from *gold eagle* - an article by taylor

  1. dub
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    IMO this is worth reading. (The highlighting of one paragraph is mine.)

    (Also, the article mentions Congressman Ron Paul - this guy is really switched on to what Mr Magoo/Bubbles and the Fed have been doing to America and to its people over the last 10 years.

    The Senator's website is: ttp:// )


    Taylor On US Markets & Gold

    Financial Markets and

    The enormous amount of money being created out of thin air by Mr. Greenspan has pumped a spurt of life into our economy, and that of much of the rest of the world, much as heroin injected into the veins of an addict gives that lost soul a new, albeit temporary reprieve from his suffering. But unfortunately, the spurt in the U.S. economic growth cannot be anything but temporary. Over-consumption and a lack of saving is and has always been a recipe for economic disaster over the longer term. But being addicts themselves, the politicians and bankers cannot resist the temptation to create a little narcotic of their own, that being the creation of more money from thin air. That drug like heroin or alcohol, provides an illusion that all is well and encourages exactly the wrong term remedy for the sake of temporary relief.

    The other day, I had an amusing recollection of the Keynesian indoctrination process I was subjected to in my Economics 101 course that I took back in the early 1970s. With his long red straggly hair and tattered and torn blue jeans, my professor Dr. Kessler looked all the part of a hippy though in fact he was a surprisingly strong proponent of free markets. Yet Dr. Kessler was obligated to teach the 101 pap that has, over the years lent support to our rapidly growing cancerous collectivist state. Kessler pointed out how during the Great Depression, individuals acting on their own behalf by saving their money in order to secure their financial well-being were in fact causing the system as a whole to fall further and further into depression. At least that was the Keynesian theory. By saving rather than spending the Keynesians argued that individuals were leading the economy toward a self-reinforcing mechanism of endless economic decline. The Keynesians thought that if only there could be a way to increase aggregate demand, by taxing the rich and letting government spend the money, they could get around this problem caused by the individual doing what was in his best interest. They saw no downside in tampering with the free market place in that way.

    But this philosophy, logical and appealing as it may have been, has now led to the creation of a monster of a different stripe. In fact, what we have now are individuals and corporations who take no responsibility to put their own financial houses in order, but instead consume more than they save because government has assured them that policymakers will continue print a sufficient amount of money to keep the party going for ever. That of course is a big lie because governments cannot ate wealth in any manner including through the printing of money compliments of thee bankers who are in actuality their partners in the crime of wealth confiscation. In fact governments consume rather than create wealth.

    And so government policies of monetary and fiscal stimulus are encouraging Americans to behave in a way that may relieve short-term stress but at the same time is encouraging a whole nation to destroy itself by consuming its seed capital. So the Keynesians used government spending to reallocate wealth to stimulate aggregate demand and in the process encourage the demise of free market capitalism and wealth creation. The monetarists accommodated this evil policy by arguing against the discipline of gold, which as Richard Duncan argues in "The Dollar Crisis" has now paved the way for a global depression via the collapse of our monet ary system.

    The Monetary Narcotic is Wearing off and so is Inflation

    Unfortunately, (or fortunately depending on how you view this issue), the amount of money being pumped into the economic veins of America is becoming ever less effective in stimulating growth, which is why 13 rate cuts have had such an anemic affect on our economy. Yet with more and more money needing to be created just to get a "buzz" from the monetary narcotic, what we are seeing is that debt continues to grow exponentially vis-à-vis income (GDP) In other words we are very rapidly heading toward national insolvency. I agree that the horrendous budget deficits and monetary stimulus have temporarily helped break the fall of the U.S. economy and have bought some time for the global economy, but at what cost? Obviously the cost of doing "the right thing" over the longer term is too great for politicians and bankers to consider as a viable option. So we must expect the same kind of short term orientated policies will continue until the system cataclysm forces change.

    Inflation vs. Deflation

    I was recently speaking to one of Congressman Ron Paul's staff people about the inflation/deflation argument. I know in talking to Congressman Ron Paul himself, he does not agree with my views about deflation. That is not surprising because few Austrian economists do. An in-law of John Exter tells of how Exter and Ludwig von Mises himself used to carry on the inflation/deflation debate. Exter, who was the only pro-gold central banker I have ever heard of, always maintained that ultimately the system would collapse in a deflationary default while von Mises argued that government could always successfully inflate.

