I have been itching to write about the gold and silver market for the last few weeks as I saw some important things developing, very interesting things. But I wanted to wait until I saw what happened on Nov 2. Since we all know now the Mr. Bush has won a second term it's important to find out who the real winner is in this election. Are the real winners the democrats? No way, is it the republicans? Not even close, the real answer is GOLD and SILVER investors!
That's right everybody, with George Bush back for a second term the final pieces of the biggest bull market in gold and silver are being put into place. I mean this is all a gold and silver bull could ask for. Not only do we have one of the most bullish chart formations in gold (a massive 12 year ultra bullish head and shoulders bottom reversal pattern) and the bottom of the 4th Elliott wave in 2001, and the DJIA/Gold ratio top in 2001 at 41, but we have the continuation of the bankruptcy in the United States of America.
Since Mr. Bush won the election we are guaranteed another 4 years of either extending or making permanent the 4 previous tax cuts, more corporate tax cuts (congress just passed another mammoth tax bill in mid Oct that is yet to be signed by the President, but by looking at his record over the last few years where he has never vetoed anything congress has put though I don't think Mr. Bush will start here). With all of these tax cuts at the personal and corporate level I just don't see how the U.S. government is going to fund all of it's future spending and obligations to the baby boomers that start to retire in 2008 (for the real story behind the 51 trillion dollar fiscal gap for social security and Medicare please read the now classic ("The coming generational storm") by Lawrence Kotlikoff.
The real problem within the U.S. was eloquently pointed out by David Chapman (DavidChapman.com) in his latest essay where he says "But the problems that were there before November 2 remain afterwards. The economy that was showing signs of slowing continues to show signs that it is sluggish at best and threatening to come off the rails at worst. The US Dollar as a result is sure to go down. The Bush administration does not have a strong US dollar policy. A painful adjustment for America and the world is about to get underway.
We doubt that the stock or bond market can withstand a serious decline in the US Dollar. Right now the expectation that the stock market is going higher seems to be almost universal. Sentiment remains very high and the VIX volatility sentiment indicator remains near record low territory. So the impetus or buying power to propel the market higher is very suspect. With a declining US dollar it should be almost impossible.
With a Bush victory the triple deficits of budget, trade and current account can only get bigger. The record budget deficits are being caused almost exclusively by the cost of the War in Iraq and its offshoots of the forgotten war on terrorism, homeland security and maintenance of a military empire.
To date the war has cost upwards of $200 billion resulting in the deaths of in excess of 1000 Americans and upwards of 100,000 Iraqis with three quarters of them non-combatants. Iraq is in a constant state of guerrilla war with daily bombings and continued attacks on the oil pipelines. Public services such as electricity remain today below where they were even under Saddam during sanctions.
With the US Dollar sure to fall taking both bond and stock markets with it the huge amounts of debt in the US remain a serious vulnerability. Today the US sits on debt that is 3.5 times GDP. Even at the height of the Great Depression it only reached 2.5 times GDP. The debt has been encouraged by record low interest rates and a very easy monetary policy, policies which "Scoop" calls irresponsible. The actual growth of the debt particularly for consumers has been encouraged by the financial institutions with unprecedented growth in credit cards and encouraging a climate of easy money.
Meanwhile despite the rapid growth in money the effect of it in the economy is declining. We call this the velocity of money and what that means is that despite more and more money being thrown at the problem the economy is actually declining. Japan experienced this in the 1990's and are now barely beginning to come out of it."
Well I could not have said it any better myself. Readers of my work always ask me "if the U.S. is cutting taxes at all levels but spending like it is going out of style, then who is funding the U.S.". The simple answer is Asian central banks. According to the "Economist" Japan, China, and Taiwan have over 1 trillion U.S. dollars in their official reserves. And that is only 3 countries. If you include India, Singapore, South Korea, and Russia, you can add on another $479 billion in foreign reserves of U.S. Dollars. I have even read that there are more U.S. dollars flouting inside Russia than there are Rubles.
The problem is that a lot of these foreign countries like Japan want to keep their currencies low compared to the U.S. dollar so they can keep their exports up as their countries economies are dependant on exports. So countries like Japan enter the currency markets and buy U.S. dollars to keep their own currency from appreciating. This process creates massive reserves of U.S. dollars that are then turned into U.S. bonds and Treasuries as these countries send some of the dollars back to the U.S. when the Federal Reserve has treasury auctions. This is why interest rates on the 10 and 30 year bonds have been so low even as the fed has raised rates 100%.
But I am always asking myself why all these countries are holding so many U.S. dollars when the U.S. government is under a totally suicidal monetary and fiscal policy strategy. I finally think a few countries are starting to figure this out! Believe me if I was in charge of some of these foreign countries official dollar reserves I would be buying all the gold and silver I could get my hands on. Maybe I would even think of buying some whole gold or silver companies.
Well just in the last few months China has announced plans through a government controlled company to buy one of Canada's biggest metals companies Noranda. And there is even talk of China wanting to invest in Canada's Oil tar sands located in Alberta. WOW, Gold and Oil these Chinese are very smart people. $480+ billion U.S. dollars in Reserves can buy you a lot of oil and gold. If I were Japan and India I would start to buy gold, silver, and oil as soon as possible with most of their U.S. dollar reserves before the price of the two metals and oil get really expensive (and believe me they will!).
