Phase Two of the Great Gold and Silver Bull Cycle Begins

By Roger Wiegand December 20, 2006 www.tradertracks.com

“Everything in the world may be endured except continual prosperity.” - Johan von Goeth 1749-1832.

“Cycles and rhythms of life are normal and somewhat predictable. Prosperity, recession and periodic depressions are standard and necessary corrections adjusting for irrational exuberance occurring in each of these cycles. Those cycles are especially mandatory and visible in a capitalistic society.  Free market conditions will spill over and affect socialism and communism as well. Our latest cycle which marked the beginning of another 60-70 year K-Wave was temporarily blocked by Alan Greenspan using too easy credit for housing. When the Nasdaq crashed in 2000, all markets should have followed suit. They were not permitted to do so as the Federal Reserve washed a sea of cash over sinking markets in an astounding trillion dollar give-away to American consumers.  This bubble has burst, sales have stopped and the housing ATM is sinking with consumer borrowers who were used by it.   There are no more new bubbles for Benny Brenanke and Hank Paulson to create.  Now its correction time coming with a vengeance.” –Traderrog

If we had infinite prosperity like Alan Greenspan, Ben Brenanke and our Federal Reserve would prefer to instigate, prices would rise forever and consumers would stop saving money. Standard procedure would be to spend it all now and working capital would soon be erased. The nasty conclusion is unpaid debts and no business growth for the future. Diluted fiat currencies feed this situation until finally consumer and business confidence wanes and then finally, all is lost.  The German example of this hyperinflation in the Weimar Republic during 1922-1923 was a famous economic historical event. Other more recent examples are Brazil, Argentina and other Latin American nations.

Bank reserves would have to be constantly replenished which is what we see today in the current borrow-and-spend environment. Americans are given easy or ridiculous credit terms and they immediately spend all the money.  Asia provides the stuff and we continue to buy it with both hands. On-going credit inflation now demands $2 Billion per day of new borrowed cash to keep this bankrupt SS United States afloat.  Consumer and business borrowing are added to these government debts. This does not even count the trillions of unfunded debt attributed to Social Security, Medicare, the Pension Reserve Trust and the future Act Two version of the Resolution Trust needed to save the 15,000 crashing banks taken down by lousy real estate loans. Last year we crossed a threshold of no return as our trade balance has exceeded the point where all traveling this road meet the identical ultimate fate-currency destruction by hyper-inflation.

As measured in current numbers no country or society has been able to regain its economic footing once the hole was dug this deep.  The cave-in is coming but no one knows the trigger or the when. This week Thailand’s green-horn, 60 days on the job lady Treasury Secretary tried capital controls to block currency speculators. She did many billions of damage in 24 hours and immediately had to rescind parts of the proposed new capital controls. Just last week our wise colleague Jim Turk warned of this event coming in 2007. Seems like we got the early 2006 test example this year instead. Like Napoleon said in our letter last week, “In politics stupidity is not a handicap.”

The United States has experienced several major depressions since its founding in 1776. The Revolutionary War was basically fought on a shoe string and the first Treasury Secretary of our nation used his own fortune and credit to help pay for that war and get our country on its first feeble monetary legs.  Most of these following recession-depression events appeared after wars which created destruction of all kinds.  The early depressive events in the 1800’s through and including the Great Depression of the 1930’s lasted from 7 to 11 years in length with the average being roughly 9.5 years.

The first one in the 1800’s was just after the war of 1812 and lasted about two years. This time span doesn’t fit the 7 to 11 year cycle but shortly after 1814 things appeared better only to be crunched again with a severe depression in 1819-1821.  The next one was officially 1837-1838 but the USA economy was in very poor shape from 1835 to nearly 1845.  There was a mini dip of scary intensity in 1857 and then a prolonged down period after the Civil War for most of the 1870’s.  In the 1890’s, the recession-depression lasted from 1892 through 1898. Smaller recessions were reported in 1914-1915 and 1920-1922.