    After having thought extensively about this debate, I believe both sides are right. Government with the willing help of bankers, can be counted on to inflate their currency. We are seeing that happen right this minute, so that by applying the Austrian definition of inflation we have an enormous amount of it now. Greenspan is giving us inflation in spades. However, I believe the dynamics that John Exter underscored are also now coming into play in a big way. As David Tice first pointed out to us in our 1999 interview with him, the more the money supply expands in its current exponential fashion, the less GDP bang for its newly created buck policy makers get. In commenting about the extremely rapid growth of M-3, Richard Russell asked this past week, "If liquidity is the food that feeds and economy, then the US economy should be going 'great guns. And inflation should be leaping higher. And gold should be surging'"

    Richard then goes on to hint that the U.S. is digging itself so far into debt that it is becoming insolvent and that eventually the foreign countries that recycle this extreme dollar liquidity will understand that America is insolvent. And that dear subscriber is what I think is happening and why it is taking more and dollar counterfeiting by the policy makers to create an additional dollar of GDP.

    I agree with Congressman Paul when he complained to Alan Greenspan that that prices are continuing to go up and that senior citizens, who have lived responsibly and saved for their money for retirement, are being robbed by the Fed's low interest rate policy. That the government understates inflation by various statistical methodologies for the sake of further robbing old folks of social security proceeds is also of little doubt in my mind. But it is also most certainly true that something very fundamental has changed since the 1970's when a similar growth in the money supply resulted in double digit inflation. I am convinced the main thing that has changed between now and then is that we now have an enormous aggregate debt load that acts as tremendous drag on the demand side of the economy. And I think the statistical work of Ian Gordon reveals that is why it is only now and not during the 1970's as John Exter thought, that deflation is a threat. As Ian points out, during the Kondratieff summer, increased money supplies result in rapidly rising prices. Then as debt begins to grow (remember debt is the raw material from which fiat money is created) in the Kondratieff autumn, you have the best of both worlds. Consumer prices begin to fall even as the money supply continues to expand because it is during the autumn that debt begins to represent a drag on the demand side of the economy.

    But the tragic end of the cycle occurs in the Kondratieff Winter and is in fact ultimately made worse not better by an accelerating money supply. Why so? Because by the Winter, debt has grown to the "threshold of lethality" which is the point at which the "patient" cannot hope to escape the death of the winter. We are nearing that "threshold of lethality" and I believe that is the answer to Mr. Russell's question, "If liquidity is the food that feeds an economy, then the US economy should be going 'great guns.' In my view and that of Ian Gordon, it is only a matter of time before debt default begets debt default and the financial system and our liability money, the dollar self-destructs. At that point, the laws of nature will demand asset money in the form of gold and possibly silver will again become the required global medium of exchange.

    Treasury Rates

    The long bond rates continued to rise last week. The 10-year Treasury was at 4.52% and the 30-year at 5.38%. There are signs that the sudden rise in interest rates is hitting the home refinance markets very hard. We believe the swap markets, which are tied into the home financing markets, may in fact push interest rates even higher and thus cause the decline in the bond market to feed on itself. Countering this of course would be foreign buying of U.S. Treasuries as countries continue to engage in a beggar thy neighbor policies aimed at cheating via undervalued currencies.

    Again, I believe the most important question to ask is "why are interest rates rising" even as the Fed continues to pump more and more liquidity into the system. Are rising rates a result of a strong and vibrant economy as the bulls would like us to believe? Or are they rising because of the enormous rise in spending by the U.S. government and Americans in general? If they were rising to fund capital spending or inventory replenishment stemming from business demand, that would be a good reason. But if demand is rising because, as I suspect, we Americans continue to live beyond our means, and/or because foreigners are no longer willing or able to supply capital fast enough to satisfy America's addiction to "Easy Street," then I suspect rising rates are a sign that the end of this orgy phase of the Kondratieff cycle is in fact nearing an end.

    The U.S. Dollar

    A sharply declining dollar might tell us that foreign capital was had enough of the U.S. Last week if anything the dollar was a tad bit stronger, as the Dollar Index continued to trade in a narrow range, about 3% to 4% above its June 2003 bottom. This should not be surprising given recent favorable economic news.

    The equity markets continued their sideways trek. The Dow remains the strongest of the major indexes and it is close to its June high as is the transport index. A rise to new highs by both would suggest still higher equity prices. However, remember that stock prices remain extremely high relative to earnings and that major bull markets have never in the past started with stocks so overpriced. In fact, equities remain priced as if they were at their peaks rather than at some starting point for a bull market.

    The other point I would like to make with respect to the Dow is that it has not even been able yet to reach the ½ point between its all time high and its bear market lows. The Dow closed at 9203 on Friday. If I could rise above its half waypoint of 9504, it would pave the way it would improve the chances for a test of its all time high.

    What we do know is that stocks remain hugely overvalued. Not only are they overvalued, but they are so overvalued that we think it is almost certain that over the next five to ten years, on average investors will lose money in the market even if our visions for a Kondratieff winter are delayed and we continue with our current "muddle along" economy.

