Junior Mines Look Great; Silver set for Autumn Rise

September 21, 2001

The market for select gold mining stocks remains vibrant heading into autumn, with certain junior mines poised for tremendous percentage gains. Meanwhile, the silver market remains favored over gold this fall in terms of upside percentage potential. Based on our cycle analysis silver is due to see a long-term cycle bottom in October.

In true seasonal fashion the gold and mining stock market leaped on high volume in response to the precipitous stock market decline of recent weeks, coupled with news-related trading in the wake of the World Trade Tower/Pentagon bombings. The upmove for gold futures, however, was purely temporary as gold's dominant cycle channels are pointing sideways for the next few weeks. However, the long-term cycles have all bottomed and gold should begin its sustained move to $320 (plus or minus) as we near the end of the year. Once gold clears $320 this year it will be the last time the yellow metal ever visits the sub-$300s as it will mark the beginning of the 2002-2006 gold boom. For the next four years ahead none of the major cycles are due to bottom below $300, and most will bottom at considerably higher levels.

Six weeks ago we wrote concerning Durban Deep: "Our supply/demand and cycle analysis all point to one inescapable conclusion: Durban's intermediate-term cycle channel will be met sometime this month somewhere between $0.85-$0.90, give or take a few pennies. The lows for the year have been seen, and even the seasonal lows we believe have been posted. The final cycle low coming up this month should register as a higher low, that is above last month's bottom around $0.80." Actually, Durban's 24-week cycle bottomed at precisely $0.80 and its sub-dominant cycle bottomed at just above $0.90. Durban's 40-week cycle bottoms in late September/early October, which means right about now. Much as we predicted, Durban has already witnessed several important cycle lows, with the final low only days away (and quite possibly near current trading levels). The stage is now set for a continuation rally into late autumn.

We further predicted a high this year for Durban of about $1.40. This forecast still appears valid and as of this writing DROOY is right on schedule for a high of at least $1.40 before the year is out. Durban has been a favored intra-day vehicle and a tape reader's delight now for several weeks. We find we can make money on Durban by day trading on almost a daily basis. When was the last time Durban's intra-day patterns were so evident and predictable? Some readers have suggested that by touting Durban in recent weeks we are somehow engaging in "pumping" Durban's price. Let it be said that in 1998-2000 when everybody and their brother was praising Durban Deep to the skies, we purposely avoided commenting on it due to its obvious bearish outlook at that time. But now that the important cycles have all bottomed and a clear-cut ascending cycle channel has been established we are unabashed Durban bulls. Now is the time to be net long Durban Deep. Currently, Durban stands at $1.12.

We wrote back in July that silver's 120-week cycle was due to bottom this fall. We are only a few short weeks away from this important bottom, and when it happens it will represent a fine interim swing play. The gold/silver ratio definitely favors silver right now. After a relentless bear market in the white metal over the past few years, it is now finally time for silver to shine.

Another prediction we made earlier this summer (June 18 to be precise) was that of a war involving America. This prediction was made solely based on the price charts of certain precious, base and industrial metals as well as the configurations of long-term economic cycles. Lo and behold, this prediction is coming to pass already-quicker than even we expected. "Bush tells military to prepare for war," screamed the headline of one major newspaper this week. All of this in response to a single (yet tragic) bombing in the U.S., putatively by a small band of foreign terrorists. Unfortunately, the worse is yet to come. Since Wall Street is online to have an "October Massacre" next month, and since the recent militant events have gained momentum in the face of a deteriorating economic condition, it would not at all be surprising to witness yet another round of terrorist strikes on U.S. soil in the next month or so, most likely in October. This would provide even more of an impetus for President Bush's war cries.

While investors were fortunate that Year 2001 has not seen a sustained massive crash in the markets, next year will not be so fortunate. Year 2002 will likely be a sustained crash year (interspersed with anemic rallies) based on cycle configurations and other technical and fundamental factors. The even-numbered year tends to be a "down" year, particularly early in the decade, and next year should be no exception. Even more momentous is the fact that the 2-year, 4-year, and 8-year cycles will be falling hard into late 2002. These factors alone should produce a considerable decline in the averages. The most significant factor of all is the fact that the 55-year economic super-cycle-the Kondratief cycle, or "K-Wave"-is in its "hard down" phase until sometime between 2004 and 2006. On top of that, the 120-year financial master cycle (distinguished form the 55-year K-Wave cycle, which is more economic than financial in nature) is down into the year 2014 as is its half-cycle, the 60-year cycle. Cycle on top of cycle on top of cycle is the picture we are seeing, and the results will not be pretty.