Those 1800’s events except the later Panic of 1906 appeared during periods following wars, minor conflicts and major turning points in commerce and business. These turning points coincided with new inventions, newer ways of doing business and the dawn of the industrial revolution in America.  The common thread was severe change somewhat like the advent of the internet in recent times. The panic of 1906 was in many respects an early example of what was to come in 1929-1940. This panic was a genuine Wall Street crash as liquidity had vanished in a cascade of stock selling after market confidence slid over the cliff.  This event was quickly repaired by J.P. Morgan and his banker friends as he forced them to re-liquefy the stock brokers thus saving the day.  This Panic was blamed by many for the birth of the notorious United States Federal Reserve which is not an official government entity as supposed by many, but a private cabal of USA bankers now holding the money power of God in our land pushing the cost and manufacture of dollars, bonds and notes wherever they choose.  So, in 1913 began the grand experiment in fiat money and the American inflation monster was born.

1920-1940 is Replicated by 1990-2010

After 1922 commerce had recovered from WW I and its aftermath. Germany was not so lucky but the USA was insulated from them in the 1920’s for the most part.  When America got moving in the early 1920’s the growth came with a rush.  A goodly part of this new boom was being financed by a massive inflow of gold from abroad as our nation embarked upon the boom of the century.

A common theme in all of these negative economic events has been: 

1. An excessive amount of loose capital being invested in fixed hard assets and illiquid paper assets. Cash was not king but owning lots of illiquid stuff was. 

2. Speculation in stocks, commodities, and real estate has been also a consistent market driver for excess gambling in all sorts of businesses as well as the Las Vegas traditional type.  

Overall effect of these massive investments has been to tie-up real cash and liquidity causing participants to become asset-heavy and cash poor. Immense pressures of too much cash chasing too few good investments created historic inflation. The bell rings when the buying stops and all values begin to decline. There is no escape as there are no buyers for all this over-valued stuff.

4. Not so much in the 1920’s but more common from 1812 through 1906 there were several dislocations in currencies somewhat comparative to Germany in the early 1920’s. These create instability and are not cured over night.  

Before 1930 several untapped and very market rich opportunities opened with the railroads, modern machinery, development of natural resources, and sudden increases in new gold reserves which greatly expanded available credit. Time payments were not much of a business before the 1920’s. A nice home in 1900 cost about $2,500 to $5,000 and home owners usually saved 100% of the money to buy before doing so. Twenty-five years later in the 1920’s boom, buying on time was “the thing” and it spread like wildfire. This expansion of consumer credit was a contributor to the 1929 event but not a primary one.  

When big trouble arrived in 1929-1932, real estate speculation in Florida’s land boom had been part of it as was the final Wall Street event which opened the crashing flood gates. 

Where are we in 2006? 

1. We took the time to revisit this history to explain there is nothing really new today compared with those events preceding 1929.

2. Credit is way too free and easy.

3. Money seems to have less value each day.

4. Inflation while not of the hyper-variety is trending in that direction.

5. There is too much big cash liquidity sloshing around on the cheap for hedge funds and New York take-over artists to promulgate their trade.

6. There is a very wide disparity between a handful of very rich people and the poor with a vanishing middle class. This is common before major market corrections.

7. Trade wars and tariffs are on the table. These threats are uttered almost daily.

This is the usual “Me first” nationalistic mentality. Putin scared Europe with his gas shut-off and Ms. Pelosi our new Demo leader is threatening China with 27% tarrifs. The Middle Eastern gang threatens oil shut-offs and currency transfers out of the U.S. Dollar.

8. Business ethics have collapsed in the past few crazy years destroying entire companies and wrecking others with misplaced trading ideas.  Enron and a few early hedge fund failures are evidence. Those boys managing that $6 Billion natural gas fund debacle were just all re-hired by Goldman Sachs to have another go.  Others are Fannie Mae, Freddie Mac and the still hidden Farm Home Loan operations. The list goes on and on.

9.   Then, we have the forever war in Iraq which appears to have degenerated into a worsened civil war threatening to destabilize the entire Middle East with Iranian and terrorist aggression. Crude oil will be used as a major weapon. Do not believe otherwise.

The stock market low from 1921 to the 1929 high was more than 500%. Interestingly, the percentage of increase is comparable to our modern day pre-crash rally of the Nasdaq.

We do technical analysis and are always looking for historical comparisons. In checking the 1928-1929 top, we discovered the preceding eight year rally run was so powerful it took nearly 18 months to form the technical top before it all dumped over. Usually these tops can form and sell in much less time. Today in 2006, our fellow colleagues and analysts have kept predicting the tip-over top and it keeps extending!  This was the big story before the 1930’s major league event.