It was only a few years ago before the bull market in gold started that most of the central banks around the world were selling all or most of their gold reserves because they believed that it was not making them any money and had fallen in price for the last 20 years. They believed that having their money in a stable currency, especially the currency of the most powerful country would be a better investment than gold. I guess even central bank employees can fall under the negative psychological spell that was in the gold market near the end of the 1990's as the paper markets were on fire(NASDAQ 5000) and people scoffed and laughed at gold and silver as a solid investment and protector of asset debasement.
My how times have changed! I think most foreign central bankers are starting to feel a little ripped off and even deceived by the U.S. and a lot of conventional economics text books that talk little of gold and silver as a store of wealth and shield against the printing of dollars. I truly believe that one of the big events that will help gold and silver get to levels that even bullish contrarians have trouble foreseeing will be that most if not all foreign central banks in the near future will be buying gold and even silver to protect themselves from the U.S. printing dollars to pay for all their debts and fancy living style that they think is there god given birth right.
Updates on Gold, Silver, Oil, Uranium
Let's start with gold, as you can see from the chart below gold has been moving sideways since Dec 2003. The consolidation of the price of gold has formed a very bullish Head and Shoulders reversal pattern and a breakout of the neckline. This is very bullish for gold and should help gold get to much higher levels over the next few months.
Silver is also looking very bullish, the chart below shows you my current Elliott wave count. Silver is in the early stages of a wave 3 rally that will be confirmed once silver gets over the wave 1 high around 8.50. Wave 3 should carry silver over $10 and end around $13-15 sometime in 2005. I like using Elliott wave on price charts that are a little longer term like 2 or 3 years like the silver chart below.
I have found that a lot of people get lost in the Elliott wave counts by focusing too much on the day to day noise of the markets. My favorite time lengths to use with my Elliott wave counts are ever longer than 2-3 years. I have found that charts going back 20 - 30 years show vivid Elliott waves. As an example take a look at the ultra bullish Elliott wave count for gold going back to 1972. This chart is from one of my favorite websites http://www.contrarianthinker.com/. Notice the clear pattern in the gold price; you can clearly see the 4th wave bottoming in 2001 and the start of a massive 5th wave to over $1000 and maybe even $5000+ by 2010 -2012. Anyone interested in learning more about Elliott wave theory please buy the book "Elliott Wave Principle" By Frost and Prechter.
As for where gold and silver stocks are going I will only say that the XAU which is an index of gold and silver stocks which is now trading around 105 will hit 150 sometime in 2005 or early 2006. I have covered the super bullish 6 year head and shoulders reversal pattern in the XAU extensively in my past essays so anyone interested in that can go to my website and look at my past essays.
Now on to oil, oil has been all over the news and everyone is talking about it so it only makes sense that the price of oil takes a breather. Longer term there is no question that the price of oil in my opinion can go much high than the current high of $55. So the real question is how far can the price of oil fall from here. Well looking at the 5 year Point and Figure chart I can tell you that as long as the price of oil stays above $37 it should be o.k. If 37 breaks then you might be looking at the price of oil touching the upper 20's. So let's just see if the price of oil can hold the $37 level during this current pullback that all bull markets go through.
Uranium is finally starting to get noticed by the media and some savvy investors. In a recent issue of "The Globe and Mail" (Canada's national newspaper) there was a price chart of uranium and a promotion of a small uranium exploration stock. This told me that the mass public is finally starting to see the bullish potential for uranium and especially uranium stocks. The reason that I like uranium stocks so much is that unlike gold and silver where you have the option of either buying the stocks or the actual physical metal, you can only buy uranium stocks if you think the price of uranium is going higher. I don't think your banker would be happy if you showed up at your local bank with a bag full of uranium to deposit in the safety deposit box! Or if you had a few pounds of uranium hidden under you bed. So you only have one option with uranium "You have to buy the stocks!"
In my last essay I talked at length about the bullish fundaments for uranium and why I think the future is very bullish for "The metal full of energy". Anyone wishing to read my fundamental views of uranium please visit my website and read my last essay.
Finally, I get a lot of people asking me which uranium stocks I like and where they can find information on uranium stocks. Well below I will list all of the uranium stocks that I know of and any readers that know of others please contact me and let me know.
(All of these stocks are traded in Canada)
Denison Mines Inc.
Hornby Bay Exploration Ltd
Northern Continental Resources
Southern Cross Resources
The above uranium stocks are not recommendations but are here to help investors find out more about them. I advise all interested investors to visit the websites of all of these companies and look at the way the companies are financed and what kind of uranium deposits they have or what kind of land claims they have in uranium rich areas.
And before I go I want to have a final comment on the general stock market. The current bullishness on Wall Street because bush was reelected is going to fade fast. Like I said before I don't really pay to much attention to the short term noise of the markets. I like to stand back and get a real long term view of the markets so I can better understand where they are going and where they have come from.
This ultra long term chart of the S&P 500 is very bearish and is calling for a wave 3 decline in Elliott wave terms to start anytime. The decline should last at least until the fall of 2006 which is the next 4 year cycle bottom just like 2002 and 1998 and 1994 and so on. We could see a little more strength in the general markets in the U.S. for a few more weeks but looking at the 4 year cycle and the presidential cycle (the first 2 years of a new term are always the most bearish as the president tries to put through the most unpopular economic reforms so the voters forget by the time the next election starts.) things are not very bullish in my opinion.
Like I said in my last essay the only bullish case for the stock market in 2005 is that every year ending in 5 (05,15,25,35,45,55,65,75,85,95,2005?) have all been up years in the stock market going back over 100 years and some in a very big way. So we will have to keep a close eye on the markets next year, but if next year is a down year and the 100 year cycle of ending 5's is broken that would be very bearish.