Big Picture View

Here is a summary of our big picture view of the markets. Note that our short-term views may differ from our big picture view.

In nominal dollar terms, the BULL market in US Treasury Bonds that began in the early 1980s will end by mid-2010. In real (gold) terms, bonds commenced a secular BEAR market in 2001 that will continue until 2014-2020. (Last update: 09 February 2009)

The stock market, as represented by the S&P500 Index, commenced a secular BEAR market during the first quarter of 2000, where "secular bear market" is defined as a long-term downward trend in valuations (P/E ratios, etc.) and gold-denominated prices. This secular trend will bottom sometime between 2014 and 2020. (Last update: 22 October 2007)

A secular BEAR market in the Dollar began during the final quarter of 2000 and ended in July of 2008. This secular bear market will be followed by a multi-year period of range trading. (Last update: 09 February 2009)

Gold commenced a secular bull market relative to all fiat currencies, the CRB Index, bonds and most stock market indices during 1999-2001. This secular trend will peak sometime between 2014 and 2020. (Last update: 22 October 2007)

Commodities, as represented by the Continuous Commodity Index (CCI), commenced a secular BULL market in 2001 in nominal dollar terms. The first major upward leg in this bull market ended during the first half of 2008, but a long-term peak won't occur until 2014-2020. In real (gold) terms, commodities commenced a secular BEAR market in 2001 that will continue until 2014-2020. (Last update: 09 February 2009)

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Outlook Summary

Gold as money

Money is the economic good against which almost all other goods are traded, or, to put it more simply, money is the general medium of exchange within an economy. The corollary is that if something is the general medium of exchange within an economy, then that 'thing' is money.

Sound money will retain its value over time (it will be a good store of value), but something can be money and not be a good store of value*. Also, there are many things that are good stores of value but are not money. Again, the test of whether or not something is money involves asking the question: Is it the general medium of exchange? If the answer is yes, then it is money, if the answer is no, then it is not. For example, the US dollar passes this test (and is therefore "money") within the US and a few "dollarised" countries, but not elsewhere. For another example, the euro passes the "money" test throughout much of Europe, but not outside Europe. Where, then, does that leave gold, an economic good that was money for thousands of years?

Unfortunately, gold no longer passes the "money" test in any of today's major economies. We say "unfortunately" because if governments had not forcibly removed gold from its monetary role, often using the excuse that a more flexible type of money was needed to prevent financial crises and economic downturns, debt levels could never have reached the unmanageable proportions of today and the future would probably look much brighter.

Strangely, stating the FACT that gold is no longer money is viewed as heresy by some gold bulls. We aren't sure why, because recognising that gold doesn't perform the monetary role at this time doesn't devalue the metal in any way. As noted above, we wouldn't be in this economic mess if the general medium of exchange were gold or gold-like. Perhaps these gold bulls are confusing what should be with what is.

In an effort to explain how gold could still be money even though it is no longer the general medium of exchange, some people have redefined the terms "money" and "currency" in an imaginative way. Money, they say, is an abstract concept, whereas currency is what generally gets exchanged when things are bought and sold. Using these definitions it can be argued that gold is still money even though it is no longer widely used as a currency.

People are obviously free to use whatever definitions they believe make the most sense, but in this case changes are being made to well-established, precise and useful definitions solely for the purpose of avoiding a distasteful conclusion. It is better, we think, to face reality.

The reality is that nowadays gold is sometimes used as a currency, meaning that there are certain situations where gold is used to purchase things, but gold is not the currency in general use throughout the economy. In other words, gold is not money, but it is occasionally used as a currency.

Looking ahead, is it possible that gold will, again, be money?

The answer is yes. Gold is actually better suited to being money today than it ever has been in the past, thanks to technology that allows gold ownership to simply and instantly be transferred without the need to physically move bullion. Almost all the monetary gold could remain locked in vaults, with ownership to a quantity of gold -- anywhere from a tiny fraction of a gram to many kilograms, depending on what is being purchased -- being effected electronically.

