Don't know that you guys read this:
LATEST ON GOLD
THERE IS MUCH LEFT TO HAPPEN IN FOREIGN MARKETS YET
The bow and arrow was part of military life for thousands of years, until medieval English archers discovered that
seasoned yew could be made into bows that stood as high as a person and send an arrow from such a longbow to
penetrate an inch of oak at a distance of 100 yards. The problem with that weapon was, when kept under constant
tension, the bow soon lost its resilience, so it was necessary to keep one end of the bowstring loose. Unfortunately, the
bowman was at an enormous disadvantage when encountering an enemy who had his bow strung, and many were
frightened when caught "unstrung" like that. Having survived in colloquial speech for many generations, to be unstrung
emerged into standard English speech in the 16th century, and still indicates a state of nervousness or fear.
Reviewing our four predictions, we first looked for a currency crisis which has come true. Second, we assumed that
central bankers would raise interest rates high enough to precipitate an important economic downturn and trigger a
decline in property prices, especially real estate a phase that should begin to hit Southeast Asia in early 1998. Third, we
have been looking for a banking crisis, and have included a large number of excerpts at the end of this feature that add
support to our long-standing warnings about the banking systems of Korea, Russia, China, and others. But the most
important banking system of all is Japan's, second-largest in the world, and we have difficulty imagining our own bull
market surviving a crash by the Japanese banks. Our Major "Sell" signal for the Japanese stock market in 1989 at
38,000 still stands, here at 15,836, in our eighth year of pessimism, so we still shepherd TDLrs away from investing in
that market. Finally, our fourth prediction is that there will be a "flight to safety" as Mass Fear grips the investing
world, sending capital from one paper currency to another in the fa‡on du jour to the ultimate safety of gold, silver and
platinum. In fact, accumulating materials of great value that also buoys diamonds and rare metals such as magnesium
and uranium (especially since China's Premier Zemin, is going to be buying nuclear reactors from the US, as a result of
his recent visit here). For the moment, Mass Psychology has investors assuming that the US dollar is their safe harbor,
because even now few realize that this is a full-blown paper-currency crisis, so central bankers seek salvations in the
meritriciousness of higher interest rates rather than prudently linking currencies to the ultimate money gold.
As the predictions laid out in your editor's second book "The Invisible Crash" continue to come true, we acknowledge
that it has taken longer than we had expected, because nobody can tell how big a bubble will get before it finally bursts.
Unfortunately, we have yet to see any reason to alter our prediction that a massive flight into the precious metals is
somewhere ahead of us, so all portfolios should maintain a "core position" in the precious metals regardless of whether
they go up or down, just as fire insurance is essential whether a fire occurs or not.
There is no denying that gold stocks are now in Downtrends, and this is our only prediction that has come as a surprise
to us, how long it is taking for investors to realize that this is a currency crisis and that the primary shelter will be in
precious metals. As we review our thinking we see no reason to alter that prediction. To the contrary, as the price of
gold bullion declines, more and more gold production will be postponed by gold-mining companies, making the metal
increasingly scarce (despite central-bank selling) precisely at the time when gold looks increasingly underpriced. We
note that gold bullion is breaking down even while silver bullion is not, a "Non-Confirmation".
Since golds are already underpriced based on Fundamental values, just as soon as Visual Analysis turns positive would
be the best entry level. Our practical advice is to wait for the Downtrending gold stocks to penetrate their
Downtrendlines and begin Uptrends. As soon as golds begin to penetrate their Downtrendlines, we will flash it by
Interim Warning Bulletin. With gold bullion now approaching the depths of a sixteen-year, neutral Congestion Area,
there should be a Bottom somewhere around these levels, probably as soon as Mass Greed shifts from confidence in
paper money to Mass Fear.
Gold plunged when the Swiss threatened to vote to sell half their gold in 1999, but this was an old proposal; four
Cantons had already voted on it and three of those four had rejected it. Actually, the Swiss populace is adamant about
backing their currency with gold. The real problem here, missed by the press, is that Swiss bureaucrats deliberately
want to weaken their currency, which is why they want to get rid of their gold. Switzerland's gold backing has made
their franc so valuable that the currency has been pushed too high; this is merely yet another competing devaluation
rather than a war on gold. Indeed, it is actually a compliment to the value of gold behind a currency, having made
Switzerland's paper currency more sound.
