J. Taylor's GOLD & Technology Stocks Catch-up with gold in 2005 Jay Taylor December 13, 2004 Demand & Geopolitical Factors Because of the U.S. influence, domination and manipulation of global financial markets, combined with some of the following reasons, may make shorting the dollar and betting on substantially higher inflation, even in the near term, a bad trade: Everyone knows the dollar is doomed and everyone knows interest rates are heading higher. Bob Hoye, who writes "Pivotal Events," points out the fact that post-bubble senior currencies are the strongest currencies. While the equity bubble has partly cracked, the housing bubble and bond bubbles clearly have not yet been pierced. Even so, the dollar could get weaker and then strengthen vis-à-vis other paper currencies. It is true that the world is long inflation and short dollars. Moreover, you must consider who the world is short dollars to. The answer? They are short dollars to "the empire," which is the banking system that has been established for the benefit of the ruling elite that established "the empire." Since the empire makes all the rules, it can do and is obviously doing, everything within its power to keep the status quo alive and well. That's why, as Richard Russell argues, the Fed will fight deflation tooth and nail because if/when deflation gets the upper hand, the empire will suffer a serious if not fatal decline, given our enormous indebtedness. Meanwhile, that debt needs to be serviced, and cash flow, at least from American industry, is drying up. If Americans can't service debt, Ian Gordon's Kondratieff scenario begins to unfold. But have no fear. The "Economic Hit Man" (EHM, as discussed below) is at the service of the establishment. And he is doing his part to enable the empire tentacles to penetrate every nook and cranny of the global economy so as to keep rulers of other nations cooperating with the U.S. Our ruling elite have done all they can to try to lock other countries into the status quo so they continue to play by the rules dictated to them post-World War II. A good example of this would be the Japanese printing yen and buying dollars in exchange to keep the U.S. dollar appearing to be worth far more than it is. What I am trying to say is that in spite of my conviction that the U.S. equity markets, the U.S. bond markets, and the U.S. dollar are all heading lower, I do not think it is a foregone conclusion that they will all suffer devastating declines in 2005. Least of all do I think the dollar will be condemned to death in 2005, because the empire has too much at stake if it is. Before they will allow that to happen they will allow the bond and equity markets to suffer rapid declines first. The establishment loves to print money because that is how it robs and pillages all of us and foreign countries, too. It did that in the 1970s, and then when things got out of hand in 1980, Paul Volcker slammed on the brakes in money supply growth, and suddenly interest rates hit double digits, and the dollar was saved. And so I assign a higher likelihood that interest rates will continue rising and stocks will decline markedly in 2005 than I do that the dollar index will fall below that magic $0.82 market that Roger pointed out as key last week. Just as Volcker allowed interest rates to rise dramatically in 1980 to keep the paper currency scam alive, I think it is entirely possible that we could see a continued rate rise in 2005, as most people believe. However, we have a much bigger problem now than we had back in 1980. Our debt loads are much higher now than they were then. We have these huge balance of payments deficits and our manufacturing base is in rapid decline now. In other words, we cannot stomach large gains in interest rates even as well as we could in 1980, even though the recession that followed Volcker's tightening resulted in the deepest recession since the Great Depression. With the U.S. economy decaying at its core and becoming exceedingly vulnerable because of its indebtedness, I think we can count on more military escapades by the empire as a desperate means of keeping the ship afloat. This week, Marshall Auerback, as always, provided more great insights into what is going on behind the scenes in international geopolitics that are very important in understanding where the U.S military may be extended next. (Read Marshall's latest essay and his weekly essays at Prudent Bear). Marshall points out the importance that oil is playing in forming what appears to be new alliances getting ready to do cold-war battle. Seemingly, China and Russia and others in those parts of the world may be teaming up against the U.S. and its military and oil interests. Marshall suggests that because of oil, Iran may be playing an important role in this Sino-Soviet alliance. To keep the empire running, the U.S. has to keep expanding into markets to gain cheap commodities. This has been a long-time unspoken policy of the U.S., and in my discussions with Congressman Ron Paul, he very much agrees that this is true. Read the following excerpt from "Confessions of an Economic Hit Man" to see how the U.S. uses its political, economic, and military muscle to rob and pillage from other nations to keep feeding and thus prolong the global economic imbalances to ever more dangerous levels. "In their drive to advance the global empire, corporations, banks, and governments (collectively "the corporatocracy") use their financial and political muscle to ensure that our schools, businesses, and media support both the fallacious concept (that all economic growth benefits humankind) and its corollary. They have brought us to a point where our global culture is a monstrous machine that requires exponentially increasing amounts of fuel and maintenance, so much so that in the end it will have consumed everything in sight and will be left with no choice but to devour itself. "The corporatocracy is not a conspiracy, but its members do endorse common values and goals. One of the corporatocracy's most important functions is to perpetuate and continually expand and strengthen the system. The lives of those who 'make it' and their accoutrements-their mansions, yachts, and private jets-are presented as models to inspire us all to consume, consume, consume. Every opportunity is taken to convince us that purchasing things is our civic duty, that pillaging the earth is good for the economy and therefore serves our higher