20 Years Ago (April 1987) Bonds Began To Tank

Dr Doolittle20 years ago the shiny yellow took off into the wild blue yonder.....see Chart of Jan-Dec 1987.

In the first week of April 1987 U.S. T-Bonds began to sell-off...coincidently, the POG began to rise in concert.

Toward the end of that year T-Bonds had plummeted 20% from January 1, 1987, while the POG soared 22%.

Interestingly, Wall Street stocks suffered a horrific mini-crash in October 1987, which was ostensibly rescued by the then Fed Chairman, Alan Greenspan, who flooded the market with liquidity by having the US Treasury buy back much of its own debt paper. Subsequently, Wall Street pulled out of its heretofore Kamikaze Dive, as bonds and stocks began to rise again with as interest rates declined.

Fast Forward----

In the event of a 1987 déjà vu, we could see the POG soar 20% from today's level ($654 spot) to over $800 by Thanksgiving Day 2007 (now wouldn't thatbe pleasantly apropos?).

Supporting arguments----

U.S. Treasuries Fall as Economy Adds More Jobs Than Forecast

April 6 (Bloomberg) -- U.S. Treasuries fell after a government report showed the economy created more jobs last month than economists forecast.

The increase in employment may ease concern that the housing slump is spilling over into other parts of the economy and caused traders to pare back bets the Federal Reserve will cut interest rates this year. www.bloomberg.com/apps/news?pid=20601009&sid=ayMV74GxD7rU&refer=bond

Per my interpretation of related TA, I am convinced of the following:

US TREASURIES will go to hell in a hand basket in 2007.

As interest rates continue to soar.

You say, SO WHAT?!!!

Here's WHAT!!!

You continue to say, SO WHAT?!!!

Well, take another gander at THIS !!

The upshot of the TNX/IRX yield ratio equal to less than 1.0 suggests gold has just begun a new leg up, which may propel it well past its historic high of $850 (January 1980). In fact my interpretation of related TA tells me a new record POG high may be made sometime in 2008 -- somewhere in the neighborhood of $900-$950/oz.

And you ask, what about HUI?

As one may well image HUI could orbit to 600 to 700 next year vis-à-vis a gold price of $900-$950.

Silver?

Reflecting the above realization of forecast events might catapult the white metal north of $23/oz.

What else happened in 1987?

In 1987 bonds indeed tanked...gold and interest rates soared...but what else happened in that fateful year?

From the dawn of 1987 stocks were soaring, fueled by irrational exuberance until the 4th Qtr, when the proverbial hit the fan:

During one single day in October 1987 the Dow plummeted 23% in virtual freefall !!

Methinks a 1987 déjà vu may be in the making. In this event we might see the Dow top 15500 by this September. Won't that be one for the story books!

Sir Alan presently commands $150,000 for one of his speeches at a businessman's luncheon. However, if the Dow rocketed to the "unsustainable" level of 15500 à la 1987 (which is a mere 15% from here), the ex-Fed head would be booked solid for 3 years at $500,000 per "royal audience."

The above forecast scenario is so captivating, it would galvanize the attention of some Hollywood mogul like Steven Spielberg, who would make a picture staring H.R.H. Alan playing himself (H.R.H. = His Royal Highness).

Sound too far-fetched...methinks not.

2007 Forecast for Dow, T-Bonds, Gold & HUI

Using the 1987 template as a guide, I think the following might transpirethis year.

déjà vu template à la 1987 (chart repeated)

--DOW to peak at about 15500 sometime late this year. However, I wouldnot venture to divine how much the common stock index will inevitably decline in during the subsequent sell-off. As we all know this is a function of the degree of the Fed's anticipated intervention.

--TBonds should continue to gradually slide until they reach par (100%). To prevent an embarrassing meltdown of the bond market, the US Treasury will defend par value at all costs.

--Gold should reach $762 by yearend, but may peak between $900-$950 in 2008.

--HUI could climb to 480 by yearend based upon its historic leverage to the POG, but may peak at 600-700 in 2008, reflecting a much higher POG.

IMO these are conservative estimates, which do NOT contemplate any dramatic exogenous events like an escalation of hostilities in the Middle-East. Such unpredictable events would accelerate and exacerbate the magnitudes of my forecast.

Clearly the US greenback will be riding herd on the whole shebang...ie if the US$ Index were suddenly hammered below 80, all time horizons would quickly shorten. To be sure the greenback will eventually reach 76 with or w/o government intervention...and consequently the POG will be pushing $1,000/oz.

A suggestion to all PM investors, patience will help determine ultimate rewards. Indubitably PMs are in the early stages of an evolving secular bull market. Therefore, methodical accumulation and buying the dips will maximize ultimate profits going forward.

"The study of history, while it does not endow with prophecy, may indicate lines of probability."

NIA and DYODD.

DrDoolittle