Gold & the Stock Market: A Time for Reflection

Mention the word GOLD to any group of friend's colleagues or clients and watch their reaction. People either love gold or hate it; but there aren't many who feel ambivalent toward it. Those who love it realize that while various paper currencies have come and gone, gold has been the ultimate store of wealth for over 3,000 years, . The New Paradigm Adherents maintain that gold is an "archaic relic" and is no longer relevant in a modern world where money is nothing more than a digital entry on a computer. Perhaps the antagonism toward gold resides in the fact that a rising gold price could be sign of BIG trouble ahead. Are rising gold prices like an economic barometer forewarning of a coming financial storm. Since 1971, when Richard Nixon ended convertibility of the US dollar into gold, various myths and misconceptions have been circulating, influencing people's opinions and resulting in a number of unfounded beliefs that have dogged the yellow metal.

For 3,000 years precious metals have maintained their purchasing power and have been the most liquid, universal form of money throughout the world. Since 1971, both the Canadian and US dollar have lost approximately 80 percent of their purchasing power while gold has enjoyed an increase. In 1971, for example, a Monte Carlo car could be purchased for $3,500 (100 ounces of gold) and a starter house in the suburbs for $35,000 (1,000 ounces of gold). Today, 100 ounces would buy you a new BMW and 1,000 ounces would still buy a somewhat nicer and larger house in one of the cities better suburbs. We are probably very close to the end of the correction in price if not in time from the recent $995 short term peak in what I think is still early in a major ongoing Bull Market for GOLD; .That weakness probably coincided with a short term bounce in the value of the dollar. I would use any further weakness in silver and gold to accumulate both Bullion and precious metal securities.

Should Gold beak out to new highs above $1060, just back up you truck or car and load up with all the Bullion and Gold Mining shares that you can afford to buy.

"WE ARE ALL KEYNESIANS NOW" - R. Nixon

We are all Keynesians, shouted the Wall Street Journal's opinion page. The collapse of the financial markets and the subsequent recession, depression, or whatever you want to call it, has the intelligentsia screaming for government money as prescribed by John Maynard Keynes so many years ago. And what with all college undergraduates receiving an economics education in Keynesianism and nothing else, no wonder government intervention is thought to be the cure all for what ails our economy. The fact that the current malaise is the direct result of Keynesian policies, and continuing to do more of the same will not only prolong and exacerbate the downturn but could turn a Recession into a Depression.

But it wasn't so long ago that Keynes was out of favor. Back in 1983, the hundredth anniversary of Keynes's birth, Forbes magazine declared that it was not Keynes who knew the way, but another economist who shared the same birth year as Keynes - Joseph Schumpeter. Instead of the government intervention that Keynesians demand to prop up and restart the economy and failed businesses of all types, Schumpeter believed that capitalism is driven by entrepreneurs whose innovations replace old worn-out business models in a process he called "creative destruction."

Keynes and Schumpeter were not only contemporaries, but also rivals who had a "distaste for each other's work and the lives of the two economists couldn't have been more different. Keynes grew up in the cocoon of the English upper middle class. He lived a sheltered life, with a father who was an economist at Cambridge University, and a mother who was the mayor of Cambridge. Keynes attended Eton and then Cambridge, where "his homosexuality and pedophilia was generally accepted as ordinary,"

In contrast, Schumpeter's life was anything but sheltered. Born in Austria, his father died when he was four. By the time he married his 3ed wife,, he had lived in nine cities and five countries. After starting as an "academic boy wonder," he published books in his twenties, had a brief career as Austria's Finance Minister in his thirties, had a banking career, and earned a fortune that he subsequently lost in the stock market crash. Returning to academics, he moved to the United States and taught at Harvard. But while he was world famous, Schumpeter was also penniless. Schumpeter told many that he aspired to be the greatest economist, lover, and horseman in the world - but then would add that he was having trouble with the horses.

Innovation and investment is what raises living standards over time. Businesses that don't innovate will ultimately fail, and it is competition that drives that innovation. Business people are, "in a situation that is sure to change presently". But the busts that inevitably follow a central-bank-liquidity-induced boom must be allowed to self correct as unprofitable enterprises and outmoded business strategies are liquidated and swept away , preparing the path for new growth.

With the world economies currently experiencing a wicked downdraft that is correcting the mal-investments of the past 20 years, a new crop of Keynesians are stomping loudly for Reflation. Such was the case during the Great Depression. "Discussions arose in many countries about public inflationary measures as a way to stop price slides. Having witnessed Austrian hyperinflation, Schumpeter believed policies of 'Reflation' to be a bad idea." Schumpeter shared Hayek's view that "neither Reflation or Price Stabilization would ever be effective". In a speech to the American Economic Association in 1948, Schumpeter told an audience of Keynesians that Keynes was blinded by his ideology of stagnationism and Underemployment equilibrium that required government stimulus to be overcome. He went on to remind the audience that the heart of the capitalist process was its endless dynamism, which was the opposite of Keynesian stagnationism. Schumpeter may not have been the strongest free-market advocate, but he would surely be dismayed by the current worship of Keynesian interventionism, which will ultimately stifle the entrepreneurial genius that drives capitalism and improves living standards.

MARXISM REIGNS SUPREME

I would never have believed it had I not seen it for myself. For 50 years I thought it was just Soviet propaganda that kept using that same old tired excuse, "the reason Socialism was not working was only because the world was not doing enough of it". Now I see it all over the world from Nouriel Rubini, who has reaped all kinds of accolades for being the first known economic professor calling for a recession (of course he was about a year behind me) to Obama to McCain to all Democratic and Republican spokesmen to economists and Media experts and everyone else in between. Of course it does not stop there, it has spread around the world. The sad part about all this is not the excuses, I could understand that since no one ever wants to admit that their ideas have been wrong so that the only solutions that are forth coming are of the harshest, Socialist Marxist variety and run completely roughshod over our Constitution, disregarding all rule of law and want to impose the harshest measures possible that are an anathema to any democratic country. Can you believe that China has, by default, become the single most capitalistic country and is therefore likely to come out of the coming 20 year+ "Depression" as the only super economic power in the world?

THE G-20

A funning thing happened at the G-20 Summit meeting, the three supposedly most capitalist of the 20 countries, the USA , England and Australia were pushing for a new joint massive stimulus package, but they found absolutely no support at all from any other of the much more socialist countries such as France or the rest of Europe but especially Germany. Germany learned their lesson from the 1940's since it was the complete dismantling in 1949 of the centrally planned government controlled Keynesian, Marshall Plan imposed on Germany by the allies after WWII and it was the return to Capitalist Economics that brought the German Miracle by the people of Germany and not their Government, contrary to the P. C History books.

THE LESSONS OF HISTORY

History has taught us that the way out of world depression was WAR followed by free markets capitalism, but up until now I did not believe that war was a necessity... A famous economist warned us back in the 18th century that, "When goods cannot cross borders armies will" which is looking more and more plausible as one country after another contemplates a return to 18th century Mercantilism, imposing trade restrictions while strengthening their armies.

THE OBVIOUS IS OBVIOUSLY WRONG

We all know the definition of insanity, yet one expert after another keep recommending doing a lot more of the same policies as what has brought us here to the edge of the abyss in the first place. Is everybody insane? Has western education been so completely taken over by Socialist Fascist Professors that there is not one economist of any standing who knows and understands what capitalism is and how it works. Socialism cannot possibly solve our problems yet it is their Cause Celeb. How can it if it keeps putting the Cart (consumption before the Horse (production)

ELLIOTT WAVE (my interpretation)

There seems to be a common thread that pervades the Markets Elliott wave Interpretations that I don't agree with but for the short term all roads lead to Rome so I have not made a big fuss about the differences. But since I mention Elliott wave so often I think Now might be a good time to outline my thinking on the Subject.

The Grand Super Cycle 75 year Bull Market that started in 1932 ended in November 2007 and the Grand Super Cycle BEAR MARKET began. If we take a step back and look at this situation logically, it would not be reasonable to expect that a 75 year Bull Market can be corrected in as little as 2 or even 5 years. Using the standard Elliott Wave Fibonacci numbers of 22%, 25%, and 38%, we get a very close correlation to the recurring natural cycle phases of 16, 18 and 20 years. Being optimistic and taking the minimum correction possible of 16 years, we get a target of 2024 as the most likely time frame to end to the Grand Super Cycle BEAR MARKET that we are now in. But make no mistake, just like the Bull Market move up from 1932 was not a one way street, as it was interspersed with numerous lower scale Bull and Bear Markets, the move down to 2024 or longer will also be tempered with lower scale Bull and Bear Markets until the final Bottom is made, which will end up losing 90% + before the next Major Bull Market will begin.