interests. People like me (author John Perkins, an economic hit man ("EHM")) are paid outrageously high salaries to do the system's bidding. If we falter, a more malicious form of hit man, the jackal, steps to the plate. And if the jackal fails, then the job falls to the military. "This book is the confession of a man who, back when I was an EHM, was part of a relatively small group. People who play similar roles are more abundant now. They have more euphemistic titles, and they walk the corridors of Monsanto, General Electric, Nike, General Motors, Wal-Mart, and nearly every other major corporation in the world. In a very real sense, 'Confessions of an Economic Hit Man' is their story as well as mine. "It is your story too, the story of your world and mine, of the first truly global empire. History tells us that unless we modify this story, it is guaranteed to end tragically. Empires never last. Every one of them has failed terribly. They destroy many cultures as they race toward greater domination, and then they themselves fall. No country or combination of countries can thrive in the long term by exploiting others." Perkins gives examples of how, when governments do not submit to the proposals provided by the U.S. economic hit men, the jackal steps in to assassinate the uncooperative national leader. And when that fails as it did in Iraq and elsewhere, the U.S sends in its military to make sure the country cooperates in order to feed the empire. Geopolitical Implications for 2005 I have taken the time to quote Perkins because I hope you will read the book. But more directly related to the financial markets, we need to understand that as a global empire, the U.S. may be able to continue defying the laws of economics longer than we have thought, because the U.S. has such enormous financial influence around the world. How much longer can it do this? Only Creator God knows for sure. Some geopolitical cracks in the U.S. armor seem to be appearing that could lead to some massive changes in markets during 2005. For example, countries are reducing dollars and increasing euros as a percentage of their reserve bank holdings. And there is no doubt that on a small scale (compared to huge paper markets), gold is being accumulated as a monetary asset directly by non-Western central banks and/or by citizens encouraged to accumulate the yellow metal. To the extent that demand for dollars continues to decline for economic or political/economic reasons, interest rates may continue to rise and consumer demand decline, which should trigger the next leg of the bear market in 2005, which I believe will take on increasingly deflationary overtones. But at all costs, painful as it may be, the dollar must survive, else the empire will not. And so, even if it means pushing the U.S. economy into recession in 2005, if that is necessary, the establishment will do it. But wouldn't that be bearish for gold? I don't think so for at least two reasons: (1) As foreign nations look at the U.S. they see an increasingly rotting internal economy with few good investment opportunities, even as the dollar weakens. That is true even with an artificially low interest rate environment, and it will be even truer as we head into a recession/depression. (2) For geopolitical as well as economic reasons, there is increasing rancor between the U.S. and the rest of the world that may lead to a continuation and even an acceleration of the trend toward diversification of currency reserves into gold. The loss of confidence in the dollar may force the Fed to push up interest rates far higher than it would like, just to ensure the dollar remains as a reserve currency along with the euro and, to a lesser extent, the yen. And even if only a very small amount of gold is added to the foreign currency reserves, it should increase demand for gold and its price very markedly. To lessen the role of the U.S. dollar as reserve currency is one way-perhaps the most effective way-for our adversaries to dethrone the U.S. Indeed, even in the West, it is no secret that the Germans and the French are increasingly hostile to the U.S. military escapades, and so while their stronger currency is hurting the Eurozone's ability to export, it is no doubt applauded in some corners of Europe as a means of curtailing our rising military aggressiveness. After all, the French and Germans, just like the Chinese, need and want oil and gas supplies. And in the case of the Chinese, their demands are growing very, very rapidly. For reasons outlined by John Perkins and others, the U.S. has succeeded in making the world exceedingly angry at us, and as China grows and Russia regains strength (thanks to rising oil prices), and considering the cultural differences between Muslim countries and the West, I think it is a given that economic weapons will increasingly be used in an attempt to bring the U.S. down. We can try to use military might to offset our financial problems caused by our overconsumption and lack of savings, but how much longer that can be effective when we have to rely on the savings of an increasingly anti-United States mindset is open to question. We can count on this growing group of adversaries to make life tough for us in 2005. Translated into market action, in my view this is likely to result in higher interest rates, a slowing economy, and a sharp decline in stocks. Will we see a sharp decline in the dollar in 2005? Because of the importance of the empire's defending itself, I'm not sure we will. But the defense of the dollar will be very painful for the reasons noted above. And for those reasons, I believe gold will rise dramatically in 2005, and with a decline in U.S. equities, I think U.S. gold stocks will play catch-up with gold in 2005. Jay Taylor email: jtaylor9@ix.netcom.com website: www.miningstocks.com J. Taylor's Gold & Technology Stocks (JTGTS), is published monthly as a copyright publication of Taylor Hard Money Advisors, Inc. (THMA), Box 770871, Woodside, N.Y.Tel.: (718) 457-1426. Website: www.miningstocks.com. THMA provides investment ideas solely on a paid subscription basis. Companies are selected for presentation in JTGTS strictly on their merits as perceived by THMA. No fee is charged to the company for inclusion. The currency used in this publication is the U.S. dollar unless otherwise noted. The material contained herein is solely for information purposes. 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