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FINANCIAL MARKET UPDATE By Edward Gofsky - aUGUST 11, 2004
Thoughts of a gold and silver bull in the dog days of summer

Since my last essay in May I have been watching all markets, DJIA, gold, silver, USD, oil, interest rates, housing, and the bond market. I have been looking to see if any of these markets break hard either to the upside or the downside and to see where my technical analysis on these markets stands since my last essay in May.

As I said before it looks like the February top in the DJIA will stay at 10,753 making that a wave 2 top in Elliott wave analysis. With the 4 year cycle and Bob Prechter's 3.3 year cycle and the 40-80 week cycle not to mention the presidential cycle all pointing down hard into year end and beyond until fall of 2006. The current diagnosis for the general market is very bearish.

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One of my favorite financial authors, Jim Willie of GoldenJackass.com, is famous for calling economists "political apologists for there brokerage houses and government agencies" and I 100% agree with him! Fridays Horrific jobs number is a perfect example of the uselessness of most economists on Wall Street and the government.

On Friday in the United States, economists were calling for a gain of 240,000 jobs for July, which would mark an improvement from Junes disappointing additions of just 112,000 jobs. Economists everywhere were calling and some secretly praying that the number would be a big one. Here is a quote from Avery Shenfeld, a senior economist with CIBC World Markets:

"We share the general sentiment the June's aberrant weakness (in employment growth) will be followed up by better numbers for July"

I would like to know how Mr. Shenfeld felt after the jobs report stated an increase of only 32,000 jobs in July.

On CNBC you could hear the oxygen getting sucked out of the studio as the talking heads and their guests gasped as they were blind sided by the jobs numbers and were left sitting in front of live cameras looking like children and someone had stolen their lollypops!

After the jobs number was released the major markets fell hard and the U.S dollar fell even harder. Gold was up strong on Fri. getting over $400, I think people are starting to finally see where me and a lot of the other contrarian investors have been coming from when we talk about the secular bear market and the rally from the Oct. lows as only a bear market rally and not a new secular bull.

Don't be fooled by the Wall Street charlatans and witch doctors who preach about the coming bull market in tech and biotech, the end of the gold rally, and new bull market highs in the DJIA very soon.

I am sorry to tell all of you but that is simply not going to happen! A bearish view could be highly profitable for short sellers and put buyers going into the fall of 2006 the next date of the 4 year cycle bottom.

Gold and silver have struggled over the last few months but have held up well, gold exploded on Fri. up $7 closing just under $400. Silver bottomed in early April at $5.50 which from the chart below is a near perfect wave (2) bottom and the start of a massive trend channel.

The next big move in silver over the next year should be a massive wave 3 rally over $10 an ounce. As you can see from this chart on silver the move from august 2003 to march of 2004 was a perfect 5 wave pattern (As I say in every single essay that I pen all readers must buy a copy of Robert Prechter's book "Elliott Wave Principle" so you to can learn the wonders of Elliott wave analysis.

Here is a great example of a stock that has a near perfect Elliott Wave count. Notice the fractal nature (patterns with in patterns) of the stocks movements. Can you see the waves within waves? It's so easy. This is a chart of (UEX) a small uranium company. I am very bullish on uranium and I consider it "THE ENERGY PLAY OF THIS DECADE" and I will be talking a lot about it in my next essay. For those of you that want to get some great info on uranium, you can go to www.cameco.com

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This first big move in silver was only the start of a massive bull market move that most people, even in the silver community can not yet believe. One of the best parts of Elliott Wave is to find big channel formations early in the stocks movements, so you can try to predict what kind of move might occur in the future and try to profit by that pattern in the stocks price.

So as you can see in the silver chart the first big up move was only wave (1) and the April $5.50 low was wave (2). Silver now stands in the mid $6 range and has formed a nice channel that gives me a clear view of a coming wave (3) up move over the next year. A break below the wave (2) bottom at $5.50 would mean a revaluation of the wave count.

Final wave (3) conformation will be made when the wave (1) top is surpassed some where close to the $8.50- $9 level

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Gold after hitting a high of around $430 has struggled hitting a low of $375 on May 10, but has since moved to the $390 range, closing just under $400 on Friday. The movements in gold are for now tied to the U.S dollar and since the dollar has had a little bounce gold has taken a breather (until Friday's jobs numbers were released).

Some of you out there have heard a lot of talk about gold and the dollar and some commentators have actually said that the bull in gold has ended and the dollar will rally hard. Really?, Is that so?, I say to myself laughing out loud as I read the work of either really under educated people or people paid to be bearish on metals analysts.

