By James Dines
The Dines Letter
There was once a huge lake in the American state of Montana fed by a river that had been dammed by a mountain of ice from Canadian glaciers, called Lake Missoula. When the ice dam broke, water hurtled west to Washington state's "Scablands" in a mega-flood to the Pacific Ocean. That massive flood 10,000 years ago carved out canyons in only a few hours. One can see the ripples in the geology of the Palouse area that look like the bottom of an ocean; that explains the origin of the many "dry waterfalls" that mark the event in the peculiar topography of eastern Washington State.
Similarly, waves in the history of gold over the centuries have been marked by some extraordinary currency crashes as a result of those overextended in debt run the printing presses in order to pay it off. Printing money with scant regard to the relationship between the amount of paper to the real wealth being produced is an old game and has always ended badly, but this is the first time in history that the entire world has been doing it all at the same time, so there must be some kind of "mega flood" ahead that will sweep the unprepared before it.
For the better part of a century the US paper dollar has been living off its old reputation as being "good as gold," as it once was when it was convertible into gold (and silver) but is not now. We have been touched by the naive trust foreigners put in paper dollars (a promise to pay nothing), and the system worked because people worldwide trusted the American peso. But something new has happened, and in only the last few years. Something profound. The crash of the US dollar (see chart below) got the attention of large dollar holders, such as the Bank of China, that saw their dollar wealth plunge when the US dollar dropped 34% in only 2-1/2 years. The rubes finally began to wise up and decided to "diversify" (meaning dump dollars) into euros. Shortly after nations worldwide switched out of US dollars into euros, the euro in turn caved in and the rubes realized that they were being had, but had not other currency to go to. Out of the frying pan into the fire. Their latest solution finally hit the jackpot because they are moving money into the precious metals, especially gold and silver! For the first time since the 1970s gold and silver are rising even as leading paper currencies decline against them, suggesting the beginning of a flight from paper money, the one we have been predicting for some years as "inevitable." Gold is the world's only money that does not involve any counter-party, and is portable, with its own value anywhere in the world.
The world is figuratively drowning in oceans of paper dollars, and newly-rich oil and gas producers are moving part of those funds into gold and silver. Iran and Venezuela, quarreling with America, fearing the freezing of their assets, are already switching out of the US dollar; in fact just two weeks ago Venezuela switched its oil revenues to euros! Needless to say, criminal and terrorist money is likewise undoubtedly moving into gold because it leaves no spoor. Hedge funds are sloshing enormous quantities of money around the world and can create their own trends, so momentum players are adding to the buying in precious metals. Even Treasury Secretary Snow has quietly dropped the hoary shibboleth of a "strong dollar."
Precious metals are one of The Dines Letter (TDL) specialty areas, and for many years we have warned about "The Coming Competing Currency Devaluations" that would play into "The Coming Trade Wars." The way it works is, a country artificially lowers its interest rates so as to make its currency less attractive to income seekers, and that lower currency gives its exporters an advantage because they are playing from a cheaper currency! This is a subtle resurrection of the Smoot-Hawley Act of 1930 when each nation blocked imports and pushed exports, which reminds use of Voltaire cynically writing about a town that supported itself by each person taking in a neighbor's laundry. Now many nations want a cheap currency and are willing to cut interest rates too low in order to get them - witness Fedhead Greenspan's historically low interest rates in recent years that en passant triggered an unsustainable real-estate bubble.
Currency levels have volatile impacts on trading patterns, so the world aches for a stable currency that provides a reliable standard for value, yet refuses to link paper money to gold and silver. For example, 84% of Canada's exports head for US markets, but only 23% of US exports go to Canada. That is because Canada's central bankers, with the kind of brilliantly and meticulously planned conquest of Vimey Ridge in World War I by Canadian troops, comparably sold off their central bank's gold holdings such that now America and Canada both pretend to pay each other with money that has zero intrinsic value. Central banks worldwide dumped their gold in recent years, whether by ignorance of conspiracy nobody knows for sure, figuring gold was "just another commodity," and they put the proceeds into US Government bonds that subsequently dropped. Slowly awakening from their spectacular bungle, there are now positive comments being made by central bankers in Russia, Argentina and South Africa aiming to fulfill TDL's prediction - when gold was at rock bottom - that central bankers would eventually repurchase the gold they were selling so blithely, hopefully from TDLrs who will next make a big profit on it.
Many professionals don't have a clue as to what is really happening in the gold arena, blaming soaring bullion prices on fear of inflation, rising interest rates, and even a refuge from fear generally. As indicated above, central bankers, no cerebral swords they, who sold their country's heritage gold, will come back as buyers at much higher prices, creating huge new demand, remains our prediction. The press says nothing about that, so the public doesn't see it either and central bankers' Survival of the Unfittest continues.
According to DITOGR (the Dines Theory of Gold Relativity, Dinesism #14) gold is the Einsteinian hitching post of the monetary universe. It takes some mental gymnastics to visualize this, because everybody speaks in terms of "the price of gold," but it is actually the reverse. DITOGR says that gold is the ultimate money and it commands different numbers of pieces of paper money in each country, depending on how many they've printed. Thus, the tremendous rise we've seen in gold recently has been the mirror image of the loss for people who held paper money. Nor is it any accident that oil, uranium, and gold made their highs at the same time around 1980, and lows in 2000, indicating that the real reason gold moves has nothing to do with the reasons usually cited, the central one being currencies. The more paper the embezzlers print, the higher the value of real things, such as commodities and precious metals. Sometimes there is a lag and a catch-up. For example, historically, one ounce of gold has been able to purchase one good men's suit, which now sells for at least $1,000, meaning that the price of gold could at least double from here because it is historically underpriced. Indeed, adjusting the 1980 high of $850 for inflation now comes out to $2,040!
When gold was near its rock-bottom lows around $260 TDL articulated the impossible-sounding targets of $3,000 to $5,000 an ounce on a "spike". While we cannot predict when those high prices will arrive, because nobody knows what governments will do in the interim, the precious metals are in powerful Uptrends as we go to press today.
We finally turned bullish on gold again in 2001 and the subsequently huge rises by gold and silver shares were followed by a Major Consolidation for the next two years - we just work here, we control nothing and are merely reporters. To us, the latest Upside Breakouts by golds since 2001 represent the Second Wave of a tremendous bull market still running. Nonetheless, after large rises, gold stocks are wont to go flat for a while in the form of Consolidations, and we are expecting one to begin in 2006. In other words, while we recommend holding golds permanently, especially our Supervised List #3, perhaps better buying opportunities would be available later this year, something we will have to handle in our regular TDLs. By keeping you in the golds we have fulfilled our function of ongoing support and the Upside Breakouts from the flat Congestion Area of 2002-2004 (see the chart of London Gold Bullion, X&Y) are the profitable reward of your patience.
The bottom line is that there has been a profound change in Mass Psychology worldwide, with confidence in the US dollar having been shaken and gold gradually becoming respectable enough to be recommended for portfolios lately. There will likely be additional wild currency fluctuations, and our gaze turns in particular toward the Bank of China's probable surprise "currency floating freely" in 2006.
Have you noticed that the world's central bankers have sold much of their gold, but America has not disposed of an ounce of it, hanging on to 9,000 tons of gold below Liberty Street, at the Federal Reserve Bank of New York, almost certainly the world's largest gold hoard? Sixty countries leave their gold there for safety, although nobody knows which ones, based on their confidence in America. The gold is artificially priced by America at $42.50, an absurdly transparent belittlement to denigrate the yellow metal, but that gold will be priceless someday, mark our words well, as that hoard becomes the basis of the next currency.
