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What Has Been



-- Posted Monday, 13 April 2009 | | Source: GoldSeek.com

by Howard S. Katz

 

          At the One-handed Economist, the prognosis of what will be is reserved for paying customers.  That is how I make my living, and these are the tough questions which put money in people’s pockets.  It is usually the establishment which gives out free predictions, but that is because, as the past decade has shown, the value of their predictions is less than that of a New York Times share of stock.

 

          However, there is no harm in a prognosis of what has been.  And what has been over the past decade is very interesting.  In 1995, I developed the theory of the commodity pendulum.  The theory of the commodity pendulum compares commodities with the money supply.  For speculators in the financial markets, the commodity pendulum is the governing principle for our day and age.

 

 

          Above is the Commodity Research Bureau (CRB) index going back to 1956.  Each bar represents one year.  This may seem to be a simple point.  However, it is too difficult for the typical 21st century economist.  What would you say if your name was Tom, and your parents came along when you were age 50 and said, “We’re changing your name to Bill?”  As crazy as this sounds, that is precisely what the economists at the Commodity Research Bureau did to the CRB Index a few years ago.  They changed its name to “Continuous Commodity Index.”  And they gave a different index the old CRB name.  Unless you are aware of this name change, you can not even research the CRB index back to 1956 because it changes its name while you are researching.

 

          Once we have gotten past this name issue, we can observe a definite pattern in the CRB index.  In 1963, with the Kennedy tax cut, the money supply began to increase, but commodities remained flat.  By 1971, consumer prices had advanced by 32%, but commodity prices were steady very close to 100.

 

          Then over the course of the 1970s, the CRB index went from 100 up to 337.  This massive rise in commodities fed through into consumer prices, and the Consumer Price Index began to outrun the money supply.  This forced the Fed (under Paul Volcker) to tighten, and the nation had 16% T-bills in 1981.  These higher interest rates caused a decline in the stock market.  Thus the play in the 1970s was to be long commodities and to stay away from stocks.  From 1966 to 1982, the real DJI fell by over 70%.

 

          If commodities are the play, then we can ask what is the best way to profit from this?  Many commodities are tricky.  Each has its own peculiarities.  Some are seasonal.  For others you must be a weather expert.  To even discover what are the important factors to watch for a given commodity may take years of study.  But gold is a nice, well-behaved commodity.  It is sort of Mr. Average Commodity.  It follows the technical chart patterns, and it does not have the surprises and fake-outs so common with most commodities.

 

          For example, this present gold bull market started in 2002 with the breakout from a saucer or rounding bottom, which stretched from 1998-2002.  This is a powerful formation.  Rounding bottoms start slowly and gradually accelerate to the upside.  In 2006-07, gold formed a symmetrical triangle and broke out to the upside.  Its March ’08 top at $1000 was the price objective of this triangle, and at this point the bull market is unfolding smoothly.

 

 

          One of the most important characteristics of a bull trend is the simple concept (fundamental to Dow Theory) of higher lows and higher highs.  As long as this pattern is in effect, the trend is up.  And the trend has a tendency to persist.  It will not always persist, but that is the way to bet.  Many analysts try to get fancy and use trend lines, moving averages, stochastics and more complicated techniques.  Usually they wind up faking themselves out.  Here the best rule is: KISS.  (Keep it simple, stupid.)

 

          In a sense, gold is a proxy for commodities in general.  Any particular commodity is tricky and requires special study.  You must trade it for years to discover its subtleties.  Gold acts like commodities in general without having the characteristics of any particular commodity.  If you want to play the commodity pendulum, then gold is usually your best bet.

 

          It can also be noted that gold has the strongest price chart of any commodity.  When a group of economic goods (e.g., auto stocks, bank stocks, grains, etc.) are all making a move together, then the one with the best relative strength (in the recent past) is the one to buy.  In the second upswing in the commodity pendulum, gold has the best relative strength of any commodity, and it is so far the only commodity to recover its March/July 2008 peak.  This also is a simple rule, but it is very difficult for people to follow.  Perhaps this is why it keeps working time after time.

 

          Going back to the chart of the CRB index at the beginning of this article, one technical fact stands out.  Not only has the CRB index been in a decisive uptrend since 2001 but the sell-off of late 2008 brought it back to the support level (337) defined by its 1980 high.  A previous high always provides technical support, and this is support on a grand cycle scale.

 

          When the forces behind the 2nd upswing in the commodity pendulum took over in 1999/2001, they were an order of magnitude greater than the same forces behind the 1st upswing in the pendulum (1971).  The money supply nearly doubled during the Reagan Administration and then kept on expanding under Bush, Sr.  There was an enormous fall in real interest rates which is still going on.