As an aside, we are discussing the possibility of a return to using gold as money as opposed to a return to some form of gold standard where dollars, euros, etc. are money backed by gold. A gold standard or any other monetary standard managed by government will always be far from ideal because governments invariably find excuses to change the rules (an official convertibility rate of X$ per ounce of gold could, for instance, be changed to 2X$ per ounce of gold with the stroke of a politician's pen).

But although technology available today paves the way for the more efficient use of gold as money, it is extremely improbable that gold will ever again be money unless there is first a total economic collapse. This is because only a total economic collapse would be capable of bringing about the sort of political change that would make sound money feasible. The reality is that the current sizes of the government and the government's future obligations (social security, pensions, promised 'free' medical care, deposit insurance, the dole, payments to bondholders, etc.) are completely and blatantly incompatible with sound money. Implementing sound money and leaving everything else the same would be like trying to keep a Ponzi scheme going without sucking in new investment.

So, replacing money that the government can inflate at will with money that has rigid limitations on its supply could only occur in parallel with direct default on a massive scale and the shrinkage of the government to a small fraction of its current self. It is not realistic to expect that this will happen as long as it remains possible to 'kick the can down the road' a little further.

    *Money that is not a good store of value will tend to have a relatively short lifespan, but it will be money as long as it continues to be used in the vast majority of economic transactions.

Treasury Bonds

Corn

Interesting quote or fact of the week

The Stock Market

Current Market Situation

The top section of the following chart shows that resistance defined by the June highs capped the July-August rebound in the NASDAQ Composite Index. It also shows that over the past four trading days the NASDAQ gave back more than half of the gains achieved in the multi-week rebound from the early-July low.

The bottom section of the chart shows that even though the current decline is only four days old, the NASDAQ's McClellan Oscillator (MO) is already approaching an oversold extreme. Significant additional weakness over the next 2-3 trading days would probably push the NASDAQ's MO down to near -100, which is about as low as it ever gets.

Rather than reaching a decline-ending 'oversold' extreme in the immediate future, it is more likely that the market will rebound over the coming week.

A rebound this week would be consistent with a literal interpretation of the "Presidential Cycle Model" that we've been monitoring since the beginning of the year. This Model suggests that an accelerated move to the downside won't begin until late this month.

The next chart indicates that last week's downside in the stock market was confirmed by a widening of credit spreads (the HYG/TLT ratio moves lower when credit spreads widen). Credit spreads should continue to widen (high-yield bonds should continue to under-perform) as the stock market works its way down to an October low.

This week's important US economic events

Gold and the Dollar

Gold

The daily chart displayed below shows that December gold has moved up to the bottom of the $1220-$1230 resistance range. It also shows that the rising 200-day moving average is now almost level with the July pullback low of $1160. Our guess is that resistance at $1220-$1230 will hold for now and that the gold price will drop back to test support at $1160. If this support fails to hold then a further decline to the mid-$1000s will probably ensue.

In our opinion, it is very unlikely that gold will drop lower than the mid-$1000s before resuming its long-term advance.

June-August is often a slow period in both the stock and the gold markets, with the markets coming back to life towards the end of August. In this regard, 2010 has been a normal year. Thankfully, over the coming fortnight we will be moving out of the seasonally slow period and into a 2-month period that tends to be 'interesting'.

Platinum

At the moment, the more 'industrial' a precious metal the more bearish its chart pattern (which makes sense considering that economic weakness has only been temporarily masked by government "stimulus"). What we mean is that silver's chart looks more bearish than that of gold and platinum's chart pattern looks more bearish than that of silver.

A daily chart of platinum futures is included below. Notice the similarities between this chart and the NASDAQ chart shown above. In both cases, a steady rise to an April peak was followed by a plunge and then a weak rebound. And in both cases the weak rebound has potentially formed the "right shoulder" of a "head and shoulders" top.

Platinum has support at $1480-$1500. Breaching this support would create a measured objective of $1200-$1250.

Gold Stocks

The HUI spent last week between 450 and 460, and failed to confirm gold's rise to a new multi-week high. Taking into account the recent price action, we won't be surprised if the HUI breaks through the top of last week's narrow range and moves up to 470; however, we doubt that it will do significantly better than that over the next couple of weeks.