People can talk all they want about the short term movements of gold and the dollar but for me I am a raging bull on gold and silver, not because I am a gold and silver bug and I pray to my silver bars and coins at night, but because the U.S.A is in a massive problem fiscally and monetarily, and the main reason is that there has only been 3 times in the last 100 years where if you would have bought gold and gold stocks and silver too, you would have made a killing in the markets possibly bigger than anyone can imagine today even after the .com boom that saw stocks go from pennies to hundreds of dollars per share.

Below is a 20 year point and figure chart of gold. This chart is extremely bullish as it shows that gold has formed a huge 12 year head and shoulders bottom pattern. The red line in the chart is the line from the 1980 $850 top in gold. So as I look at this very bullish 12 year head and shoulders bottom breaking through the long term downtrend line I can only be very excited about the future price of gold in this decade.

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The 3 best times, only times, in the last 100 years to buy gold and gold stocks were 1929, 1966, and 2000. All of these dates were major tops in the DJIA and major bottoms for gold (generational bottoms). As you can see from the chart below from a great web site CyclePro.com by Steven J Williams.

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After hitting those 2 highs in 29 and 66 the DJIA/gold ratio (which to me is nothing more than the very best gold buying indicator ever, hands down) fell hard and bottomed only when you could buy the DJIA for 1 or 2 ounces of gold. (In 1980 for a very short time the DJIA was 800 and gold was $800 for a perfect 1 to 1 ratio)

Today the DJIA/Gold ratio is at 25 so we have a long way to go in this bull market for gold and silver (Silver will be dragged along even if kicking and screaming to new all time highs with gold) this chart alone could be all you need in this bull market for gold and you can just buy gold coins and bars and gold funds and stocks and just watch the bearish gold analysts panic as the DJIA/Gold ratio shrinks down under 10 in the years to come.

So here are some charts of gold and gold stocks to see if this bull markets in gold is over or in my opinion is just getting started.

This first chart, from one of my favorite web sites contrarianthinker.com is one of the best gold charts I've seen; it's a perfect Elliott wave pattern for gold from the 1971/1972 bottom to the wave 3 top in 1980 and the very long wave 4 correction until 1999/2000 (which also happens to coincide with the DJIA/Gold ratio top and major gold buy signal).

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This chart is showing me that gold has formed a near perfect channel and that the 20 year generational bear market (I am 26 so gold and silver have basically gone down my entire life, until just recently, lucky me hey!) is over as wave 4 has finished and we are now in the very early stages of a massive wave 5 rally to new highs in the coming years 2006-2012 as the chart indicates.

Also you can see that at the wave 4 bottom the price of gold briefly dipped below the price channel just as it did back in 72. So you could interpret this as the best buying opportunity for gold and silver since that last major generation bull market in the metals in the 1970's (I know I do!).

The following are a bunch of gold and silver stock charts going back as far as I could get them for the only picture that really matters (THE BIG PICTURE). As you can see these stocks have barely moved and there is someone buying a whole lot of these shares, like they know something that most if not 90% of the population does not know.

And what is that you might ask me? The answer is obvious to me, someone knows that gold and silver and the company's that mine them and own huge reserves of the metals are the buy of this generation. Take a look for yourself at these awesome charts below.

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As for interest rates and the bond market, I really don't think Greenspan wants to raise rates so close to the election (especially after Friday's jobs numbers). But after the election is a totally different story! As I have said in most of my essays, the U.S is bankrupt and is only allowed to keep its head above water by selling bonds to Japan and china and by printing billions of dollars to fund the twin defects.

I could talk all day about why the dollar is going to hell in a hand basket and why the U.S government is totally financially bankrupt but I will spare your time and just tell you that you have to read the book The Dollar Crisis by Richard Duncan. In the book the author meticulously paints a very bearish picture for the dollar using nothing but cold hard facts and the only thing that really matters, the truth. The integrity of the dollar is and will come into more question as 2004 rolls on and into 2005.

The only way that the fed thinks it can get out of this mess, and really the only politically expectable way is through massive printing of dollars to pay off foreign debts and stop a total run on the dollar. Having deflation (a contraction in the supply of money and credit) at this time in American history would be a major disaster and totally unacceptable in Washington and the White House. So the only choice is to fool the population and secretly tax them though the gross means of hyperinflation.