    With respect to the U.S. markets, I think the following quote published from the August 1, 2003 issue of "A Pfennig for your Thoughts," provides some good solid reasons not to be optimistic about the U.S. dollar and equity markets.

    "Relax, the government is broke (and still talking tax cuts) the states are broke, there are few jobs, your home state of Missouri has a 6.2% unemployment rate, of those poor souls still on the roll. What happens this winter when natural gas prices are at $7 to $10/btu and we spend 100's of billions of dollars playing 'where's Saddam?' all the chickens will come home to roost laying big eggs on everyone's dollar nest egg! How do you spell fiat currency? Hey I'll help you….DOLLAR!"


    For all the reasons we don't want to own stocks and the dollar, we do want to own gold. At this stage of the still very new secular bull market in gold, stocks are leading the bullion higher. What we have seen over the years is a constant trade off with the bullion leading the stocks and then vice versa. What we do know from the chart below is that the HUI index of unhedged gold mining firms shown below is a beautiful sight to behold if you are a gold bull. The chart of the HUI, also known as the Gold Bugs Index, shows the index closing at 182.22 compared to a 20-day moving average of 169.23, a 50-day moving average of 158.50 and a 200-day moving average of 139.1.

    We think gold is holding up real well in spite of the constant economic cheerleading and constant attempts to destroy gold (and thus build up fiat money) by the establishment. We remain convinced we are still in the very early days of a multi-year, multi-hundred dollar move (if not a multi- thousand dollar move) in gold that will represent the greatest bull market in gold of all time. And because we are confident that we are in a primary bull market for gold, we are not terribly interested in the week to week movements. We simply think you should accumulate gold and gold shares while the yellow metal remains extremely cheap by all historical standards.


    A Neat and Orderly Way to Value Gold Stocks?

    One subscriber contacted our office a couple of weeks ago to suggest we start using some sort of yardstick to help subscribers understand relative valuations for the companies we follow in our newsletter. I completely understand the logic for this request. We carry more than 45 gold stocks on our list. How in the world is an investor to know which one to buy first and how to allocated his/her scarce resources from that point onward? After all, most subscribers may not wish to buy all the gold stocks on our list nor may they be able to do so. A simple quantitative measure for ranking gold stocks that we could use to make gold investment decision making more simple would indeed be desirable.

    There are of course, various ways to rank gold stocks. Your editor's favored analysis involves comparing current and projected cash flows in relation to the price of a stock and then using that yardstick for judging whether the expected rate of return warrants buying a risky junior gold stock. I particularly like to use a discounted cash flow analysis to factor in the lost time value of earnings and cash flow for gold mines because these projects are usually long term investment propositions with cash flows stretching out of ten, twenty, thirty years or longer. Earnings 20 or 30 years out are certainly not worth as much as earnings today because of the opportunity cost related to receiving earnings in the future rather than now.

    Still another valid technique for comparing one gold stock with another is to look at ounces in the ground compared to market capitalization. But there is a problem with using any of these techniques for one gold stock with another and that is that no two gold mines are alike. Simply put, it is impossible to compare "oranges to oranges" or "apples to apples" when comparing one mining company with another. For obvious reasons, quantitative ranking techniques are most valuable among gold producers as opposed to exploration companies. But even if you are comparing two gold producing companies with one another and even if those two companies each have just one project, variations between those two companies are almost always very significant. For example, you are likely to have significant differences with respect to any or all of the following issues: Environmental regulations, taxes, corporate governance issues, mine life, political environment, exploration prospects, capital costs, etc., etc. Moreover, most mining companies, especially the major companies, are not single project firms. Most gold producers have numerous mining projects at different stages of their life cycles and those projects are often located in many different countries where regulatory issues can be as different as night and day. Trying to compare one of these companies with another is virtually an impossible task.

    Last but not least, the calculation and tabulation of various quantitative ratings require an allocation of time that your editor simply does not have, given all the areas of coverage already provided in this newsletter. If I were to begin engaging in quantitative comparisons of different mining companies, it would come at a cost in terms of coverage of other industries like our tech or energy stocks as well as political and economic commentary. Some investment banks with significant resources do provide quantitative comparisons, ranking one gold stock with another. However, most of the time, these comparisons are constructed for self serving purposes, and they can be highly selective to make a case for the particular stock they are trying to sell.

    In summary, I am sympathetic with the desires for a quick and clean comparison of gold stock investment opportunities. Unfortunately, any such comparisons are subjective and require significant resources to implement. For now, we will continue to bring to your attention stocks that have not yet caught the attention of the investing public and which, given their low cost and exploration prospects or current cash flows represent unquestionable value for their price.

    August 18, 2003

    Jay Taylor, Editor of J Taylor's Gold & Technology Stocks



    a bug in a boat!

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