The Old Order

By Howard Katz    Aug 3 2009 10:39AM

“The old order changeth, yielding place to new."

So wrote Alfred Lord Tennyson, a British poet of the 19th century. And indeed, Tennyson saw many changes in his life. There are some periods of human history when people go through mind-numbing centuries of absolute sameness, such as the great age of Egypt. But Tennyson lived in one of the most rapidly changing countries (Britain) at one of the most rapidly changing periods (the late 19th century) of history.

Tennyson’s changes, however, were all to the good. Men (largely) ceased to devote themselves to war. They spent their energy in the service of creation, not destruction. They made great advances in the useful arts and sciences. The standard of living rose more rapidly in Tennyson’s age than it ever had before in human history and more than it has since.

After Tennyson died, the changes continued.  But they were changes in the direction of evil. Two massive wars engulfed the world. The twin evils of communism and fascism emerged to torment mankind. For a time, the world seemed consumed by hate and destruction.

And here, in early August 2009, the world is once again perched on a knife-edge. Or, perhaps a better analogy would be that it stands at a fork in the road. Which way shall we travel, it asks? The night is dark, and we can see only dimly into the future. This is the moment of decision.

The key decision for our time will be made by the market for the U.S. dollar. This chart last ran in my June 8, 2009 article. Since then we have had a weak rally. In July, the rally failed, and we once again rest on the Dec.18, 2008 low.

The difference between now and June 8 is that the first time that a chart pulls back to a support level the support is still intact and should cause a rally one order of magnitude smaller than the support itself. (This refers to my theory of the 4 levels of market cycle: grand cycle trend, major trend, intermediate trend and short term trend. These last, roughly, 1-2 decades for the grand cycle, 2-4 years for the major cycle, a few months for the intermediate cycle and a few weeks for the short cycle.)  Thus the Dec. 18, 2008 bottom was part of an intermediate rally in the dollar. This leaves it with enough support to spark a short term rally the first time the support is tested (which was early June).

This means that the action in the dollar over the past two months must be viewed as follows: There is a bearish force, of either intermediate or major term significance.  This is putting the dollar down and has been operating since early March. And there is a bullish force that is trying to put the dollar up and which consists of those people who had resolved to buy at the support level. For the past two months, buyers have battled sellers. What is the result?

First, since the selling is intermediate/major term and the buying is only short term, the sellers have an obvious advantage. When a bearish trend meets a bullish force like this, pretty much the only chance the bulls have is to delay the decline for a time in hopes that the basic bearish trend will turn. We can imagine an advance platoon trying to hold off the main enemy army in hopes that its own forces in the rear can come up in time. Second, in this case the larger forces are easy to diagnose. The dollar rallied last autumn as a part of the general world view that a massive “deflation” was about to engulf America and the world.  “Deflation” is simply a word for an appreciation of the currency. And so the dollar appreciated from 71 to over 90.

But that general world view, variously called “recession,” “depression,” “financial crisis,” is now reversing. Suddenly, the stock market is rising. Favorable articles are appearing in the newspapers. On July 24, an article entitled “The Economy Has Hit Bottom” by Alan Blinder appeared on the Wall Street Journal’s Op-Ed page.  The dollar rally of last autumn was an interruption of a much larger down trend, which itself was caused by very strong fundamentals. The U.S. trade deficit is horrific, telling us that U.S. prices are too high in relation to foreign prices. And to top things off, the massive Bernanke easing, which started in 2007, has caused international hot money to flee America, and this traditionally has been a very bearish force on any nation’s currency.  It is an obvious conclusion that, as the “recession” fades into distant memory, the impulse to buy dollars will fade with it, and the trends which were in operation prior to March 2008 will resume.

And when the real economists look back on this period from the future, they will say, “You know, in the first part of the 21st century the markets were in a 20 year rise in commodity prices, and seven years into it, there was a 3 month (Sept. to Dec. 2008) pull back. This commodity price decline, although very small, scared the dickens out of the people of that day. Many of them were shouting, ‘Great Recession.’ Many others were shouting ‘Second Great Depression.’  Yet here in 2020, on the new, much larger scale charts, we have to draw to accommodate $14,000 gold and a 5,000 CRB index, those tiny declines are barely noticeable.”

Prices are going up because the dollar is going down. That is all ye know and all ye need to know.

And if there were any question on the subject, then all one has to do is to contemplate Obama’s projected trillion dollar deficits. These deficits will not be financed by borrowing from the American people.  That is a lie.  No democratic government has ever borrowed from its own people since the beginning of democracy in England in 1688. THE GOVERNMENT WILL PRINT MONEY AND “LEND” TO ITSELF. The U.S money supply will balloon from $1.3 trillion in early 2008 to somewhere in the neighborhood of $5 trillion by 2012. What do you think is going to happen to the value of the U.S. dollar with that kind of a massive increase in the money supply?  (The only thing which can stop this and invalidate my $14,000 gold prediction is some kind of political “miracle” such as a sweeping Republican victory in 2010. And even that would require some new-fangled type of Republican who will balance the budget.)

All this has happened before. In Britain after WWII, the (left-wing) Labour Party was elected. They brought in Keynesian advisors, printed money and depreciated the British pound. The pound collapsed on the foreign exchange markets and ceased to be the world’s reserve currency. The British Empire fell apart and Britain’s period of greatness in world history came to an end.

So here we are, in America, following the same Keynesian policies which led to such disaster in Britain a half century ago. That is, of course, the definition of a fanatic: a person (or  nation) who keeps repeating the same actions and expects somehow a different result.