People ask me all the time why I am so bearish on the dollar and the major stock markets and why I am so bullish on gold and silver. Well let me tell you just one of the many reasons that I am bullish on the metals and bearish on the dollar and DJIA, I believe a lot about demographics and that the baby boomer generation is a major force, a massive wave if you will that drove the boom and accumulation a debt from 1980 to 2004 and that is what really drove the bull market, and the rush to get rich by buying paper (stocks and bonds).

As you read the essay below from Laurence Kotlikoff (professor at Boston University) you too will see a historical case of something that is very ironic, the baby boom generation will in the end be called the baby bust generation.

All the books that came out in the late 90's to help explain why the DJIA was going to 25,000 then to 100,000 because the largest ever generation, the baby boomers would have to buy stocks forever to fund there retirements and to help each and everyone of them get rich was a total con!. Anyone remember that little book "The Roaring 2000's"

You heard it here first but I believe that the big baby boom will be remembered in history books as the great baby bust, and that whole generation will be despised by there own children following there massive retirements starting in the later part of this decade as the stock markets and the dollar are crushed into an abyss of disbelief as the children of the boomers realize that they where fooled and blinded by a fog of deception, and are forced to pay the debts of there parents extravagant party from 1982 to 2000.

For anyone wanting a great understanding of what is to come in the later part of this decade, please read the book Rich Dad's Prophecy by Robert T. Kiyosaki.

Like I said from the title of my essay, I have been thinking a lot lately about the dollar and especially gold and silver. I love writing about the markets as it helps me learn and I love to share my passion for the markets with like mined people. I tell people all the time that I don't day trade and I look at the bigger picture and I just sit and wait for the patterns that I see develop in the stock charts to complete themselves and then I SELL!.

That is what I believe is the best way to invest and not to give money away through commissions, slippage and taxes.

Just remember that in 1975 in the last bull market in gold and silver as the DJIA/Gold ratio was working it's way to a 1 to 1 ratio you could have bought gold and silver stocks at pennies or a few dollars and sit tight for 5 years and not do a thing until 1980 when you got the big sell signal of the under 5-1 ratio of gold to the DJIA and sold all of your gold and silver stocks for hundreds of dollars per share, some as high as $500 per share from $1 or $2 dollars only five years earlier as gold fever ripped through the financial markets worldwide.

So as I finish this essay I want to share with you something that I have been thinking about all summer, one of the best articles that I have ever read, explaining what is wrong with the U.S government and what is going to happen to the dollar, gold, silver, the DJIA, and interest rates going into the future as this decade rolls on.

Here is what Laurence Kotlikoff (Economics professor at Boston university and co-author of "The Coming Generational Storm" FORTUNE MAGAZINE, May 17, 2004... has to say:

"Countries that can't cover their spending with taxes or via further borrowing are forced to do so by either printing cash or creating money electronically. And more money chasing the same goods ultimately means higher prices. Like other governments, ours engages in a sleight of hand when it makes money by making money. In creating money to cover expenditures, Uncle Sam has the treasury sell bonds for the needed amount to the public, and then the fed buys the bonds right back with either fresh cash or an electronic bank credit.

The result is the same as if the fed simply gave the treasury the money directly. If a country's fiscal gap - the difference between its planned future spending (including debt service) and its projected future taxes - is massive, the government will eventually have to really crank up the manual and electronic printing presses to cover the difference. At that point, something extremely scary can happen: HYPERINFLATION.

But can't the fed always raise interest rates a lot to keep inflation in check? Nope. When the fed is faced with a choice of (A) defaulting on federal government debt and failing to pay critical bills like Medicare and Social Security or (B) printing money, it has to go with (B). And by so doing, it creates a nightmare scenario: Interest rates, out of the fed's control, now reflect the prevailing inflation rate, which in turn is determined by the rate on new-money creation, which itself is on autopilot.

The reason interest rates reflect inflation is that lenders need to be compensated for implicit default (ie, paying creditors in watered-down dollars). Hyperinflation is a real and present danger for the simple reason that the U.S government is effectively bankrupt. Its fiscal gap is $51 trillion, when measured as a present value. That's 11.6 times official debt, 4.5 times GDP, and 1.2 times private net wealth.

Coming up with $51 trillion without a printing press would require, immediately and permanently, either hiking federal income taxes 78%, cutting Social Security and Medicare benefits 51%, or eliminating more than 100% of federal discretionary spending. That is America's menu of pain.

When investors around the world wake up to U.S insolvency, it will be extremely expensive for our government to borrow. The only option then will be printing huge sums of money - generating exactly the hyperinflation the bond market has decided to expect. Sharply higher interest rates would be bad for stocks. When rates rise significantly, growth stocks are worth less because the market puts a lower value on the discounted stream of their future earnings.
Why would you want to own a stock with earnings growth of 10% a year, with all that risk that stocks entail, when you can put your money in short-term treasuries yielding almost as much? Consumers are indebted to an almost unnerving degree. In 1993, household debt amounted to 80% of after - tax income; today that figure stands at 110%.

In the early 1950's owners' equity as a percentage of household real estate was around 80%. Today it's 55%. What happens if rates climb suddenly and depress real estate prices? And of course, rising rates could also crimp the housing market by making homes less affordable. Moderately higher interest rates will probably be returning for the foreseeable future."

That is a great piece of work and it really hits home why everybody needs to have gold and silver in there portfolios as this decade and the early parts of the 21st century move forward.

Mr. Kotlikoff will be on Jim Puplava's great radio program Financial Sense Online on August 14/04 and I highly advise everyone reading this essay to tell everyone they know to listen to the radio show every week as I do and especially on Aug.14 where Mr. Kotlikoff will go through all the reasons for a great dollar bear and why the government and the Fed are in behind the 8 ball.

Let's take a good look at two bankrupt entities, Enron and the stock of the United States, the U.S dollar, and see if the price patterns in those stocks technically show massive bankruptcy. As you can see from the charts, the price patterns are very similar, the numbers on both charts are not Elliott wave counts, but are there to help people see how close the movements are in charts with a similar psychology.

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So as you can see in both pictures, there is a 4 wave movement followed by a very bearish head and shoulders top (the exact opposite of the ultra bullish head and shoulders bottom pattern). This then leads both charts into a massive decline that still continues today.

These are just some of the thoughts of a gold and silver bull in the dog days of summer, I look forward to sharing with you more thoughts and essay as this gold and silver bull continue through out this decade.

The pieces are in place for a massive move in both gold and silver and it will only be realized by the investors with enough foresight to see the pieces of the puzzle that are already in place, all you need is a strong will power not to listen to CNBC and the undereducated market analysts who still believe that gold and silver do not matter in your portfolio and a new bull market in the DJIA and the NASDAQ is right around the corner. With the dividend yield on the DJIA at 2% and the P.E ratio at 21 don't believe it.

I can not finish my essay without a comment on oil. I am fascinated with oil and all the drama surrounding the history of oil and how it is so interwoven into everything in our economy to everyone in Washington, the white house, and the Middle East. Oil simply is the most important commodity on our planet.

In my last essay in May when the price of oil was under $40 dollars a barrel I had a nice point and figure chart showing a price projection of $57. Well, since May the price of oil has moved up to over $44 dollars recently, shocking a lot of people from Washington to Wall Street. Most people hear all day long that the price of oil is hitting record highs but this is not true if you adjust the current price of oil for inflation.

Looking at the chart below, you can see that at current prices oil has a lot more upside if you use inflation adjusted prices.

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After reading and listening to a lot of oil experts talk about the future of oil and the future price of oil I am convinced that we are at the threshold of a new paradigm in the oil markets that will lead to much higher prices throughout this decade. As Richard Hienberg said in his now famous book "Oil, War and the Fate of Industrial Societies"

"The world is about to change dramatically and forever as the result of oil depletion. Within a few years, the global production of oil will peak. Thereafter, even with a switch to alternative energy sources, industrial societies will have less energy available to do all the things essential to their survival. We are entering a new era as different from the industrial era as the latter was from the medieval times".

And David Goodstein in his awesome book "Out Of Gas" said.

"Over the past century, we have developed a civilization firmly rooted in the promise of an endless supply of cheap oil. That promise is about to be broken, much sooner than most people realize, possibly within this decade. Anyone who remembers the temporary, artificial oil shortage of 1973 can guess what will happen when the oil really starts to run out".

Anyone of you reading this essay that is interested in Oil needs to read these 2 books first to get a full understanding on why Oil is moving much higher as this decade rolls on. Below is my point and figure chart of Oil (stockcharts.com) and under that is my longer term chart showing a massive head and shoulders bottom pattern that is extremely bullish.

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As the summer rolls on into the presidential election I will be keeping a very close eye on all markets and will be reporting on anything that I fell needs to be talked about.

Of course I will be writing my essays every few months to keep my readers up to date on where I stand in the markets, how the chart patterns are progressing, and to watch with me as this decade continues, the coming historical rise in gold and silver as the dollar is turned upside down into a vast fog of uncertainty and questionability.

Edward Gofsky
I welcome all comments and views on my essay. Contact me to discuss this posting.
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