Almost everyone thinks gold has bottomed. And almost everyone also thinks I’ve been dead wrong on gold.

I wish I were wrong. I wish gold has bottomed. But there is nothing, and I mean nothing, that convinces me that my models on gold are wrong. Only in the very short-term.

Keep in mind my models on gold have never missed one single major turning point since 1978. Not one.

There’s always a first time for everything, so with that in mind, I have been studiously watching the gold market this year — more than ever before — fully open to the idea that I could be wrong.

But as I just said, I have yet to be convinced that my models are wrong.

First, and foremost, the January low that did not happen merely means the gold market is undergoing a “cycle inversion” — one that pushes the final low off to the next important cyclic period for a major low, which is May.

Second, no major buy signals have yet been hit in gold during this cyclic rally inversion.

The most important of those buy signals are a weekly close above $1,320.40 followed by a weekly close above $1,449.50.

We are approaching the $1,320 level now. If gold closes above it on a Friday basis, you can expect a further rally. But I doubt very much gold can close above $1,449.50.

Third, the trading pattern of gold’s recent rally is not that bullish. In Elliott Wave terms, which I often use as an additional tool, gold is in a fourth wave upward correction, one that is accompanied by declining trading volume.

You can see it in this chart. Notice the sloppy upward slopes of the recent rally. It’s choppy, characteristic of a correction.

At the bottom of the chart, notice how the volume of trade has been declining. That, too, is characteristic of a bounce and not the start of something much bigger.

Also note the Fibonacci extensions I have drawn on the chart for you. If gold’s rally ends near its current level — an “e” wave of a fourth wave upward correction — then the next leg down, the fifth wave, would find gold falling to at least $1,062.50, and more likely, even lower, to about the $967 level.

I find it fascinating that on my system models I have major support and sell signals at the $1,059 and $962 levels.

Derived from an entirely different model that has nothing to do with Elliott Wave Theory — when the two point to the same conclusions and support, I consider it a kind of double confirmation that my models are going to end up being right.

Fourth, the double bottom that’s been made in gold, at $1,180.81 last June and $1,184.50 on Dec. 31, are way too close together in terms of price, to hold.

Double-bottoms are a misnomer. They almost always give birth to a temporary rally, but then the market turns south again and demolishes the double-bottom, spiking to substantial new lows.

I believe the same thing is going to happen to the June/December 2013 double-bottom in gold (and silver as well).

There are many more reasons I believe the current rally is nothing more than a correction and that new lows are likely ahead, for both gold and silver.

But right now, I want to outline the two main scenarios for gold going forward.

Scenario A: Gold’s rally stalls at current levels or slightly higher, then it resumes its downtrend. That’s the scenario right now according to my models. New lows will then be seen by May, and the bear market will finally be over.

Scenario B: I am dead wrong and gold continues higher, taking out the $1,320 level and then moves even higher, taking out $1,449.

In this scenario, gold would still retrace a very large part of its first wave up and decline back to the mid or low $1,200 area before resuming its new bull market.

In other words, even if I am dead wrong, we would have a chance to get on board at much lower levels.

What about any further rally from current levels? Should you get in now? That’s up to you. I can only tell you what I am personally doing and recommending. The answer is no.

I prefer to buy gold, or any market for that matter, when my models give me a 90 percent probability that the bottom is in. Right now, those models are saying that there is less than a 25 percent chance we have seen the bottom.

What about mining shares? Or silver, platinum and palladium?

Same applies. I do not believe any of them have bottomed.

I know it’s tough to watch gold go up and not participate. It’s tough for me too. But discipline and patience is key. And in the rare event that I’m wrong, keep in mind that …

One, you will still get a chance to get on board during a major pullback. And …

Two, gold is going much higher over the next few years, to over $5,000 an ounce. So if you miss a $100 or $150 move, it’s no big deal. It’s always far better to buy when the odds are on your side.

Best wishes,

Larry

 

Before he passed away, my father talked about the policy mistakes of past presidents and warned about a series of climactic events still to come.

But it still never ceases to amaze me how, in an advanced society like ours, each new generation of economic policymakers fails to learn the hard lessons of their predecessors.