And here in early August we have come to a decisive point in the depreciation of the U.S. dollar. As the chart above shows, the dollar has formed what technicians call a double (or M) top. This is a chart which traces out the shape of the letter M. It is complete when it breaks below the low point of the M (in this case, 78.20 in the Sept. dollar future). It predicts a further decline (below the low point of the M) equal (in percentage terms) to the decline from the top to the low (13%). This would be a decline to 68, which would be an all-time low in the U.S. dollar index.

It is a no-no in technical analysis to anticipate the breaking of a technical pattern. The pattern is not valid until the break has occurred. But I am going to be a bad boy here and speculate a bit. Here we are on a quiet weekend in a quiet month when many people in the northern hemisphere take their vacation. Friday’s action closed almost perfectly on the break point.  Not only are we right on the break point for the dollar, but we are close to the break point for head and shoulders bottoms in both gold and a good many gold stocks. At this writing, the dollar is exactly poised on its break point.  If 78.20 breaks, we will have a completed double top in the U.S. dollar and head and shoulder bottoms in both gold and many gold stocks. $1000 gold will be in the bag.

As noted, if the dollar breaks, the double top will forecast a 13% decline (over a period of perhaps 5-6 months). This will mean that world commodities will all rise by 13% in price. Excuse me, that 13% is the U.S. dollar versus foreign currencies. The fall in the U.S. dollar versus goods will be worse (because all those foreign currencies are themselves falling versus goods. On top of this, commodities bottomed on Dec. 5, 2008. They have been going up for 8 months and are well on their way to recovering their 2008 highs. (Gold, as you know, recovered its 2008 high on Feb. 20, 2009.

Think about what the situation will be like in early 2010. Prices will be sharply on the rise. The Canadian dollar will be worth more than the U.S. dollar. The last time the country had a serious bout of rising prices was 1979, when prices rose by 13.3%.  By early 2010, we should be within spitting distance of that figure. On top of this, Obama has antagonized the country with his socialized medicine proposal and his trillion dollar deficits. At this writing, Rasmussen reports that his approval rating has slipped to negative 8% (38% strongly disapprove, 30% strongly approve). (Rasmussen is one of the few pollsters who poll only likely voters.  His prediction for the 2008 Presidential election was exactly on the nose.) The conservative Democrats are running away from Obama as fast as their little legs can carry them. Rasmussen also reports that, if asked whether they plan to vote Democrat or Republican, then voters would vote for a generic Republican by 42%-39% over a generic Democrat.

In short, by early 2010 it is very possible that Obama’s program will be in tatters, and the future prognosis for the country will be much improved. Along these lines, Rasmussen also reports that Ron Paul’s movement to audit the Fed now has the backing of 75% of all likely voters..

These events could be the culmination of what happens here and now in the foreign exchange market. This is the time when America has to make her decision.

It is an overwhelming idea, but to succeed in the markets you have to understand that the entire structure of our society (academia, the media, everyone whom you trust and respect) is deceiving you. They are not directly deceiving you to cheat you in the markets. Rather, they are making a large-scale effort to deceive all Americans for the purpose of getting political support for a policy of printing money and lowering interest rates. This policy will rob wealth from the average American and give to themselves.  If one can steal a dollar from each of 300,000,000 people, then he will have $300,000,000. Then he can take a small part of that $300,000,000 and “influence” (bribe is such a harsh word) important politicians, academics and media. They will tell the average person that he is getting richer when in fact he is getting poorer.

That has been the name of the game since March 9, 1933 when F.D.R. took the nation off the gold standard and gave commercial bankers the privilege to create money out of nothing.  Since they profit from creating paper money and steal the product of your labor like the medieval aristocracy, I call them the paper aristocracy. Since that time, the whole system has been based on fraud.

Not all of the people feeding you misinformation, of course, are engaged in direct fraud. Many people are just too stupid to know what is going on and believe the misinformation themselves. That is not much comfort to your bottom line.

Through this entire period, during which the economy of the U.S. first slowed and then went into decline, the media have been screaming to us about our wonderful economic growth. After all, if a counterfeiter moves into town and starts printing money, he will steal the real wealth created by the people. But since the people experience no drop in their (nominal) wages, most of them will not think anything is wrong. The only way they can tell that they are poorer is that the price of all goods and services rises.

You have to protect yourself from this printing of money, and right now the best way to do that is by putting your money into gold and gold stocks. Your only friends are myself and my companion gold bugs. We are on your side. NBC, Fox, CBS, the New York Times, the Wall St. Journal, Barney Frank, Henry Paulson and Barack Obama are stealing your wealth to give to the paper aristocracy. 

I publish an economic letter, the One-handed Economist, to bring the truth to the people of the world. I am one small voice, but one man plus the truth is an army. Visit my website, www.thegoldspeculator.com. You might also enjoy my blog, (guaranteed to outrage and offend) www.thegoldspeculator.blo gspot.com

Thank you for your interest.

Howard S. Katz

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Howard S. Katz was one of the early gold bugs of the late ‘60s and ‘70s, turning bullish on gold in 1965. His favorite gold stock, Lake Shore Mines, went from $3/share to $39/share over the course of the seventies (sold at $31). Katz turned increasingly skeptical about gold as it mounted its final rise in 1979, and he called the top after the close on Jan. 21, 1980 (with gold at $825.50/oz.). Katz traded gold in and out during the ‘80s and ‘90s and once again turned long term bullish in Dec. 2002. His thoughts on commodities, stocks, bonds and real estate are available in a letter entitled The One-handed Economist and published every two weeks giving specific advice on trades in stocks and futures. This letter is available (both electronic and paper copy) for $300/year with a 3-month trial for $100. Send to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.(Include both electronic and mailing address.)