Another interesting situation was the large amount of foreign loans made by the USA (both public and private) for war restoration in Europe but also throughout several other nations as well. This was the first time big money in large amounts was loaned outside of the USA.  From 1919 to 1930 the total exceeded $15 Billion which was massive bucks in those days. Please note that over ½ of this money went into portfolio investments where there was zero American management of those funds. Sound like China?

Domestically, America by 1929 had discovered most of the newer investment frontiers and there were not enough new trading or investment ideas to swallow all the available capital that was being tossed around. Does this sound familiar? Today we have the same problem but it’s probably 1,000% worse since Japan’s carry trade and our dollar printing have escalated credit to legendary new heights.

Exactly 80 years ago in 1927, as in our forth-coming 2007, real estate and construction were and are in the soup followed by major inflation. At this cycle juncture people are getting tense with bad credits, lack of cash, higher prices, and failing installment sales of several kinds with questionable erratic stock markets.

Here comes the big one: In 1927 when it was obvious business and commerce was slowing dramatically, THE FEDERAL RESERVE BANKS BEGAN TO BUY GOVERNMENT SECURITIES. It seems there is nothing new in this world at all.

Also, in 1927, it was reported and generally believed by the American public that the Federal Reserve purchases were taken to PREVENT LARGE EXPORTS OF GOLD FROM THE BANK OF ENGLAND TO THE UNITED STATES.  INTEREST RATES IN ENGLAND WERE HIGHER AT THE TIME.  THIS RATE DIFFERENCE AND THOSE POTENTIAL GOLD SALES WERE CONSIDERED A THREAT TO UPSET THE TEA CART ON BOTH SIDES OF THE POND. Is this de-ja vu all over again or what?

In 1928 the Federal Reserve was openly trying to discourage speculation. In spite of their efforts stocks went on a wild buying spree in spring of 1927 which spilled over into 1928-1929. The markets kept advancing and as the “easy money” became common street talk, the explosive pinnacle appeared over the horizon.  This open craziness by the public at large surfaced in 1928 but in May of that year the market had a severe correction (Like May 2006 or will it be May, 2007?)

A common phrase in later 1928 was that the country was experiencing a “profitless prosperity.”  Today Wall Street observers and players deem it a profit recession or a “Goldilocks Economy” somehow masking Goldilocks’ terminal illness. The Federal Reserve tried to reassure the public in later 1928 that despite gold exports following a discount rate reduction in fall 1927, our nation still held gold worth over U.S$1 Billion. Period analysts checked for gold exports and found few if any and decided this announcement was public relations talk to reassure the Sheeple. We certainly know all about this today don’t we?

In November of 1928 the stock exchange reported its first of five, six million share trading days. Watch for this kind of similar volume to precede the next blow-off top. From August of 1929 through the fall, this was the beginning of the end as speculation and gambling fever in the markets was virtually uncontrolled. The initial crash lasted two months and was followed by a rally of six more months into the spring of 1930. After that the markets sank into oblivion.

One largely unnoticed fact was the idea these markets had mostly recovered by 1936. This was not the case however, and those that had re-entered with fresh buying in 1934-1935 were smashed for a second time in 1937. That one had to be the mother of all “Dead cat bounces.”  Is 1937 to be replicated in 2007?  The timing sure looks identical to us. During the past year or so, we have read several remarks from our colleagues that 1934-1936 closely resembles 2004-2006. Can this be true?  We have seen some overlay charts for both cycles and they are very close in appearance.

There is a strong uneasiness and undercurrent in the markets; especially among the older experienced traders and New York market guys. We could name some well known guys but are not allowed to do this.  For the most part they choose not to be negative as they don’t want to scare the Sheeple or their investors.  In watching their body language accompanied by extraordinary semantic dancing we can tell these boys smell a rat and they are getting very, very nervous.

Traders should shorten their time horizons in our view as volumes and volatility increase. Use trading stops and do not over trade. Buy physical gold and silver and make yourself, your friends and family as secure and protected as possible by being independent of the system.  As we used to say in the Boy Scouts; Be Prepared! –Traderrog

Roger Wiegand is Editor of Trader Tracks recommending trades for gold, silver and energy markets using futures, commodities, stocks and options.