They spend like drunken sailors and then wonder why the federal budget gushes red ink.

They slap interest rates down to zero and then wonder why investors flock to speculative bubbles.

They print money up the gazoo and then are shocked when the dollar is gutted.

They do ALL of these things to supposedly rescue the economy from disaster, and yet they remain totally unprepared for the next disaster.

If each new crisis were less painful than the previous, we might be able to turn a blind eye to their transgressions. But unfortunately, it’s precisely the opposite:

 

• The runaway inflation of the 1970s was worse than any prior economic crisis after World War II …
• The S&L and bank failures of the 1980s made the ’70s look like a walk in the park …
• The tech wreck of the early 2000s destroyed more wealth than either of the above, and …
• The housing bust of the late 2000s caused even more financial damage than the tech wreck.

 

Each time, Washington trotted out bigger and bigger guns. And each time, they planted the seeds for the next, even bigger collapse.

No one can foresee exactly when the next calamity will strike. Nor can we describe, ahead of time, the next big guns Washington will try to deploy.

But there’s one thing I do know for sure: No one can truly be ready unless they heed the vivid voices of the past.

Vivid Voices of the Past

Cardboard boxes with my father’s memoirs and personal documents were in storage for a long time.

I told everyone, including myself, that I was too busy writing my weekly Money and Markets column and attending important meetings to dig through them.

It wasn’t until many moons later, when my staff had gone home and the office was quiet, that I became aware of the true cause of my procrastination.

The sun was down but Florida’s evening brightness flooded the room, much of it reflected from the lake below.

I picked one box to open at random, and a surge of grief rolled up my chest. I suddenly realized it was the first time I’d looked through any of Dad’s papers since he passed away. I had yet to fully accept his absence.

In the box, personal letters were mixed with public statements — some loose, some in folders or envelopes, some neatly joined with rusting paper clips.

Bernard Baruch

Most dated back to the 1940s and ’50s, and from each, I could hear voices speaking to me almost as if they were here today …

One letter to Dad, yellowed by four and a half decades, is from Bernard Baruch, the famous advisor to many presidents. It’s dated April 6, 1959.

Baruch’s bold-faced, Madison Avenue letterhead competes with his Kingstree, South Carolina address typed lightly in the upper right corner. The word “Private” is handwritten across the top.

Weeks earlier, Dad had founded the Sound Dollar Committee, a non-partisan, non-profit organization to fight for a balanced budget and prevent a decline in the dollar.

And in the early days of the Committee’s formation, Dad had spoken and written to Baruch several times, seeking to enlist him as the Democratic co-chairman of the Committee.

Former President Herbert Hoover would have been the Republican co-chairman. But Baruch was reluctant to be his counterpart.

“Inflation,” he wrote, “flows from the selfish struggle for special advantage among pressure groups. Each seeks tax cuts or price increases or wage raises for itself while urging the others to make the sacrifice, and with little regard for the national interest. …

“Ever since the end of World War I, I have tried to show what the results would be — giving all of my time and resources to this. But alas, my efforts have not succeeded. …

“I hope that you and those associated with you will be more successful because it is just and should win.”

It was his way of offering moral support — but little more.

Leonard Paul Spacek

The box also contains four sheets of the original Sound Dollar Committee stationery. The names of 17 members, printed in dark blue ink, line up neatly along the upper left margin.

Some of the names I know; some I do not. But my research reveals that each man on the list has his own urgent message for us today — words that we can choose to heed with respect, or ignore at our own peril.

One of the messages comes from Leonard Spacek, who, not coincidentally, had a lot in common with Dad.

Back in 1928, around the same time Dad was meeting his first important boss on Wall Street, Spacek met his boss as well — a man whose name you will surely recognize: Arthur E. Andersen, the founder of the accounting firm that would become the largest and most prestigious in the world.

After Andersen’s death, Spacek took the helm as the second managing partner in the firm’s history, emerging as a fiercely outspoken champion of shareholder rights.

He advocated strengthening audit procedures.