Believers in paper money knock gold on the grounds that it pays no dividends and earns no interest, but that is basically true of most investments these days. Paper currencies will compete against each other, but all of them will be laid low by gold, a "currency Darwinism" that will lead to a Big Kaput. Gold haters insist that the metal is "only a commodity," but gold moves against paper currencies, proving our point that it is more than just a commodity. Today's fiat currency is the biggest bubble in recorded history and, as is typical of bubbles, it is invisible to those inside it (see DIBUBBLE, Dinesism #20).
Another source of new gold demand is exemplified by the Equity Gold Trust, listed on the New York Stock Exchange, representing actual bullion in a vault and trading in real time. Most investors are over their heads in the commodities futures markets, so this is a less-volatile way to invest in gold bullion. Plus the price of the fund is on ticker tapes worldwide, so the effort to suppress gold's visibility is crumbling. Indeed, we long ago predicted that shares in such funds, backed by gold, would be the next gold-backed currency! Still difficult, one could theoretically assign shares in this company, or require payment in these shares in this company, or require payment in these shares in contracts! Another source of buying is the new prosperity in Asia, particularly from China and India. In any event, TDL has never wavered in its prediction that the world would return to currencies linked to something tangible, almost certainly gold and silver.
One reason we have such high targets for precious metals is that they uniquely go up based on Mass Fear, whereas the usual driver of bull markets is Mass Greed. The climax of this gold bull market will be driven by Mass Fear and, unlike greed, fear knows no limits.
All gold portfolios contain political risk from greedy politicians - you can't pack up and move a gold mine - therefore our carefully crafted Supervised List #3 has diversified that risk geographically. Any one mine could be take over by a government, but not every single one of them in a portfolio (unless the world got very different). In other words, if one is nationalized ("stolen") by a government the other ones should rise to make up for the missing production, so that we could have a defeat and yet not be defeated. As in life, we can lose an inning and yet survive to win the game. Accordingly, we recommend that you figure out how much your "core position" in gold should be, to be held no matter what, up or down, the way one buys fire insurance and hopes there is no fire. Those who wish to learn more about gold should study our Video Instructional which lays out the tools and demonstrates them on actual gold-mining charts. We are reduced to shepherding our loyal TDLrs through the minefields ahead, especially the house of cards that is the world's currencies these days. But this is Portfolio Generalship, hopefully of Clausewitzian elegance.
Supervised List #3 contains solid, international spread of precious metals such that it is difficult for us to imagine a bull market in those bullions without having a wonderfully lucrative impact on these stocks. However, for those who wish to take additional positions, there are lower-priced precious metals in our Supervised Lists, depending on your risk profile. The fact is, higher bullion prices mean very little extra costs, so most of the extra money drops right down to the bottom line - much as with uranium companies. These higher metals prices, while impacting favorably on blue-chips, elevate "marginal moose" pasture to "valuable" - enabling low-priced gold stocks to vault higher to reflect that transfiguration. It can be seen that our Supervised Lists already sport some huge gains, which is the result of our methodology of weeding out the laggards and continually putting "Attack Capital" into new recommendations. If you check the Dines Mass-Psychology Oscillator (DIMAPSO) in my Mass Psychology book, the right hand side of the page shows that the normal reaction at this stage is, "It's too late to buy golds."
Editor's Note: James Dines is editor of The Dines Letter, P.O. Box 22, Belvedere, CA 94920, 1 year, 17 issues, $195. Introductory Offer: 6 months, 6 issues, $115. The Dines Letter is one of the best-known and oldest stock-market newsletters of its type in the world. Basing its recommendations on Mass Psychology, Technical Analysis and Fundamental Economics, The Dines Letter offers explicit advice on stocks, gold and silver stocks, commodities, currencies, the economy and the overall international outlook. See Special Offer. You'll discover the "one" uranium stock Mr. Dines is recommending that will soar to unbelievable heights. For a limited time, Mr. Dines will include his big "2006 Forecast Issue" with a new subscription.