Southeast Asia is Japan's biggest market so the only other strong export market for Japan is the US, and we are looking
for a 20% rise in their surplus, to over $65 billion this year. Furthermore, China's trade surplus with the US this year
will exceed $50 billion for the first time, almost as large as Japan's, and as devaluations continue against the US dollar
we are looking for spectacular trade deficits that will shake the paper dollar to its foundations. Treasury Secretary
Robert Rubin has secretly warned Hiroshi Mitsuzuka not to drive down the yen any further so as to boost Japanese
exports, additional evidence of the correctness of our predictions of "The Coming Trade Wars" and yet another reason
to maintain a "core position" in the precious metals.
Meanwhile, avoid excessive margin, hold some buying power in reserve, and exercise patience by biding our time, as
we grope for an ideal buying opportunity, when others are unstrung.
Indian silver bullion imports reached more than 100-million ounces in the first eight months of 1997, a 50% increase
over the corresponding period last year. In 1996, India was the world's third-largest fabricator of silver, importing
nearly all of its raw material needs. Last year, total Indian silver imports reached a record 105-million ounces, which
represented 16% of the world's new silver demand. Imports this year may greatly exceed that level, having surpassed
95% of last year's imports in just eight months. THE SILVER INSTITUTE, 20 Oct 97 Ed: Silver will outperform
gold, at first.
Asia's turmoil could signal the death knell of the era of pegged-exchange rates, which for decades have been the
foundation of developing countries' monetary systems. Small countries that tie their currencies to that of a larger
country or to a basket of currencies hope the arrangement will help them control inflation and create credible monetary
policy. Yet time and again, currency pegs have proved inherently unstable in the face of speculative assaults. These
problems led Barry Eichengreen, a senior policy adviser at the International Monetary Fund, to conclude that it is
anachronistic for one nation to link its currency to another informally. Michael Sesit, WALL STREET JOURNAL,
Front Page, 20 Oct 97 Ed: Paper linked to paper is still paper; they need to link paper to gold. They look but do not
see.
Some of China's small and medium-sized banks and credit co-operatives face bankruptcy because of bad loans but a
financial crisis that hits exchange rates and banking payments is unlikely, according to the head of China's central bank.
James Harding, FINANCIAL TIMES (London), 28 Oct 97 Ed: Imagine the political ramifications of a Chinese banking
crash.
Consumer confidence has been badly hit since April, when the controversial sales tax was increased by 2 percentage
points to 5%. Japan's Gross Domestic Product fell 2.9% in the April-to-June quarter. Shinpei Nukaya, Deputy Director
General of the Economic Planning Agency, said the economy was marking time and denied it was heading for a
recession. However, Mitsuo Horiuchi, International Trade and Industry Minister, warned that a "drastic, clear"
stimulus package, including specific timetables for tax system reforms and other measures, was required if Japan was
not to fall into a slump. Paul Abrahams & Gillian Tett, FINANCIAL TIMES (London), 27 Oct 97 Ed: Fools who raise
taxes deserve what they will get.
Outflows of capital unleashed by the market's loss of nearly a fifth of its capitalization the equivalent of nearly $75
billion over the past week have put pressure on the Hong Kong dollar's link to the US dollar. With more than 40% of
bank lending in Hong Kong now tied one way or another to the property market, bankers say they are putting some
deals involving Hong Kong and China on hold. Hong Kong's property market is in trouble. Peter Stein & Yu Wong,
WALL STREET JOURNAL, 27 Oct 97 Ed: Charging over $20,000 (US) a month (in rent) for a one-bedroom
apartment was the biggest bubble since tulipmania, making a property crash inevitable in Hong Kong.
Hong Kong's market problems are causing concern at Japanese banks, which are the largest single lenders to the
territory. If the turmoil spreads, it could pile on the pressure. In Indonesia, in contrast to Hong Kong, several Japanese
banks are believed to have over 50% of their loans to local companies. Many of these are unhedged, and thus could
easily go bad if turmoil returns to Indonesia. Gillian Tett, FINANCIAL TIMES, (London), 28 Oct 97
Emerging market bonds went into freefall yesterday as investors dumped high-yield bonds for US Treasury bonds and
other high-quality liquid instruments. Edward Luce, FINANCIAL TIMES (London), 28 Oct 97 Ed: Our advice to
avoid emerging markets was a lucky guess and see the first hint of a "flight to safety"?