He fought for standardizing accounting rules so that financial statements could be fairly compared.

And in 1958, one year before joining Dad in the Sound Dollar Committee, he declared that “the man on the street … has the right to assume that he can accept as accurate the fundamental end results shown by the financial statements in annual reports.”

This approach may not seem radical to you today. But it was then. And with it, Spacek made history. But he also made some enemies, a foreshadowing of greater troubles yet to come.

If he were alive today, I can just imagine what he’d say about those who followed in his shoes.

He dedicated his life to sound accounting. He’d be horrified by those who led his own great firm down the path of accounting hocus-pocus in the tech bubble of the late 1990s.

He’d be mortified by their role in the demise of Andersen’s big clients like Enron and Global Crossing. And he would have no pity for those who allowed Andersen to become the first accounting firm in history ever to be convicted of fraud.

In his eulogy for Spacek, former SEC Chairman Arthur Levitt put it this way: “There aren’t any Leonard Spacek’s in the industry anymore.”

Let’s pray his ideas and ideals never die.

General Leslie R. Groves

Also on the list of members of the Sound Dollar Committee are a couple of retired generals.

Why did they join? Dad told me that it was because they saw the connection between fiscal prudence and national security; financial soundness and physical safety.

Both goals, they believed, were threatened by the same human weaknesses — lack of discipline and outright greed. Neither, they insisted, could be achieved without the other for very long.

Leslie R. Groves was one of them, and he played an entirely different role in America’s history from any of the other Committee members.

Groves was a major force in the construction of the Pentagon. And he was the de facto leader of a secret weapons project based in the New York District of the Army Corps of Engineers: The Manhattan Project, where the first atom bomb was made.

As one reviewer of his biography explains, “to the uninformed, Groves’ contribution to the production of the atomic bomb was as scoutmaster for a collection of scientific mad monk geniuses in the desert of New Mexico.

“In fact … Groves was more of an absentee landlord at Los Alamos. The real action was going on elsewhere, primarily in massive industrial complexes at Hanford, Washington, and Oak Ridge, Tennessee. In some respects the building of these two industrial facilities was as impressive as the making of the bomb. That Groves was able to build, not one, but two, mammoth atomic factories in roughly eighteen months is staggering.”

Now, here’s why I think this is so important and relevant to the sorry state of the world we live in today:

Groves advocated no sharing of nuclear technology with allies. Even within the U.S. government, he zealously embargoed information from most agencies and departments, including the White House itself.

Fast forward to 2004. Like the Leonard Spaceks of the accounting world, the Leslie Groves of the world were mostly gone; and in their place, nuclear proliferators gained the upper hand.

A Pakistani nuclear scientist, Abdul Qadeer Khan, for example, ran a worldwide sales network, disseminating nuclear technology to North Korea and Iran. And today, the world is still paying the penalty, with only faint hopes of avoiding even greater dangers in the years ahead.

If Leslie Groves were here today, I think he’d be the last to say “I told you so.” Instead, he’d lead the battle to end nuclear proliferation. And in parallel, he’d demand an end to Fed money printing.

Dean Alfange

As the legal counsel to the Sound Dollar Committee, Dean Alfange is the last name to appear on its stationery.

When I was a young boy, I used to like visiting him at the Committee’s headquarters at 500 Fifth Avenue. He was like an uncle, always welcoming me with open arms.

Dad told me Dean had run for governor of New York. And later, I discovered, that he was also founder of the liberal party of the state, helping to infuse it with a strong Ayn Rand philosophy.

Today, he is well remembered for a short piece he wrote entitled “An American Creed” …

“I do not choose to be a common man.

“It is my right to be uncommon if I can.

“I seek opportunity not security.

“I do not wish to be a kept citizen, humbled and dulled by having the state look after me.

“I want to take the calculated risk; to dream and to build, to fail and to succeed.

“I refuse to barter incentive for a dole. I prefer the challenges of life to the guaranteed existence; the thrill of fulfillment to the stale calm of utopia.

“I will not trade freedom for beneficence nor my dignity for a handout.

“I will never cower before any master nor bend to any threat.