Support lies at 420-430. Breaking through this support would probably be followed by the test the February low (370) that we've been anticipating for the past few months. And if this were to happen it would create a terrific opportunity to buy gold stocks in preparation for what should be a very strong gold market during 2011-2013.

Currency Market Update

Last week's downward reversal in the stock market was associated with an upward reversal in the Dollar Index. By breaking decisively above its channel top (see chart below), the Dollar Index has provided preliminary evidence that a correction low is in place.

The initial upside target is resistance at 85. It is possible that the Dollar Index will move up to this target without much hesitation, but if the stock market rebounds over the coming week then the US$ will probably retrace part of last week's gain before making much additional headway.

Update on Stock Selections

(Notes: 1) To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question. 2) The Small Stock Watch List is located at http://www.speculative-investor.com/new/smallstockwatch.html)

Great Basin Gold (AMEX and TSX: GBG). Shares: 348M issued, 454M fully diluted. Recent price: US$1.85

This is an interesting and critical time for GBG, for two main reasons. First, the company's two main projects (the Burnstone project in South Africa and the Hollister project in Nevada) should reach commercial production within the next two months. If all goes according to plan, Burnstone will produce 150K ounces of gold next year, 250K ounces in 2012 and more thereafter, while Hollister will have steady production of around 120K ounces per year. Second, 56M warrants with an exercise price of C$1.60 are due to expire on 15th October 2010. This means that if GBG's stock price remains comfortably above C$1.60 over the next two months then about C$90M will flow into the company's coffers, considerably strengthening its balance sheet. On the negative side, the exercising of these warrants would result in a lot of new shares being issued and would probably limit the stock's short-term upside potential even while it strengthened the balance sheet.

GBG's chart (see below) shows that the stock has done very little over the past 8 months. It has essentially traded sideways since late last year within a narrow (and narrowing) range, and ended last week at the top of its contracting range.

A decisive break above the top of this year's range would create a chart-based target of around US$2.50. Taking into account GBG's valuation, the remaining uncertainties and the potential effects of the soon-to-expire warrants, we will probably exit if we are able to do so at around US$2.50 within the next two months.

    First Majestic Silver (TSX: FR). Shares: 93M issued, 108M fully diluted. Recent price: C$4.22

FR's latest quarterly results, which were released after the close of trading on Friday, revealed that growth in its silver production is now (finally) starting to pay off in terms of reduced operating costs and increased profitability. FR had earnings of C$0.096/share during the June quarter, which equates to C$0.38/share on an annualised basis.

The following chart shows that FR has well-defined resistance at C$4.50. A break above this resistance would create a measured objective of C$6.00, which, we think, would also reflect full value assuming a silver price of $18-$20. Going the other way, there is very strong support in the low-C$3 area.

FR is not likely to buck the sector-wide trend, so if the precious metals sector trends downward to an October-November low then FR will probably do the same. Under this scenario there could be an opportunity to buy the stock near the aforementioned support within the next three months. On the other hand, if the silver market proves to be more resilient than we currently expect then FR could soon break out to the upside and begin making its way towards C$6.

We'd be buyers at C$3.00-C$3.50 and holders at the current price.

    Greenscape Capital (TSXV: GRN) is involved in a number of "green" businesses and projects, most notably the development of a new parking facility -- touted as being the world's greenest parking facility -- serving the Denver International Airport (DIA). The DIA parking facility is under construction with an expected completion date of November-2010 and an appraised value of around US$32M. This appraised value equates to about C$0.77 per GRN share assuming a total share count of 30M and accounting for about $10M of debt. GRN's stock price ended last week at C$0.325.

GRN is too small and illiquid to be put into the TSI Stocks List, but we previously wrote it up in the 22nd February 2010 Weekly Update as a speculative idea that readers might want to investigate further. We are mentioning it again because it is now cheaper and a lot closer to having a business that generates significant positive cash flow. It is still very risky, though, because it doesn't have much financial flexibility and could therefore have a problem if the parking project experiences cost over-runs and/or delays.

GRN's chart shows resistance at C$0.35-C$0.40. A daily close above C$0.40 would be a clear sign that a bottom was in place.

Chart Sources

Charts appearing in today's commentary are courtesy of: