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My Turn

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Bob Moriarty
July 29, 2002

Two of our excellent writers have provided their take on what happened last week. Craig Harris of Harris Capital Management wrote a great piece based on a viewpoint based on what Alan Greenspan might be thinking. And Dr Bruce Batchelor sent us his views based on the action of specific stocks and how that probably took place.

I want to interject my views even though I am in substantial agreement with Dr Batchelor. I would give it a 70% probability of being accurate. As we evolve into more and more of a television-educated society, we have become a herd with herd mentality. The large general mutual funds (Did you know there are more mutual funds than stocks on the listed exchanges? That's always a sign of a major top) all use about the same computer models. They buy at the same time and sell at the same time. And with an industry as illiquid as that of gold/silver shares, massive selling causes an instant collapse.

If you are in agreement with Bruce and me, you should be buying with both hands right now. Some stocks have declined by 2/3 in the last month. But the industry in general is in far better shape now than 18 months ago. Some companies run by insightful management such as that of Silverado, Candente, NovaGold, National Gold, Golden Phoenix and GoldCorp have taken advantage of gold's popularity to conduct placements and have replenished their cash on hand to a much safer level. In short, it doesn't matter what happens to gold over the very short term, they are going into production and have adequate cash levels.

But is the collapse in the metals shares a simple case of the 800 pound gorillas catching the stomach flu and having diarrhea, or could it be something far worse?

One of our favorite writers came to Florida with his family for vacation and we went out to dinner with him last week. As Rick Ackerman points out in his piece today, he often is out of town when interesting events take place.

Two people that I know of actually forecast the current deflation long before it became a subject suitable for the family dinner table. Rick wrote a great piece going back to 1993 where he warned that deflation would be the most dangerous issue we face, not inflation. And of course anyone familiar with the brilliant Robert Prechter should be familiar with his prediction of $200 gold made years ago.

Rich Ackerman said something to me last week which was so to the point that I want to share it. He said that we are in an area of history where we have no guidelines or maps. We are in uncharted waters.

We are passing through the biggest bubble in history and most Americans are still in denial even though the bear whacked about $30,000 from every man, woman, and child in the country. The stock market hasn't hit bottom yet but 90% of Americans actually believe we are going right back to 1500 on the S&P.

It's possible to lie to yourself about your retirement funds and stock market investments but a far more dangerous enemy lies just over the horizon. Every serious financial writer I know sees a real estate crash coming. It's obvious, it's coming and lots of people know it but few have actually prepared for it.

The government through the GSE's have been pumping up the real estate bubble for years and one of the first things to happen in a deflation is when housing prices start going down rather than up.

You can always postpone your retirement and many of us are going to, but what do you do when your $150,000 condo is worth $75,000 on the market and you owe $135,000? Or more.

Rick Ackerman has pointed out, very accurately, that debts don't disappear, they just move around. You can stiff your bank for the mortgage but they in turn are just going to turn around and stiff someone else. Maybe you. Probably you.

I want to bring up one more very serious possibility which we should all consider. What happens if we enter a period of serious deflation and gold does go to $200 as predicted by Robert Prechter?

In February 2001, with gold trading just above $250, The Elliott Wave Theorist took note of the extreme bearish sentiment that had pervaded the gold market and suggested that investors begin changing their thinking towards gold and silver. It went on to say:

"The ideal outcome would be a sharp rally now, completing a more complex wave B up, and then the start of wave C down. Wave B in 1980 retraced 61.8% of wave A; the recent wave B has retraced 50%, leaving a bit of room for gold to take out its October 1999 high. Such a rally would force the now- confident shorts out of the market just before the final collapse.

"Wave B did indeed carry gold higher from February 2001 to early June of this year, where the spot market recorded a high of $332. A choppy decline has unfolded since this high. If wave B were to equal the 62% retracement in 1980, prices would push toward $355. But it is late in gold's countertrend rally and wave C could start at any time if it has not already. Bullish sentiment remains above 72% in both the Daily Sentiment Index and Market Vane's Bullish Consensus, so sentiment conditions are ripe for a significant decline. Our target of below $200. for the end of wave C is very much in place." -The Elliott Wave Financial Forecast -- July 26, 2002

Robert Prechter is one of the sharpest guys in the financial world and you should listen carefully to what he has to say. I pay a lot of attention to him even if I don't totally agree with every word he says. For more information and a chance to get a trial of his service, go here.

I must confess here that I have conflicting feelings. I have read Bob Prechter's book, "Conquer the Crash" about the coming deflation and I agree with most of it. I just don't believe gold is going to $200 an ounce.

In his book, Prechter says gold and silver in physical form are about the best investments you can make. But as you can read above, he also believes gold will crash before going up. I'd give about a 15% probability of that happening. Gold and silver have already crashed. And while the metals and metals shares alike got real popular in May and June - way too popular - I suspect gold shares are about as popular as warts with investors right now. That's the time to buy.

But even Prechter says that if gold goes to $200, it will be the final bottom and rocket from there. I personally don't believe it but by now you should have learned the painful lesson of trying to argue with Mr Market. Mr Market goes where he wants to go, and while you may be right in the long term, you can go broke in the short term.

If gold goes to $200 an ounce, there will be a fire sale on gold and silver shares like you have never dreamed of. I don't believe it will happen but if it did, I'd hock the family jewels to buy more. Meanwhile I'll lick my wounds from last week and make a new promise to myself to stay a little more 'in cash' to take advantage of panic situations and firesale prices.

We live in interesting times. And that's a curse.

Bob Moriarty
July 29, 2002

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