You're right. Martin Armstrong is a joke. We should all email him and plaster this crap all over once the s@*t hits the fan. I especially like the sentence, "Gold and silver might rally if the dollar were at risk. However, the economic crisis is NOT taking place in the US - it is taking place everywhere else but!"
Is the last Bear Market leg in Metals
Just Getting Started?
By Martin A. Armstrong
August 25, 1998
Copyright Princeton Economic Institute
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The long-term perspective for both gold and silver is becoming very ugly to say the least. While the metals group has been the target on intense manipulation involving everything from copper, palladium, platinum and silver, there has also been attempts at trying to create the impression that even gold is getting tight. One trade house in particular has specialized in going after the funds day-in-and-day-out. Just recently, this house has been taking delivery of gold trying desperately to force it higher based solely upon the commitment of traders report that claims there are 60,000 short speculative positions. Despite selling in the cash and buying on the floor of the COMEX in a vain attempt to keep up the image that they rule this market, the overwhelming bearish fundamentals have prevented their latest play.
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We have maintained that silver has been the primary focus of a group of serious market manipulators that have included one major member of the London bullion dealers. While stories of shortages have still filled the air, the truth is that these stories originate from London where the dealers still REFUSE to publish the inventories on hand. Given the fact that this type of behavior in the United States would be considered "insider trading" bordering on the line or criminal activity, the only way to approach this market is based upon price action since the fundamentals CANNOT be proven nor trusted. According to our sources, the vaults in London remain full with the greatest shortage still being storage space itself. Combining this information with the fact that nearly 70% of all silver exports from the US during the second-half of 1997 were made to London and not Asia, we tend to believe the US government statistics over those in the bullion industry, which a vested interest in hiding the truth. We do know that demand for silver in India has fallen by 80% during the first quarter of 1998. We believe that India's silver consumption will be down on an annual basis at least 40% and perhaps as much as 60% for 1998 thus wiping out any shortage between current production and demand. The sanctions imposed on India for its nuclear testing have had a major impact upon its economy as well. This situation is only further complicated by the collapse in Asian currencies. The rise in the dollar due to the continued meltdown in the world economy is also having a negative impact upon silver.
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The popular belief that gold and silver will rally with a stock market crash has anything but materialized. This is largely due to the fact that gold is now a commodity and not the official form of money as was the case under the gold standard. Therefore, as economic turmoil swirls around us, the first priority is liquidity. Where during the Great Depression gold represented liquidity, keep in mind that gold was cash, which was acceptable to pay one's bills. Today, cash is the dollar. Gold is not acceptable as payment on your VISA card, mortgage or just about anything else within the modern monetary system. Hence, gold this time will act like a commodity. ALL commodities collapsed during the Great Depression bottoming in 1932 along with stocks. Commodities, including silver, failed to provide any hedge whatsoever against the Great Depression despite the fact that the US remained on a gold standard throughout the entire period.
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As illustrated here, silver collapsed from $1.344 in 1920 down to 25 cents going into the bottom of the Great Depression in 1932. Those who have been preaching that as soon as the stock markets crash the metals will rally do not have any historical correlation to support such a scenario. Consequently, 1998 appears to have been the culmination of a 7-year bull market instead of the beginning of a breakout. We had hoped that a low in 1998 would have developed. However, given the manipulation of the metals group in general, we now see that the low will most likely develop in 2000 perhaps during the 2nd quarter. The portrayal of Buffett as the savior of silver, who will NEVER sell under any circumstances, again has distorted the facts. When it comes to bonds and crude oil investments, Buffett has NEVER been a long-term investor. He has always taken very short-term views. Buffett's long-term investments have been restricted to purely stocks that pay a reasonable dividend and good capital appreciation. At this time, Buffett's silver investment is already in a 10% loss position and it could become much worse.
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There is one popular rumor that has been floating around the marketplace, which we have no solid opinion on. It has been alleged that PhiBro had a pre-existing silver position in excess of 100 million ounces dating back to 1995. In order for Buffett to sell Solomon Brothers to Smith Barney, he was had to take this unprofitable position on his own books. This cannot be proven either way without getting into the books of PhiBro. Nonetheless, we do not believe that some of the players who were front-runners would have jumped into the silver market with both feet if this rumor were correct.