 

          At CRB 184 in 2001, the CRB index was (less than) half the real value it had been at in Oct. 1971.  It was the lowest real value for commodities in American history.  So if the CRB could triple over the first upswing, it would follow that it can sextuple over the second upswing.  That would mean a CRB equal to 184 x 6 = 1104.  This, of course, is before the recent economic “crisis” where some head of state is promising to print up another trillion dollars every time he gets an opportunity to grab a newspaper headline.

 

          Let’s do a little calculation.  Before the “crisis” the U.S. money supply was $1.4 trillion, and the Fed’s portion of that was $800 billion.  The Fed printed up one trillion by the end of 2008.  It announced in March that it planned another trillion this year.  And after the G-20 meeting, the G-20 leaders agreed on another trillion.  It all has the aura of some Alice in Wonderland monopoly game, and I keep getting the feeling that at the next photo op some political figure will promise to create a quadrillion dollars.  No skin off his back.

 

          If we can be confident of CRB 1100 based on what was done prior to 2001 and we merely follow the absolutely insane news events of this day and age, we realize that CRB 1100 is a very conservative estimate.  The actual number may be an awful lot higher.  After all, circa 1970 I was predicting that gold, then $35, would rise above $100.  This made me a radical at the time, but I wound up badly underestimating the price objective.  On Jan. 21, 1980, gold hit a high of $875 on the Comex (near future).

 

          Think about it.  What do you read in every paper and see on every TV news report?  You read that some political figure has a plan to steal wealth from Joe (that’s you) and give it to a) the world’s poor, b) Goldman Sachs, c) himself, d) the beloved bankers who made the NINJA loans.  How is he going to do this?  The answer is always the same.  He is going to print money.

 

          Those who study the U.S. Constitution know that the printing of paper money is illegal in this country as it is not one of the 17 powers allowed to Congress in Article I, Section 8.  The printing of money, of course, is counterfeiting, and the politicians of the Demopublican Party are a group of counterfeiters.

 

          Unfortunately, I cannot defeat the criminals who have taken over the U.S. Government.  The question is, what are you going to do to preserve your own wealth?  You cannot prevent them from stealing from the rest of the people.  But you can save yourself.

 

          Unfortunately, there are many people who promote to gold bugs who are preaching the establishment line that prices are coming down.  Shame on them.  There is only one way that the establishment has to steal from you: the printing of money.  To tell you that the establishment has engineered a gigantic decline in prices when the actual figures show an enormous increase in money is irresponsible.  The Wall Street Journal, for example, told us that the velocity of money was dropping rapidly.  Garbage.  Velocity was made up by Irving Fischer, who was the most influential person getting the country off the gold standard in the 1930s.  His followers simply say anything about velocity they want to say depending on what conclusion they want to reach.  Another gem was the Journal’s remark that the Fed could eliminate the newly created money at any time.

 

          Well, in theory they could.  But the Federal Reserve was created to print money.  That is all they have done since they came into existence.  There have been a few occasions when the Fed has made very modest reductions in the money supply for brief periods.  Far more often, the Fed has continued to print money in massive quantities and was unable to see anything wrong with this.  From 1933 to today, the U.S. money supply has gone from $20 billion to $1.6 trillion.  Just when was any newly created money eliminated?

 

          Look, the political leaders of the U.S. have a good thing going.  They have conned the majority of the people into submitting to the stealing of their wealth via counterfeiting.  Why should they stop?  When have they ever stopped?  What is the percentage in it for them to stop?  They are a criminal gang.  They cackle, wring their hands and conspire to rob more wealth from you.

 

          This can only be done by the printing of money, and that is what they are going to do.  So the technical signal from the CRB index is telling the truth.  It is saying that the CRB index is going to hold at its 1980 high.  It is saying that the CRB made its low on Dec. 5, and crude oil made its low on Dec. 26.  The gold bugs know what is going on, and they know what to do.  Don’t leave your wealth in paper money.  Put it in a real asset until such time as the people of this country wake up and take the counterfeiting power away from the government (and put the counterfeiters in jail).

 

          Gold was the first money chosen in human history.  And it remains the best money today.  You can carry a large amount of wealth in a small purse of gold.  You can hide it from the thieves.  Gold is honest money, the money of those who respect property rights.  The criminal gang in the Demopublican Party has abolished gold money, but gold remains the best vehicle for those who wish to preserve their assets and keep for themselves the product of their own labor.

 

          So much for what has been.  For this there is no charge.  If you want the good stuff, analysis of individual stocks and projections of what will be, for this I ask that you cross my palm with silver (or gold).  The One-handed Economist is available for $300/year.  (The Wall Street Journal, whose record is nowhere near as good, costs $600/year.)  A subscription is available via my web site: www.thegoldbug.net (no charge) where I blog on political and social issues from an economist’s point of view.  This week’s blog is on homosexual marriage.

 

          Thank you for your interest.

 

# # #


-- Posted Monday, 13 April 2009 | Digg This Article | Source: GoldSeek.com




 



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