The complete faith of the populace in the buy and hold philosophy is now DEAD and will not return until there is a new generation of investors who do not remember the Bear Market that we are now in. Just as there are cycles in nature, (short, medium and long term) man being part of nature is also subject to these very same cycles. There is only one constant that never changes and that is Human Nature, which is the main reason why History Repeats.

BEAR MARKET (OCT. 2007 - 20?? )

Every Major Move always begins and ends with a 5 Wave move; which in turn becomes only Wave I of 5 or a Wave "A" of an "A,B,C" and this Bear Market will be no different. At the time that I began this analysis, we had recently completed the first of five Waves Down: Which is either Wave {I} or Wave {A) which I had projected to be completed in the 6,500 area, plus or minus a few 100 points.

The Market has already dropped below its 2002 low and has also given us another DOW THEORY confirmed sell signal, which confirmed the earlier Primary Dow Theory Sell Signal (a very rare but powerful indicator of future markets). I tell you all this just in case you either don't know or have no faith in Elliott Wave Theory. Since it does not have anything to do with Elliott wave.

BEAR MARKET RALLY

The 2000 to 4000 point Rally that I have been looking for Since my Special Bulletin of March 6 seems to now be confirmed. For those of you who took my advice Sit back and enjoy the ride. By now The prevailing belief of most Elliotticians is that the last sell-off into March 5th marked the end of Wave B of an A, B, C, Contra Trend Bear Market Rally and a 3000 to 4000 point Wave [C] is expected to follow (although I do not agree with the popular readings). At this time, there is no point in discussing it, since regardless of labels a sizeable rally is expected and no one cares what label we give it. However, I would like to point out that since the 1929-32 Grand Super Cycle Bear Market Wave B was a simple ABC zig zag that lasted only 1 years, the Grand Super Cycle Wave {VI} sell-off that we are now in, will likely, according to the rule of "Alternation" be a much more complex formation. Probably a double or triple Zig Zag or what is quite common for 4th Waves, a diagonal triangle, lasting at least 2 or 4 years. But for the time being enjoy the rally but remember it is a suck in rally in an on going BEAR MARKET and NOT the beginning of a new Bull Market We will just have to be satisfied with it being a Pause That Refreshes and that sets up the best "SHORTING" opportunities of our lifetime. It will be similar to the 1930 50% Rally that trapped even the most knowledgeable and most professionals of the Bears, who ended up going broke into the rally and were not around for the 1932 crash that ended up being much worse than the initial 1929 crash. The total losses from the 1929 top to the 1932 bottom ended up being 89%. This crash will be equal to it, if not worse for three reasons:

#1 The US is in a much worse financial position today than it was back then when it owned 75% to 80% of the world's Gold and Gold was the Worlds reserve currency. And the US was the world's largest creditor and had a Huge Trade Surplus.

# 2 The US $ is today the worlds reserve currency but is in grave danger of loosing its position to some form of Special Drawing Right as proposed at the G-20 by China, Russia and a host of others also suggesting that Gold be part of the New Currency. The only way to avoid this potential catastrophe Is for the US to drastically cut spending and reduce our deficits both budget and trade.

#3 Today's government is almost twice as much involved in manipulating the economy as it was back in the 1930's. Many of Obama's and Bush's policies will have to be reversed and a move back to capitalism will have to be implemented before America and the world will be able to dig their way out of the quagmire that we now find ourselves. In,

BE CAREFUL: The coming contra-trend rally (whatever its label) could even be as large as 4000 points and we will be making money trading it as it will, for a time, raise all boats. The main reason that I am bring it up now is to warn you that it will NOT be the beginning of a New Bull Market and you must resist all the Media and Wall Street hype that will be calling it as such. Anyone, who was caught with their pants down and did not foresee the 7000+ 50% sell-off, will certainly not be able to foretell the coming of the future Bull Market. So be on guard as to who you listen to.

