Let the Revolution Begin

Resource man John Myers fills us in on the doubled-barreled bull market in real assets, which, he says, "has only just begun."

All the press talks about these days is this "miraculous recovery" of the U.S. economy and Wall Street. But when you examine the numbers, there’s no avoiding the fact that this so-called recovery is NOT happening. The economy is still off…and so is Wall Street. The greenback has plummeted, unemployment is still too strong, personal savings are down, but…commodities are soaring.

As you know, gold just recently hit seven-year highs. But look at these other metals: lead is at its highest point in five years; aluminum is selling at two-year highs; copper is at levels last seen in December 2000. In fact, the CRB index, which represents a broad basket of commodities, is currently trading at 246, up from 190 at the beginning of 2002…a gain of 29.5%.

There are two things, really, that are pushing commodities to all-time highs. In fact, I call this a double-barreled bull market…and it has only just begun.

The first barrel is one readers of the Daily Reckoning will be well versed in: the downfall of the U.S. dollar. In the past year, the dollar has fallen 15.8% against the euro, and given the events of this past week, there appears to be little relief in sight.

Commodity Uptrend: Decoupling from the Dollar

But this has been going on for some time. In late September the U.S. dollar took a heavy hit, dragging the bond market along with it. The dollar’s latest comeuppance came on the heels of a Group of Seven meeting, where leaders called for a flexible exchange rate. Translation: Countries are rushing like mad to decouple their money from the greenback.

According to Hughes Lajeunesse, a currency analyst with BNP Paribas, the gist of the G7 meeting was that "the U.S. wishes to see a weaker dollar." Given the lax monetary policies instrumented by the Federal Reserve and the humongous trade and budget deficits, the United States will not have much of a problem seeing its wish come true.

Of course, the biggest beneficiaries of the dollar’s fall are commodities and real assets – not to mention the companies that produce them. The move is well under way.

This week, bullion pushed its way briefly past the vaunted $400 dollar mark. I strongly believe the Midas metal is heading towards $450 and above. The Gold Bugs index of mining shares is up a whopping 489% from its lows.

The price of copper, meanwhile, has climbed from 62 cents per pound to 86 cents…its highest level since December 2000. During the same time span, silver has risen from $4 per ounce to more than $5. Zinc, tin and aluminum are all at two-year highs…lead is at its highest point in five years…and nickel has climbed the charts, hitting a 13- year high.

Commodity Uptrend: Undervalued

The grain markets are also strong, with wheat prices fetching $3.50 per bushel – almost a dollar more today than what they brought in spring 2002. And soybeans have soared from $5.20 per bushel to $7.20 – since August!

But the real surprise and thus the opportunity is that even after this run-up, commodities are still undervalued.

Wall Street likes to say that stocks are cheap right now. I hardly agree based on historical measurements, such as the market’s overall price-to-earnings ratio. But even if you buy into the argument that "new era" stocks should be evaluated in a "new" light, stocks are still not nearly as cheap as real assets. Right now, the discount in the most glamorous of commodities is incredible.

Take the number of ounces of gold needed to buy a share in the Dow Jones Industrial Average. When gold became unrealistically priced at the end of 1980, one ounce of gold would buy one share in the Dow. That was when gold was at $800 per ounce and the Dow was at 800. In early 2000 that ratio became an incredible 42-to-1. (The Dow reached 11,906 in March of that year, a time when gold was trading at $280 per ounce.) Even now, with Wall Street gurus calling the stock market cheap while heaping disdain on gold, the ratio stands at 26-to-1.

In the same vein, oil is also cheap. In 1980 it took 22 barrels of oil to buy one share in the Dow. By 2000 that ratio reached an astounding 545-to-1. Today, the ratio is still 312-to-1.

This is a dramatic change since 1980, when you consider that the Dow 30 companies continued to offer new shares, but there had been no new discoveries of oil.

Commodity Uptrend: Double-Barreled Bull Market

It’s only a matter of time before these trends start to reverse themselves. A few brave gold analysts even believe that an ounce of gold could one day be worth more than a share of the Dow. But even if it doesn’t happen, investors will still have a very good chance to get rich with commodities – thanks to another unstoppable force driving commodity prices.