The trend over the better part of the past three decades has been toward progressive globalization of the world's leading economies with the United States leading the way. The global economic advocates have gotten their wish-a world economy is now a reality. Unfortunately, it won't turn out the way many people expected as the economies of the world experience a catastrophic tumble in the coming years. The United States - an economic powerhouse and leader for so many years - will once again resume its position of leader leading the way down for the rest of the world. We predict the coming two years will see the most marked and rapid deterioration of the U.S. economy in its history.

A sad concomitant of globalism is terrorism. Last week's devastating events in Washington and New York were, by all indications, directly related to America's involvement in another country's affairs. We ask, "Is unmitigated free trade and international 'cooperation' really worth it in light of all of this?" This is a question that all concerned Americans should be asking.

Yet another of our summertime predictions has recently come to pass: We wrote in a GOLD-EAGLE commentary in July that the "D-word," meaning deflation, would become more talked about in the months ahead. Already several major headlines in the financial press are laced with talk of deflation. And to think that earlier this year talk of inflation was all the rage among mainstream economists and academicians. How quickly things change in a bear market.

After 97 years of continuous business, surviving numerous economic setbacks including the Great Depression and the virtual dissolution of the U.S. steel industry of the past 20 years, Bethlehem Steel (BS), the company founded by Charles Schwab, is going out of business. "Bessie," as the stock was once affectionately called, was among the last surviving stalwarts of a backbone American industry. The company managed to survive numerous recessions, including a near-total business collapse in the 1990s. But the company hasn't made a profit since 1998 and already Bethlehem Steel executives have sold off numerous assets to creditors. With the folding of BS, a number of questions come to mind, such as "What has become of America's once great steel and iron industries?" Steel is the backbone of any industrial economy and without it a vibrant industrial economy cannot be maintained and neither can major wars be fought. With BS out of the way, that leaves only a couple of major steel producers in the U.S., and even these producers aren't what they used to be. It is perfectly clear that the U.S. corporate-state policy of relying heavily on foreign imports in order to bleed dry domestic producers has finally succeeding in producing its goal: the near-total obliteration of American industry and near-total dependence on foreign trade. This is well in keeping with the elitist-Marxist vision of a utopian one-world government and economy.

Since America in recent years has become heavily dependent upon foreign imports for its steel needs this leaves us in a precarious position when the next major war is fought involving America. This point is especially critical considering the highly charged political environment in light of the World Trade Tower bombing and President Bush's consequent warmongering statements. Also, keep in mind that it was our steel and ironworks industries that helped pull America out of the last major depression (in the 1940s), so the question naturally is, "What will pull us out of the next one?" Without steel, it will be interesting to find out what the answer will be.

A question that is being asked a lot lately is "Why aren't those Fed Funds interest rate cuts helping to revive the economy?" The answer is that interest rate cuts alone will not solve any economic problems (ask Japan), but effective implementation of those cuts is needed. What this means is that major banks should be willing to make commercial and industrial loans at these lower rates of interest but clearly they are not. Instead, lending institutions appear to be using the rate reductions to clear their books of bad loans (à la Japan of the late 1990s). The latest statistics for commercial loans show a considerable reduction in lending to major industries and commercial endeavors, which is bad for the economy. Of course, even increasing lending at lower rates would not guarantee a revival from the recent economic slump, but it could perhaps stimulate the economy to some extent. In the grand scheme of things, keep in mind that it is the long-term economic and financial super-cycles that dictate the state of the economy, and there is probably little that can be done at this point to assuage the economic pains that are surely on the horizon.

On a related note, President Bush delivered a speech recently in which he stated that there are definitely economic "problems on the horizon." This is a bold admission for an early-term president to make, especially since the recession is still young and is not yet severe. Bush's team of economic advisors have undoubtedly told him to be forthright with the American people about the coming recession/depression, and it is to his credit that he has taken their advice. The fact that he has admitted things will grow worse should send alarm bells ringing in the minds of those who think the economic slump will simply "blow over" in the near future. Presidents and heads of state don't make these kinds of statements unless they see something of profound importance ahead.

Also, the latest report out of Washington shows that consumer spending barely rose in the latest period. The sub-headline for this article reads, "Economists hopeful consumers will become less tight-fisted in coming months," but this is so much wishful thinking on their part. Besides, in a situation like this it isn't the consumers who determine the course of the economy-it's the banks. And the banks have made it clear through their recent lending policies that they have no intention of making new loans to either consumers or businesses. Instead, they remain focused on calling in loans and generally getting their outstanding money back any way they can before things really get out of hand.

For the quarter, our combined Bear Market Portfolio is up nearly 100%. Not bad in light of the fact that most managers are significantly trailing the S&P 500…which is down for the year. With our latest strategies we are on line to have an even better fourth quarter.

Spanish Conquistadores invaded the Inca Empire in 1528 to steal their silver and gold.

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