THE MAIN FORCE BEHIND THE LAST 20 year
(1987 - 2007) BULL MARKET

As the Bear Market in bonds made its low in 1982 (low prices but very high interest rates), interest rates began to fall steadily and the Bull Markets in both bonds and stocks began. At that time, 75% of all investment assets were in bonds and only 25% were in stock. As the bond yields fell, the return on stocks began to out distance the return on bonds and a massive shift of investment began to switch out of bonds and into stocks. This culminated with Greenspan and then Bernanke dropping interest rates down to 1%, until the investment mix became 75% stocks and only 25% bonds as Wall St. convinced everyone that a P/E of 30 and 40 was still reasonable and undervalued, culminating with the dot com bubble. Sooner or later, with rates now at virtually zero %, interest rates must rise and that tremendous inflow of funds into the stock market will reverse. Over the next 20 years, the stock markets around the world will be faced with a tremendous drain of money out of stocks back into bonds. You can forget about a new bull market in stocks similar to 1982 to 2007 for at least the next 20 years.

THE NEXT BULL MARKET ?

Oh, we will have what some, maybe even most, will call Bull Markets alright, but they will be similar to the ones that we had during the years 1962 to 1982: Contra Trend Rallies in an ongoing Bear Market. The Street refused to recognize it back then and they will refuse to see it in the future as well. The buy and hold mantra is over, so stay tuned to the new investment paradigm that is upon us and renew your subscription, at least until other astute analysts get in tune with the new reality. It will require a new generation of investors; one that doesn't remember the 2007 to 20?? Bear Market before the next true Bull Market can begin sometime around 2025?

CHEER UP

The swings will be just as wild, maybe even wilder, but it will be easier to make money as you will not have to face the one-sided irrational exuberance that we had to face in the 90's where the less you knew and the more gullible you were, the more money you made. From now on, you will no longer have to ignore common sense in order to make money investing. All you will have to remember is that investing has now become a two way street.

HISTORY REPEATS

Analysts are finally waking up to the fact that we are not in a new paradigm and that history repeats. However, it's not as easy as it first sounds. Which period in history is now being repeated? If you choose the wrong period, you lose and lose big. However, even if you chose the right period, you still have to be very careful because of all the political correctness of the History Authors, none of whom were well versed in economics. Even if you chose the 1930's as the most appropriate, you must be careful not to get caught by such popular political misinformation that FDR saved capitalism from itself (nothing could be further from the truth). Obama and Pelosi seem to be trying to replicate FDR's actions and in doing so they will also replicate his results: Turning what should have been a 3 year recession into a 17 year depression again for exactly the same reasons. The big danger today is the same as back then: Both Obama and FDR had virtually complete and unchecked political power. Will Obama have learned the lessons of the past? I do not think so and that is why I am so sure of what lies in store for America and the world.

A GRAND SUPER CYCLE BEAR MARKET WAVE {IV}

To correct a Grand Super Cycle Wave {III} of the same magnitude will require at least a 38% correction time wise, which gives me my 20 years bear market expectation. But have no fear (at least about the stock market), I haven't missed a Grand Super Cycle yet. All you have to do is subscribe and pay attention. Download and keep my letters and when you become uncertain or confused go back and reread my past letters to find what you missed the first time around. ( how many other analysts are anxious for you to reread their past letters?)

GOLD: Where too now?

Gold has entered a temporary irrational exuberance stage, but only among fans of gold (Gold Bugs). I have still never heard a major portfolio or mutual fund manager say that he is buying Gold or Gold Stocks. Most of the ads for Gold are to purchase consumer's Gold jewelry and/or attempts to sell fraudulent gold plated coins. We are not close yet to the kind of media coverage that is associated with a top in Gold. However, temporarily we are in overbought territory and going through a consolidation. DO NOT LIQUIDATE your positions - but you can sell at or slightly out of the money 2 to 4 month options to pick up some downside protection and generate cash flow. Then use this money to buy more when the options expire. Copper and the base metals seem to making a recovery and this is good for Gold mining companies since most of them have large byproducts of copper, zinc, silver and other metals that reduce their mining costs. Watch out for the Johnny come lately who are trying to make money by jumping on the latest band wagon. Stick with Papa and I'll be on the look out for Goldilock's return.

 

 

I have spent my entire career identifying major trends in the markets and helping others to profit from them. These are trends that will be happening in the near future; trends that most analysts and investors notice only after they have already been well established and we have made the majority of the easy money. In my newsletter, "UNCOMMON COMMON SENSE", once I uncover changes to the major trends, I then present specific, actionable recommendations that will help you profit even during the worst of times and before they become obvious to everyone else.

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UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
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561-840-9767