This bull market has more than just the inner machinations of an inflated U.S. buck backing it. The other part of the double-barreled bull market is growing demand. Throughout the world, demand is outstripping supply.

But nowhere is this more prevalent than in Asia, where the superpowers of tomorrow are underpinning the long-term cyclical uptrend in commodities. This region is exploding in population, economic growth and spending.

All across Asia consumers are discovering their buying power. These consumers are younger than their counterparts in the West, and most importantly, the number of these young Asian consumers is growing. In 2000, there were 1.2 billion Asians between the ages of 30 and 59. That number’s expected to rise to 1.7 billion by 2020. Compare that to the same age group in Western Europe and America, where the number of consumers is actually shrinking.

Also consider that these Asian consumers are buying more and saving less than their high-saving parents. Basically, Asia’s growing number of well-educated singles and couples are enjoying a sense of confidence in their own living standards…much like America during the 1950s. They are spending money on homes, consumer durables, luxury goods and tourism. And with the path they are on, Asia’s consumers may soon replace America’s consumers as the drivers of global growth.

The nation that’s leading this growth is China. With its 1.29 billion population – up 12% since 1990 – this massive country is bent on modernizing itself in a more Western image. China’s estimated economic growth this year is 8%. Compare that to the United States at 3% GDP and Canada at 2.2% for 2003.

And along with their need for more roads, housing, energy…everything required for everyday survival, they’re also consuming more base metals. With China’s booming economy, the nation’s factories are consuming 2.8 million metric tons of copper each year (and they’re only producing 800,000 metric tons from the state-owned mines). China’s consumption of copper was only 6% of the world in 1990. By 2010 it’s predicted to be 29% or more.

And that’s just copper. The thriving steel industry in China is bigger than the United States and Japan combined.

Demand is up; supply is down. The growth within Third World countries entering their own Industrial Revolutions – and especially China’s impact on real assets – is just the beginning of a double-barreled bull market in commodities. In less than two years, though, it will be the hot topic in the investment community. Now is the time for you to profit from this boom.


John Myers
for The Daily Reckoning

Novemeber 20, 2003

P.S. With China’s economy growing by leaps and bounds and a national will to become a modern society, many of the Earth’s already taxed resources will fall into bidding wars that will drive up their prices not by 20%, 30% or 50% but by 200%, 300% and 500% before this decade ends. The Chinese are known to say there is always tremendous opportunity in a crisis. Well, the crisis is here.

John Myers son of the great goldbug C.V. Myers – is the editor of Outstanding Investments. Our man on the scene in Calgary, John has his fingers on the pulse of natural resource profits – including oil, gas, energy and gold.

Doo dah…doo dah…


Bill Bonner, back in Paris…

*** What’s this? After a big boost in the money supply in the early summer…suddenly, M3 numbers are falling. So are net capital inflows – from $50 billion in August, down to only $4.2 billion in September. Central banks are said to still be buying America’s debt. But individuals are cutting back. We don’t know what this means, and neither does anyone else, but it sounds ominous. *** Dan Ferris sends this alarming message:

"You walk through the automatic doors into a cavernous space, brightly lit.

"An elderly woman greets you with a radiant smile and a charming ‘hello.’ You see two or three others, also dressed in blue, like the smiling woman. You then slowly wander through a space the size of two football fields, through stacks of merchandise 20 feet high.

"Along the way you encounter stacks of cans and boxes, pillows and stereos, furniture and clothing everywhere; you are practically the only person in the store. It’s quiet, except for the sounds of ‘The Girl from Ipanema,’ wafting down from somewhere above you.

"No, this is not an all-night grocery store at 4 am Sunday morning.

"This quiet, almost desolate, place is Wal-Mart on the 14th of the month. The throngs of greedy, sharp-elbowed bargain hunters are not there.

