The 50 percent principle
January 11, 2006 -- Last week I wrote about gold in relation to the 50 percent principle. Let's apply the 50 percent principle to the action of gold. The 50 percent principle has to do with what happens to gold, following a major decline, when gold turns up again. Once gold is on the recovery path, I want to see what occurs as gold approaches the halfway level of the preceding major decline. The big question -- can gold recover more than 50 percent of its losses?
During the extended bear market, gold dropped from a high of 850 in 1980 to roughly 250 in 1999. That represented a 600 point decline. The halfway level of that bear market decline was 550 (250 + 300).
On January 9 Feb. gold closed at a recovery high of 550.50, and then (yesterday) gold backed off. I doubt if more than a handful of people in the world realized what was happening.
Gold backed off literally at the halfway or 50 percent level of the great 1980 to 2000 bear market decline. The BIG question, the CRUCIAL question, is whether gold can advance above 550 and then hold above 550. If gold can do that, then under my interpretation of the 50 percent principle, gold will be on its way to testing and eventually bettering the old bull market high of 850.
Just as there was no time limit during the gold bear market (it occupied 20 years), I don't see any time limit for the current bull market. Much depends on world events and the viability of fiat paper money.
Along these lines, I was impressed by a piece written by Richard J. Greene which was published on two excellent sites, 321Gold and Gold-Eagle. I include a few paragraphs from the Greene article below --
"As it is clear we have transformed to a debt-based monetary system, it should also be clear that an economy fueled by debt must continually increase supply since interest is always adding to the total obligation owed. When debt grows in excess of the rate of the economy which it is currently doing by several times, interest charges will consume the economy itself, particularly if interest rates are rising. Could this be why M-3 money growth has taken on growth rates over the past two months that could only be termed hyperinflationary if they persist? No wonder the Fed plans to stop releasing this number in the near future.
"We may have reached the point where the only way to fund shortfalls in capital is to flat out print it. Gold moves up when this becomes feared. Among other concerns that are worrisome are: an oil exchange soon to open in Iran that will offer the sale of oil in euros decreasing the demand for dollars; and ongoing resignations at the Fed including the retirement of Alan Greenspan. Could these ultimate insiders in the money game be bailing out of a hopeless situation so as not to be directly associated with the implosion of the financial system? You would not have this impression if you tuned in to Bubblevision on CNBC, where everything is perceived as just great as long as the stock market stays up and the economic statistics can be tortured into admitting anything the masses wish to hear. As long as the money expansion continues at its recent pace it will be difficult for the major stock averages to move much lower since the currency, (or measuring weight) is on a constant debasement.
"Some signs that gold, silver, oil, and all real things are the place to be include the high level of deliveries being exercised on the COMEX recently in both gold and silver trading. Investors may finally be wising up to the fallacy of depending on paper claims to hard assets as opposed to the assets themselves. Jimmy Rogers manages one of the biggest commodity funds and had the research dead right but is learning the hard way about paper claims through the defaults at Refco. If you own futures and the demand for the physical soars you get on line and hope you get filled with something other than more paper. Those that get caught in that dilemma have not completed their homework or understand a big part of the reason for owning gold and silver in the first place." (site www.thundercapital.com).
On to another subject, and the subject is departing Fed Chairman Alan Greenspan. Greenspan is, I believe, a year younger than I am. We both grew up in New York, we both went to the same type of prep school, we both graduated from New York University, we were both played in swing bands, we both knew the same ladies (one of whom was Barbara Walters) with whom I double-dated and with whom Greenspan also dated but later. At any rate, I think I have some insights into Greenspan's mind.
When you get into your late-70s and early 80's which we both are, you start thinking about the world, and what you might owe the world. One thing I think I owe the world is to be honest. At the age of 80, you've probably done most of what you set out to do, and it's rather late to prove anything, so why not "say it like it is," better known as dropping all pretentions and becoming honest. I think that's where Greenspan may be today.
And I note that Greenspan is now issuing warnings. The following Greenspan warnings, issued over recent months, are a few that we might review --
In London Greenspan said, "If the pernicious drift toward fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalization, the adjustment process could be quite painful for the world economy."
Here's one from the Jackson Hole meeting -- "History cautions that extended periods of low concern about credit risk have invariably been followed by reversal."
And another, "Our budget deficit will substantially worsen in the coming years unless major deficit-reduction actions are takenThe likelihood of growing deficits is of especially great concern because the deficits would drain a correspondingly growing volume of real resources from private capital formation and cast an ever-larger shadow over the growth of living standards."
And how about this warning from the Maestro -- "The imbalance in the federal budgetary situation, unless addressed soon, will pose serious longer-term fiscal difficulties. Our demographics-especially the retirement of the baby-boom generation beginning in just a few years- mean that the ratio of workers to retirees will fall substantially. Without corrective action, this development will put substantial pressure on our ability in coming years to provide even minimal government services while maintaining entitlement benefits at their current level, without debilitating increases in tax rates. The longer we wait before addressing these imbalances, the more wrenching the fiscal adjustment ultimately will be."
So you see my point. Greenspan will be out of office in a matter of weeks. [Editor's note: Countdown]. He's evidently decided to leave his office with a series of warnings. Subscribers know that I've not been a Greenspan fan. Greenspan, after 18 years in office, leaves with the purchasing power of the dollar cut in half during his reign. Furthermore, I believe the nation is in far worse financial shape now than it was when Greenspan took office in 1987.
But to his credit, of late he's been "laying it on the line." He's been issuing a series of warnings. It's never too late to be honest. And I believe the quotes above are part of the legacy this politically-savvy "public servant" wants to be remembered by.
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