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TIMES THAT TRY MEN'S SOULS Seven Years of Famine It's been four months since I last penned (or it's electronic equivalent) an article, but a lot of things have been on my mind. First of all, I want to comment on the December article. In it, I said how a few major gold and silver stocks were still trading well relative to their underlying commodities on longer time frames. Well, that has changed. The larger stocks I follow have decisively broken from their up channels relative to gold and silver respectively, so I have exited all of them until relative strength returns. In fact, I am now sitting on 45% cash, and will probably raise more. Example:
Junior mining stocks are doing even worse. In fact, they are in a true bear market, many 60-80% of their highs, with miniscule volume and sellers slightly outnumbering buyers, day after day, week after week. I keep trying to pick bottoms on some of these stocks, and they keep finding new ones, even those issues announcing extremely good drill results. I keep the number of shares on these entries small, and hence the losses to a minimum, but it is frustrating. It's also a very tough market. It is so important at these times to be patient, but also to remember the Biblical allegory of seven years of feast, followed by seven years of famine. We had a pretty good time from late 2001 to early 2004, but the punch bowl has definitely been taken away until further notice. If you go broke, you won't be able to participate in the eventual bull market in precious metals. Well duh, but you HAVE to protect capital and live within your means during times like this. We're Running out of Tricks It's a sad day when the doctor pulls you into the little white room and gives you the lowdown on a loved one. I remember one time a doctor describing their efforts to keep someone alive, and the decreasing efficacy of the procedures. "We're running out of tricks," he said. I thought of this recently when I was reading about the 2004 tax break for US corporations which allow them to repatriate overseas profits, essentially tax free. And then, the Euro Zone announced that they, too, were going to relax deficit rules to stimulate their economies. Those US profits heading home (until October) and the Euro-Left-Turn may have been the cause for the US dollar to galvanize, and it has rallied significantly the past 4 months, causing gold and silver to go flatline (literally). The joke, of course (which isn't funny), is that these are probably just more tricks to allow the credit machine to keep working overtime and the US consumer consuming. The underlying reality is that the economy is very, very sick, and one day the tricks will stop working. Various commentators have noted that the US consumer is probably the weak link in the whole financial process. When they are finally unable to take on more debt and hence buy more foreign built consumer items, the dollar recycle trade collapse and the squeeze is on. The world on the other side of the resultant credit tightening will not be pretty. "Our dollar, your problem," will take on a more ominous tone as it is now everyone's problem. The 100 billion dollar repatriation trick, properly leveraged by the credit machine and contrasted to a weaker Euro will probably keep things going for another 3-6 months. And then? How many more tricks are there before they ultimately stop working and strong-arm techniques become necessary (or the patient dies)? Incidentally, I don't think there will be a gold confiscation scheme again. In 1933, many people had had firsthand experience with bank failures. Physical gold or US gold certificates were quite the norm to protect oneself (as were ironically US dollars since they were backed by gold). Today, very few people own gold (or silver) in size. Debt repudiation is a more likely measure. It Can't Happen Here "Are there no workhouses?" - Ebeneezer Scrooge I worry about North Americans. Most of them have never 1) Experienced hard times. 2) Been forced to take a job where they had to work really, really hard, for really, really crappy wages to buy necessities. The credit and housing bubbles are the latest (and probably the last) attempts to insulate the vast majority of Canadians and Americans from problems 1) and 2) described above, but the day of reckoning approaches. Let's face it. Sixty years of relative prosperity have left most mainstream Americans ill equipped, physically, mentally, or emotionally, to deal with a harsh world. But, the wheel is turning and the situation gets darker every day. House price increases and associated equity extractions to support lifestyle can't go on forever. When the housing bubble bursts, it will unleash a financial tsunami most are not prepared for, in fact are leveraged against. Foreign industrial workers making $25 a week will hardly be expected to offer a lot of sympathy when "honest, hardworking Americans" can't find $800 a week jobs, or perhaps any jobs at all. I see a day where squatters