"This isn’t a scene from Wal-Mart’s future, either. This is how it is right now, today. You see, Wal-Mart’s foundation customer has finally gone bust…"

Today, we remember Maryland’s racetracks fondly. Such a rich source of graft…corruption…slush funds…laundered money…and investment wisdom!

"Yo’ don’t bet on de hoss yo’ think is gonna win," an old gambler once explained to us. "Yo’ bet on de hoss dat’s got de bes’ odds…"

Solvent traders understand the principle, but few investors do. Since you can’t know which horse will win, you bet according to the odds…favoring the under-rated animal. Your bob-tailed nag may not win, but he’s still the best bet. That is why you can believe that stocks are most likely to go up…and still short them. And you can think that gold will probably go down…and still buy it. Because the reward from any bet is the likelihood of the event happening multiplied by the payoff. Long odds usually pay well. A poster on the Rue Sebastopol reminded us of our old racetrack friend. It advertises a concert by a black gospel group, the Blind Boys of Alabama. One of them looked familiar.

Maybe we should join them, we thought. Except for the facts that we can’t sing and are not black, we would fit right in. Nearly every investor, economist, and analyst in America thinks he can see the horses crossing the finish line even before they start the race. We must be blind; we can’t see a thing.

What do you do when you are blind to the future? You turn your head around and look to the past…and figure the odds.

Investors who failed to buy stocks at the end of WWII…when the Dow traded below 200…must have kicked themselves for the next 20 years. Stocks rose until the late ’60s. Then, they fell…and then they rose. By the time the century was over, the Dow was over 11,000. What a long and fabulous ride; and they missed it!

But if that investor didn’t buy…it was probably because he was already black and blue from kicking himself for the previous 20 years – the period from the late ’20s to the late ’40s…in which stocks had fallen. ‘Why bother investing in stocks,’ he may have said to himself, ‘they always go down.’

In real terms, stocks don’t always go down. They go up…and then they go down. Measured in constant dollars, during the 20th century, they rose for periods of 17-20 years…and then they fell for periods of similar length.

We don’t know what will happen next year, but we know that stocks rose from a Dow under 1,000 to a Dow over 11,000 – from 1982 to 2000. They began falling in March of 2000…they dropped about 20%…and have since bounced back to recover about half of what they lost. In order to return to its low of 1982, the Dow would have to fall to around 2,000 – a fall of nearly 80%.

Gold, meanwhile, did almost the opposite. It peaked out in 1980…and then began an 18-year bear market….which, in real terms, wiped out nearly 90% of its value. Since then, it has bounced, recovering about 10% of what it lost – to slightly below $400 an ounce. But to fully recover, adjusted for inflation, it would have to trade at over $2,000 per ounce.

At this point, gold can go up 500% and still not equal the price it set 23 years ago. Stocks, on the other hand, can go down 75% and still not be as cheap as they were during the first Reagan administration.

What is more likely to make you money? Betting that stocks will rise further from today’s near-epic high…and that gold will fall from today’s near-epic low? Or betting that the patterns of the last hundred years will repeat themselves?

Of course, a lot has happened in the course of the last 2 decades that could twist history in a strange direction…but nothing that is likely to make a stock worth much more than 30 times earnings…or gold worth much less than $400 per ounce.

We will see…

In the meantime, more news from Eric Fry:


Eric on the scene in New York…

– Let’s peruse yesterday’s headlines and try to connect the dots: "AT&T to Axe More Than Ten Percent of its 30,000 Workers," "Detroit Jobs Exported to India, as General Motors, Ford Reduce Their Costs," "Yen Falls After Bank of Japan Sells Currency, Dollar Gains," "Bank of China Starts Gold Trading," "Arrest Warrant is Issued for Michael Jackson in Child Molestation Probe."

– Ok, maybe there’s no DIRECT connection between the Bank of China’s gold trading and Michael Jackson’s alleged child molestation. On the other hand, we see a metaphorical connection between the two headlines: The "little guy" is exacting revenge! Having suffered years of abuse by currency-debasing politicians, small investors are seeking a kind of monetary justice. They are buying gold instead of paper money.