Nowhere was the despair greater today than in Hong Kong, the
epicenter of the region's meltdown. At computer terminals scattered
throughout Hong Kong, crowds were packed two and three deep as
investors watched their portfolios shrink. Many saw their life's efforts
shredded before their eyes. For here, playing the stock market has
become an obsession, an activity that resembles less the careful
reasoning of the conference room than the frenzied betting of the race
track. "There's a kind of casino mentality," said Diahann L Brown, a
vice president at Thornton Management (Asia) Ltd. "You saw a new
kind of investor who came into the market this year, secretaries,
hairdressers, and people not earning lots on the market." Edward A
Gargan, NEW YORK TIMES, 29 Oct 97 Ed: Re-read "The secret
desire of all gamblers to lose," page 71 in our Mass Psychology book.
Local investors joined the panic to exit the Hong Kong stock market. Shaken sales executives at brokerage firms here
said more losses could be in store, because the China shares had risen so far this year on speculative hopes rather than
on firmly improved earnings. "Liquidity has just evaporated," said the head of sales at Schroder Securities. The Hang
Seng's slide came as mutual fund managers facing the possibility of investor redemptions in the midst of Asia's
currency instability have sought to sell their most liquid stocks to raise cash. In Asia, the most liquid stocks are Hong
Kong blue chips.
INTERNATIONAL HERALD TRIBUNE, 2 Sep 97
Ed: Remember our warnings about the "illiquidity of mutual funds in extreme conditions"? It will come to Wall
Street.
With an estimated $200 billion in accumulated nonperforming loans
- five times the equity capital of all Chinese banks - China's banking
system is essentially insolvent. At least 50% of China's state-owned
companies are in the red, constituting a far larger chunk of the
economy than failing companies representin any other Asian country.
It's difficult to find a Chinese economist or government official who sees much relevance between China's economy
and what's happening in the rest of Asia. Craig S Smith, WALL STREET JOURNAL, 4 Nov 97 Ed: See how they
fool themselves.
Currencies still standing because they were never consumed by the flames the most prominent are the Hong Kong
dollar and Argentine peso. Their currencies have thumped along at a fixed rate to the US dollar. Ever since nation
states began issuing fiat currencies, we have been taught that the power to create money and control its supply is a
powerful tool for good. Monetary policy can be used, according to this mantra, to promote full employment, improve
global competitiveness and assuage the ill effects of government overspending and borrowing. Why on earth would a
government want to give up its power over money? Hong Kong tied its dollar to the US dollar at a parity of HK$7.80
to US$1 in 1983. Argentina linked up the peso as part of its economic reforms in the early 1990s, finally killing off the
inflation that had plagued it for years. These countries fix through a "currency board" which are rare but they may
become less so after national leaders see how well they performed in the latest crisis. At the end of next year, as many
as 11 European nations will begin the process of turning over monetary policy to a single European Central Bank.
There is little evidence anywhere of a country that has managed to devalue its way to prosperity. Few business
operators in Thailand would prefer their competitive position to that of Hong Kong as they face the higher cost of
imports, the evaporation of capital and liquidity and the inflation that devaluation of the baht is likely to bring.
Thailand's poor will take the hardest hits of all. Southeast Asian economic policy makers face all this because they
believed in the myth of competitive devaluation. Editorial, George Melloan, WALL STREET JOURNAL, 4 Nov 97
Ed: See how they stumble toward our 37th year of struggle for a link to gold or silver, after we founded "The Hard
Money Movement."
South Korea's beleaguered economy is much more developed than those in Southeast Asia, but it risks falling into a
similar spiral. A mountain of short-term debt, much of it denominated in foreign currency, is souring. Worries over the
bad debt have led to a sell-off of Korean assets by both foreign investors and Korean companies and individuals,
leading to falling stock prices and a 12% decline in the won's value against the dollar this year. Through it all,
neighboring Japan sees its biggest export rival steadily gaining a cost advantage, as each drop in the won's value makes
Korean goods cheaper overseas. The close ties between South Korea and the developed world's economies make what
happens here of potentially greater concern than what has come before in the rest of Asia. And the country's prospects,
to judge by the financial system at the heart of Korea's economy, are bleak. Foreign investors are heading for the
doors. The result could be a flood of defaults: nine of the 11 banks could see their equity wiped out. Last week,
Moody's Investors Service Inc downgraded the ratings of four Korean banks. Instead of beginning the painful process
of cleansing the system by allowing bankruptcies, the government has intervened in a way that may simply be
prolonging the agony. "The concern is that the government will run through its reserves and not be able to support the
banks," says an executive at a foreign bank in Seoul. The banks have had difficulty raising foreign currency on
international inter-bank markets, and have been charged higher rates than rivals in Japan. WALL STREET
JOURNAL, 5 Nov 97
"Denial" can be more than merely a river in Egypt.
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