Neither A Borrower Nor A Lender Be
Posted on Wed, 18 Jun 2008 @ 12:39:15 PDT by Captain_Hook
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Originally Posted on Fri, 25 Apr 2008 @ 05:47:02 PDT
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 – Click Chart For Sharper Image
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 – Click Chart For Sharper Image
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 – Click Chart For Sharper Image
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 – Click Chart For Sharper Image
What does this mean? We are referring to the fact actual price increases, and of course the monetary inflation that sponsors such increases are far greater than what is reflected in CPI statistics, which means gold should eventually trade much higher (see Figure 4)
than the $2,300 highs shown above. So again, and now supported by the
attachments directly above, once gold is through four-digit resistance
at $1,000, it should be on to $2,000, as per Figure 4, and then all the
way up to $5,000 in the end, at a minimum. And as mentioned above, it
should be the shares leading the way this time, so for those of you who
have been holding back on accumulating, now is a good time to be adding
to portfolios on the expectation a bottom in the sector will be seen
during May.
Preferred precious metals stocks that appear to be in the buy zone at present include Franco Nevada (FNV.TSX) for conservative elements within portfolio structure, to junior / emerging producers such as Novagold (NG:AMEX & TSX), San Gold Resources (SGR:TSX-V), and First Majestic (FR:TSX)
in the silver camp. And for those with high risk components within
their portfolios, in the exploration silver’s we of course still like Orko (OK:TSX-V). In the exploration gold’s, we also continue to like Kodiak (KXL:TSX-V), Coronado (CRD:V), and Premier Gold (PG:TSX)
at present. All of these companies can be accumulated at current prices
in anticipation of a bottom in gold within a fortnight. (i.e. two
weeks.) FNV will be added to the Precious Metals Portfolio
today, along with outlook changes putting us bullish across the board
now, and in heavy accumulation mode. (i.e. this means prices might
decline further, but that such weakness should be embraced as a buying
opportunity.)
And
it’s most likely gold continues to head lower, as master planners need
to slow the rate at which the $ is declining. Here, and like the HUI
profile outlined above, it’s possible gold falls all the way down to
the 21-month EMA at $755 (seen here),
but I wouldn’t count on it. (i.e. look for gold to bottom close to
previous all-time highs at $850.) You see because master planners have
seen fit to hold gold down against a rising tide of inflation all these
years, metrics such as the swing line for gold on the monthly plot are
not truly representative of technical conditions, where the 21-month
EMA might be at say $2300 today, the CPI adjusted equilibrium price, if
prices had been allowed to flow more freely.
So,
buy the dips, because gold will soon begin discounting a continued
contraction in the credit cycle, as it has definitely turned lower on a
secular basis. For those looking to buy lower, you might wait until
after the Fed meeting next week, but much discounting of ‘tough talk’
here has already occurred. In this respect then, you are taking your
chances by waiting, where more permanent lows could be established
ahead of time. Certainly chart patterns of the above mentioned stocks
are suggestive this could be the case.
It’s time to get bullish again, and take any setbacks in the proper context – that being – neither a borrower or a lender be.
Instead – be a gold owner.
Special Note: All charts provided courtesy of The Chart Store.
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