices may in fact be heading further down once the apparent head and shoulders pattern (H&S's) in the gold chart is broken to the downside. This is not an unreasonable expectation considering the H&S's in the Amex Gold Bugs Index (HUI) was violated yesterday, with precious metals shares characteristically leading the way. What's more, with the 21-month exponential moving average (EMA) (swing line) at 375ish (seen here), a trip into this price range to test the trend is expected (as mentioned previously), with the measured move in the HUI's H&S's down to 330 providing ample scope for such a move. (See Figure 1)

Figure 1

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After this correction lower is finished however, which as you know from discussion over the past few weeks we expect to occur in May, if history is a good guide one should see prices advance afterwards, with potentially spectacular returns possible in junior shares based on our studies. Here, you may remember we were originally looking for a bottom in late April consistent with the 1978 model (see Figure 3), where circumstances (stagflation) / seasonal patterning at present are similar. Because of delays associated with excesses of inter-market relationships however, mainly predicated on stubborn dollar ($) weakness which is finally correcting higher now, the final corrective wave lower for precious metals should fall in May, which as you know is a common turn time within the context of the present bull market. And of course this hypothesis is heavily fortified in the above chart, where it should be easily discernable to you that like a beach ball held under water, gold is now popping straight back up to the surface, which is measured by peak 10-year returns witnessed in the 70's.

Along this same line of thinking, you should know that crude oil is already back to the peak returns witnessed in the 70's, which is not evident on the true monthly chart below because the data for April has not been added yet, but never the less the case. So, by way of example for the skeptics, and because we are looking at the right charts then, we know that crude oil has now set the precedent for the present larger cycle in returning to long-term highs, which is now the expectation for gold. Moreover, precious metals shares should lead this move if gold is set to outperform crude oil at long last. (See Figure 2)

Figure 2

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Sound reasonable? Although it may appear counter-intuitive to many for gold to take off after crude tops (temporarily), it should not be surprising from the perspective for whatever reason(s), not the least of which being investor ignorance and official price management. Moreover, there is also the practical reasoning profit growth for producers will lag if input costs are rising faster than commodity pricing, which has undoubtedly held back a great deal of orthodox institutional investment as a result. It should be noted however that this condition is set to change recently coming off of all time lows extending back to the 60's, as can be observed in the Gold / Crude Oil Ratio seen below. (See Figure 3)

Figure 3

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This is of course the primary reason precious metals shares have been held back, with the juniors decimated over the past few years despite rising commodity prices, albeit at a relatively slow pace. Correspondingly however, this is also the opportunity at present then, where as you can see above, the party is just getting started. As mentioned above, all we need to see is gold back over the large round number at $1,000 on a lasting basis and the party will be on. Here, it's important for you to realize that the money has already been printed to ensure such a result, as measured in the inflation adjusted gold price, conservative as the Consumer Price Index (CPI) measure may be. (See Figure 4)

Figure 4

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Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our newly improved web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.

On top of this, and in relation to identifying value based opportunities in the energy, base metals, and precious metals sectors, all of which should benefit handsomely as increasing numbers of investors recognize their present investments are not keeping pace with actual inflation, we are currently covering 69 stocks (and growing) within our portfolios. This is yet another good reason to drop by and check us out.

And if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.

Good investing in 2008 all.

Captain Hook
TreasureChests.info

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. We are not registered brokers or advisors. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Do your own due diligence.

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