“It is my heritage to stand erect, proud and unafraid; to think and act for myself, enjoy the benefit of my creations, and to face the world boldly and say, this I have done.

“All this is what it means to be an American.”

He equated this model for self-reliance with the ideal of small government and the discipline of a balanced budget. Perhaps others should do the same.

Moral Power

Each of these men brought to the Sound Dollar Committee the force of moral rectitude, and it was this force that was truly behind the Committee’s incredible success.

From the various documents in the box, I have tried to identify what got the entire campaign started. I have little doubt it was the age-browned, ripped and crumbling piece of paper now sitting between my computer keyboard and monitor: A full-page ad that the Sound Dollar Committee placed in The Wall Street Journal on March 19, 1959.

Here are some highlights …

Inflation is our greatest enemy … a narcotic. It soothes and exhilarates while doing its deadly work.

Already it has reduced our dollar to half of its purchasing power. It is the killer rampant in our midst, threatening to destroy us as it has other countries whose rulers thought they could have a little bit of controlled spending and inflation; a little cheapening of their money. THEN IT WAS TOO LATE. …

Some people say we need deficit spending by our government for prosperity and growth. But they forget that the means can destroy the end.

The best minds of the world have said so …

William McChesney Martin, Jr., Chairman, Federal Reserve System: “No greater tragedy, short of war, could befall the free world than to have our country surrender to the easy delusion that a little inflation, year after year, is either inevitable or tolerable … for that way lies ultimate economic chaos.”

Senator J. W. Fulbright: “Excessive inflation in the long run destroys the will to work and the will to save, which are the foundations of our economic system. Inflation is a deadly enemy of a free capitalistic system.”

President Eisenhower: “If you do get mounting inflation, our whole scheme of economy would just go out of the window.”

Why Big Spending, Extravagance and Waste?

Men in government — in Congress — are plain human beings. They want to keep their jobs as we all do.

But what has been happening to these men? They have been put on the spot.

On the one side, they have been entrusted with the job of protecting your interest, your money.

On the other side, they are being forced by every conceivable kind of pressure group to spend, spend, spend … for every special interest and selfish program except the basic protection of your money and your rights as a taxpayer. Yet the bill comes to you either in the form of higher taxes or deficit financing (spending money we don’t have) or both.

When this happens … it is because you have not taken the trouble to tell them that you have had enough … that your pocketbook won’t stand any further whittling away of the dollar. …

Remember: Lawmakers are human. They want to do what is right. But if you don’t tell them what you want, the blame is on you — they will continue to play politics with your money…”

Within days after this ad appeared, the Sound Dollar Committee campaign was on fire. “Mr. Weiss and I have been so busy we haven’t had time to think in normal terms,” wrote James Selvage to the members.

But they were not alone.

The Reader’s Digest had also placed a series of full-page ads in newspapers around the country.

The Institute of Life Insurance, representing the largest life insurers in America — including New England Mutual Life, John Hancock Mutual, Metropolitan Life, Massachusetts Mutual, and Prudential — launched a parallel campaign, placing a series of ads in 575 newspapers, reaching 46 million readers each time.

Met Life sponsored its own campaign in the Saturday Evening Post, Life, Time, Newsweek, Forbes,Business Week, and U.S. News & World Report.

All spoke with one vivid voice. All demanded a balanced budget and a sound dollar.

Soon, they were responsible for driving an estimated 11 million letters, phone calls and telegrams to Washington, swaying Members of Congress, and helping Eisenhower balance the budget.

What Now?

Today, although official measures of inflation may look tame, highly flammable inflationary material lies nearly everywhere on the planet.

We have the lowest interest rates for the longest period in modern history, a known prelude to inflation.

We have the most reckless money printing since Weimar Germany, another powerful inflationary force.

We have serious threats to the world’s largest energy supplies, another potential driver of inflation.

And we see the first signs of possible currency wars — competitive devaluations by countries in a race to the bottom.

My recommendation: Stay safe. Stay alert. And be sure to follow the protective strategies recommended in our Money and Markets issues.

Good luck and God bless!

Martin

 

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