– For the first time "since the establishment of the People’s Republic of China in 1949," the Shanghai Daily reports, individual investors can buy gold bullion through an officially sanctioned gold-exchange. Ever since Mao Tse- tung was passing around little red books, the People’s Bank of China has tightly regulated gold trading. But the increasingly confident and de-regulated communist nation is letting "the people" decide for themselves how much gold they wish to own. This new liberalization may not be immediately bullish for the gold price, but we suspect that it will not be bearish.

– The yellow metal fell $4.00 in New York to $394.75, while the dollar recouped about one third of Tuesday’s losses, rising to $1.18 per euro. Stock investors took courage from the contrived dollar rally, and returned to buying their favorite overpriced U.S. stocks. The Dow gained 66 points to 9,690 and the Nasdaq added about 1% to 1,900.

– The dollar’s one-day respite – and gold’s one-day retreat – does not alter the global monetary trends that are unfolding. The long-term dollar trends still looks very scary, even to many of the long-term dollar bulls. Citibank, one of the largest traders in global foreign exchange markets and biggest dollar bulls, closed all its existing long dollar positions Tuesday. The about-face by Citibank is significant, says Dow Jones News, "in that the dollar’s slide has forced one of the most aggressive dollar bulls in the market to temper its optimism toward the currency.

– "In a research note," Dow Jones continues, "Citibank currency analysts cite three specific reasons: the U.S. decision Tuesday to impose temporary quotas on certain textile imports from China, the dollar’s failure to respond to positive U.S. economic data and the breakdown of key technical levels such as dollar index support at 90.56."

– In addition to Citibank’s touchy-feely reasons to sell the dollar, we would add three more: America’s gaping current account deficit, record household indebtedness, and half a trillion dollar Federal deficits.

– Gold’s ascent toward $400 an ounce is a direct reflection of the dollar’s woes. However, gold’s sudden surge of popularity suggests – from a contrarian perspective – that the yellow metal may struggle to conquer the $400 level.

– Strategic Investment editor, Dan Denning, explains: "When I wrote recently about hedging your downside risk in gold stocks by owning some puts on the Philly Gold Index (XAU), I was anticipating a temporary fall in the gold price. The reason for my caution [stems from] last week’s Commitment of Traders report from the Commodity Futures Trading Commission showing that commercial traders (‘Commercials’) had increased their short position to more than 185,000 contracts. The Commercials are thought to be the ‘smart money.’ So if they are betting against the gold market in a big way, it’s usually best to bet with them.

– "But the futures traders shift their positions quickly and often," Denning continues. "So I don’t want to get too hung up on what they are doing. I think it’s more important to continue focusing on the big trends, all of which are very bullish for gold. In fact, the Commitment of Trader’s report itself, while bearish for gold over the short term, highlights a phenomenon in the gold market that is very bullish over the long term. The fact that the commercial traders are net short gold means that the gold companies are still betting against their own product! And they’ve been betting against their own product for more than 10 years…They continue to sell their future production at today’s prices. – "Think about that…Let’s imagine that a mutual fund could mine shares of Cisco Systems like a gold mining company mines gold. Let’s imagine further that the mutual fund could sell today, at today’s prices, the Cisco shares that it would mine five years from now. Can you imagine any mutual fund manager selling shares of Cisco Systems at today’s prices, instead of waiting to sell them for the price he would receive five years from now? Every mutual fund manager in America believes that Cisco will be worth more in five years than it is today. – "But the opposite point of view prevails in the gold market. The very same companies that pull the stuff out of the ground fear that prices will be lower three four and five years from now. So they sell their future production at today’s prices…This institutionalized bearishness towards gold is one of the strongest contrarian arguments for a higher gold price…a much higher gold price.

– "One day – timing uncertain – the gold mining companies will have to reduce their forward sales by buying back at higher prices the gold they have already sold. The higher the gold price climbs, the more costly it will be to buy back these forward sales."

– Be patient, Denning concludes, "If you’re nervous about the gold price retreating from $400, keep in mind you’ve got a box seat for a major event in financial history: the forced deleveraging of the American financial economy."

The Daily Reckoning