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All things considered, the metals are simply headed significantly lower. A monthly closing for silver below $5 will then warn that a decline to the $4.50 level is in order. At the end of the day, our computer models are still adamant that silver will drop below $3. If our sources are correct that the London bullion dealers are indeed hiding 500 million ounces of silver from the world statistics, then this target is very realistic. While we no doubt will receive the usual hate mail due to this forecast, the point is that this issue can be settled very easily. London should open its vaults for a full INDEPENDENT audit. The mere fact that the London dealers refuse to publish these statistics perhaps suggests that there is indeed a pile of silver they do not want the marketplace to know about. If there is indeed a vast quantity of silver beyond Buffett's 120 million ounces sitting in London, what better way to keep up the propaganda about shortages than refusing to publish the inventory statistics? If our sources are correct on this issue, then considering the collapse in Asian demand combined with 500 million ounces in London, there is NO shortage at all and in fact we are back to a 2-year surplus or much more. Those who simply point to the COMEX stockpiles and claimed that "we assume that European stockpiles have declined by a like proportion" are making a very dangerous and irresponsible statement. They should take great care in their reports when the bona fide statistics are NOT available. They are either being paid as a consultant to those who want to propagate the myth of a shortage on an undisclosed basis, or they are not exercising their due-diligence that is expected of all independent research. We are NOT prepared to join the crowd on this issue of a shortage until London becomes a market where who own what can remain confidential, but total supply is fully disclosed to the public. After all NO leading financial market in the world operates under such rules
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In the end, the continued collapse in Russia is likely to spillover into the former eastern block as well as into Latin America in particular Mexico. We are looking at another Asian contagion but this time in Europe. Unfortunately, this reality may keep commodities in a deflationary trend going into early 2000 before any reversal develops. Indeed, the similarities of our current global crisis are a much better fit fundamentally with the Great Depression than any other period in time. While the stock market peaked in 1929 and collapsed into 1932, the dollar soared into 1931 where it established its major high against every currency known to man. Every European nation defaulted on its debt, with the exception of Switzerland while Britain suspended payments for 6 months. Russia defaulted, China, most of Asia and Latin America. With each default, capital fled to the dollar creating domestic deflation within the US marketplace. Due to the fact that 40% of the civil work force in the US was employed within the agricultural sector, as the dollar rose commodities fell forcing farmers and miners into bankruptcy. To a large extent, we see the similarities with this period of the 1930s as striking to say the least. However, we do NOT see a 90% decline for stocks or commodities from current levels. While gold might collapse to the $190 area and silver down to $2.75, the US share market at worst might reach 3800 on the Dow or about a 66% correction. To be much more modest, we would expect perhaps a more realistic decline in the 40% area assuming that the next low in September/October unfolds with about a 23% correction. A correction of 66% would ONLY become likely if by mid October the Dow were down by 40%.
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In summary, during the 1930s gold was money. It could be used to pay your landlord and debts. Today, a deflationary contraction drives the same forces into a search for liquidity. In the 1990s, liquidity is still cash; it's just that cash is the dollar - not bars of precious metals. Gold and silver might rally if the dollar were at risk. However, the economic crisis is NOT taking place in the US - it is taking place everywhere else but! Reagan at least reversed the trend in the US economy away from socialism and toward a more fiscal conservative system. This shift has yet to take place in either Japan or continental Europe. The unfunded liabilities throughout Europe are more than twice those in the US on a percentage to GDP basis. This too is similar to the 1930s when European debt simply collapsed due to fiscal irresponsibility.
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To add salt to the wound, the IMF has led the hedge funds and the Banks to the slaughter over Russia. By standing out as the guarantor of the world, many ran into Russia to buy GKOs yielding 100% or more. These guys looked at the high yield and assumed that the IMF would never let Russia collapse. The problem now is that Russia has collapsed and the losses are spreading around the globe. Again, Europeans hold about 90% of this exposure. Those who still think the dollar is a fiat currency are merely living in a fantasy world. The dollar remains as the most secure and fiscal responsible currency today. That might change in a few years, but for now - the dollar is looking very, very strong. The final death-blow to the metals may in fact be the IMF, which in the end will be forced to see its gold reserves for cash. The IMF is broke and with the collapse of Russia, in part propelled by the IMF itself, funding in the future is going to be lean indeed. With 70% of its liquid assets in gold, the IMF will become the next seller of last resort. With the rise in the dollar, we can also expect a continued increase in mine production for silver as well. Selling should be expected from both Russia and Mexico. A few years back, Russia was selling gold and buying silver switching their own reserves in part due to the shortage myth. Again reliable sources claim that Russia is also sitting on at least as much as Buffett bought.
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During the final days of any bear market one is confronted by fundamentals that suddenly turn very ugly. When governments began to default during the 1930s, the final low came about 1.5 years later. Here too, we may be looking at about a 50% decline over the next 1.5-year period moving into a final low by the 1st or 2nd quarter of 2000. |