are ensconced in darkened 4200 square foot homes with no running water. I see people unloading their plasma TV's to buy enough gas to drive their unsaleable SUV's to the unemployment office. One day, an entire nation will slowly wake up and ask, "I'm entitled, aren't I?" "What happened to the guarantees?" and "Did the bank call again?" It's happened altogether too often in history, and the only difference today will be the scope of the misery. Ironically, Canada may escape relatively unscathed because of our lower debt levels, raw materials, and lack of a housing bubble relative to other places. But, looking at overweight, formerly complacent North Americans, will I have the guts to look into their eyes and tell them? "Sorry, about your situation mate, but I can't loan you any money. Party's over. Good Luck, though." I am an immigrant to this country and arrived "Without two 'ha'pennies' to rub together" (i.e. with nothing). Worked, saved, went to college, worked and saved some more, invested, prospered, and now live within my means. I took every crummy job I could find to put myself through college and after to get going, and there's no shame in that. Will mainstream North Americans, accustomed to easy access to everything, be able to rediscover the fabled pioneer "self-reliance"? Well, they'll have to. Only, there won't be any free land, and there's competition now. So, another item which caught my eye is the recent changes to the US bankruptcy laws, which amongst other things, essentially forbids anyone from walking away from credit card debts. So, what happens when the rubber meets the road and individuals can in no way, shape or form service their interest charges and live at the same time? Are we going to see debtor's prisons in America? Will they have them and call it something else? Will it be a crime to owe money to a bank and not be able to repay? I've been trying to do some research into the history of the original debtor's prisons and whether there are parallels for today. Nothing definite yet, except they grew out of a time of (surprise, surprise) easy credit. So, let's say someone is living from paycheck to paycheck, credit card to credit card, and owns three houses, and then the credit crunch hits. What will happen to them? What will the incarceration rates be for a society already housing 20% of the world's convicts? Maybe the Consensus Could Be Right I have discovered the most gorgeous set of charts produced by a Belgian man (permission granted to put in this article!) which had I discovered 4 years ago would have made me a lot more money on the gold and silver bull up until now. It is a very fine working of the spot prices and futures interest which clearly shows where one should have been buying or taking profits during that time. He updates it every week: http://users.skynet.be/bk336919/commodities/cotoi.html Properly interpreted, I could have made a lot more money than I did 2001-2004. I sold out too soon in 2001-2003 when I should have stayed in, and stayed in too much in 2004 when I should have gotten out. The chart clearly shows the overbought situations, but, because it was a real bull market up until last year, I could mistrade it like I did and still make huge returns. From the chart, right now the commercial interest is slightly bullish to neutral relative to historical norms and the slowly rising open interest (more paper needed to contain moves?). We also see the rising "wedge" in silver the past year which brings up the subtitle heading. It looks like we may need 2-6 more months before precious metals start to move up again. This is also about the amount of time necessary to resolve the "wedge." The "consensus" estimate amongst gold and silver observers is precious metal weakness in the short term, with a bull move beginning in the summer. Consensus estimates are usually wrong, but it sure does look like it might be pretty accurate this time. If we get a washout (commercials "net short" meet lower trend lines) between now and the end of July, I would be an aggressive buyer of my favorite juniors. Other than that though, we'll just have to be patient. Finally Let me reiterate a few earlier points. If you're investing in precious metals, invest and trade in such a way you can stay in the game until the bull market resumes. Assess your risk tolerance, and be brutally honest about it. I think I mentioned in another article that I am completely out of US markets and have some physical metal as a long term hedge. Canadian dollars and markets are obvious choices for me. Don't be afraid to take some losses and wait for the bull market to resume 2-6-8-12-18 months from now. One day, the tide will start to rise again, and it will be unmistakable. Don't be afraid of missing the bottom. Real bull markets, like times of feast, last for years, and we'll quickly make up what we have lost the past 12 months, and probably a lot more besides. And did I mention the famine coming? The real one?
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