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We had previously earmarked the long Thanksgiving day weekend as potentially a major turning point or window of opportunity for a significant breakdown in the US Dollar and breakout in the Eurocurrencies and a rebound attempt in the perennially weak Japanese Yen. As it turned out, the intense pre-Thanksgiving volatility literally across the board may well have been the most volatile in living memory, if not ever, and with good reason: It was ushering in a change of monumental proportions that would become the continuation of the devastating decline that began over four and a half years ago in the US Dollar. And as we pointed out, following a six month shorter-term consolidation (which is part of a larger 2 year consolidation) it might well signal the beginning of what we foresee as being a significant multi-point decline in the US Dollar index that could well be anywhere from seven to fifteen points in magnitude.

However, given that the initial breakdown from the bull market highs of early 2002 (or 120 on the Finex US Dollar index) ended up becoming a stunning 40-point decline into the last week of 2004, don't hold your breath hoping that a 7 - 15 point decline might so conveniently contain the downside that the US Dollar could suffer over the next three years or so. We have many times earmarked 2009 as our ultimate low-point time-frame for the US unit that, regrettably, could see the once-almighty Dollar cut in half from current levels! That puts us in agreement with the chart below [not included with this commentary], with essentially dual scenarios of low points in the mid 60s initially, prior to a possible extreme low point in the low 40s.

As we have said before, there are a lot of similarities in the behavior of the US Dollar over the past five years compared to what happened to the Japanese Yen beginning in March 1995 when the Yen and Asian Currencies were in turmoil and Eurocurrencies were out of favor.

Unfortunately, we foresee the US Dollar as succumbing to the same kind of potential decimation over the next three years as the economic mismanagement of the past could manifest through an extreme currency adjustment and the attendant inflation this will inexorably bring to bear.

One positive that could emanate from this over the coming decade might be where the US could emulate Japan's low interest rate era of the past few years. In such a scenario, the US could gradually replace Japan as the source for cheap money, and this, in turn, could power hemispheric or global growth as a whole.

The flip-side is what consequences a sharp US Dollar decline will have on overseas investors with massive holdings in US Treasuries and Securities. Should a panic liquidation occur, it could have extreme consequences such as we outlined in the article entitled "Trillion Dollar Killing," not the least of which could be soaring Gold and Silver prices...

Could such a scenario put the United States in the same position some years from now, perhaps for much of the next decade? Quite likely so, but in the meantime Ben Bernanke has his hands full trying to manhandle the hyperinflationary ticking time-bomb he inherited from one Alan Greenspan who, in a series of overlapping bubbles over his tenure, has laid the groundwork that could make the 1970s look like a dress-rehearsal for the ultimate day of reckoning, wherein Gold and Silver will finally assume their rightful place and time by climbing to prices that reflect the true reality of life today. By most measures, all the world's goods have risen anywhere from 5 ~ 10 times over the past two or three decades; e.g. the six-fold rise in house prices in Great Britain since 1980 in today's expensive British Pounds, and of course the US housing mania that has seen extreme variations of inflation. The forces that be have claimed to contain inflation—but everybody knows the official numbers just don't compute...

What does compute is what will happen if the US Dollar gets cut in half or even if it falls "only" 7% ~ 10% henceforth: The hyper-inflationary threat that has been kept hidden until now will be launched like the proverbial genie out of the bottle and cannot be put back by any amount of Fedspeak and spin. In this respect, Ben Bernanke's comments of just a few days ago were profound in that he singled out inflation as his greatest worry as it hangs over him like the "Sword of Damocles." He is damned if he does and damned if he doesn't. As he tries to keep the Titanic steaming ahead, he must avoid hitting the economic icebergs (inflation on the one hand and de-flation on the other). But if the ship stops or goes into reverse, then he has only one option: Reflate !!
 
In our daily lives and investment decisions we are often perplexed by market behavior that doesn't seem to make sense. For example, many are puzzling over why the US stock market and other world markets have rallied so strongly in recent months. We laid out our reasonings for this in past issues and will elaborate more on this in forthcoming issues, but our own ground-breaking research prepared our subscribers from day one for this unfolding near-record rally even when we nailed the beginning of the ascent to the very day, against a backdrop of impending gloom and doom with our at-the-time startling headline: 'A New Bull Market in the Making.'

It's kind of the same with Gold and Silver: there is a huge disconnect that simply doesn't make sense. How can Gold be trading at around $650 today, when it was trading at exactly the same price back in 1980, almost 27 years ago, in a currency that—depending upon what you measure these values against—is arguably worth only one-fifth or one-sixth of its 1980 value today?

Our only answer: 'Carpe Diem'—Seize the Day, Seize the Opportunity and Bet Big on this idea. Why? Because when you look at a chart of Gold from 1976 thru 1980 and at the same time try and relate the statistics below that Derek Van Artsdalen has so meticulously outlined for us, it's hard not to see that, in any case, Gold has major upside ahead. Not to take advantage of that would seem folly. In such an uncertain world as now exists, if Gold or Silver even begin to trace out our expectations, then not being invested would be the missed opportunity of a lifetime.

We've seen this movie before and have the luxury of knowing the outcome. Investors at the bottom of the correction in 1978 had no earthly idea that a better than 400% move up in Gold lay directly ahead and within just over two years.  And that's not all. Let us remind ourselves how legendary investors like Carl Icahn, Carlos Slim, Jim Rogers, Warren Buffett et al see such opportunities and go for them when others cannot see the wood for the trees.
 
These heavy hitters periodically counsel us in rare interviews, and when asked how they got to be so rich, their typical response is: Whenever you see or recognize a glaring anomaly or see a stock whose fundamentals are improving while the price is declining, or where the value is so compelling you can almost reach out and grab it—buy the stock or buy the commodity. Nobody has done a better job than foretelling this commodity boom than Jim Rogers. He even wrote the book "Hot Commodities," telling us all what the future held before it happened...

And so it is with Gold and Silver... Nowadays, not just Jim Rogers, but everyone in their heart of hearts knows that Gold and Silver are way out of whack with just about everything else and are insanely undervalued and that the last remnants of disinflation—such as productivity, low wages and falling technology prices—have probably run their course.

We were intrigued, if not blown away, by the outstanding statistical analysis and mapping of the behavioral tendencies of Gold and its potential relationship to the late 1970's bull market that was published just a few days ago by good friend and highly esteemed subscriber Derek Van Artsdalen. This analysis, leads us to conclude that the propensity for metals to go parabolic over the next few years is fast approaching. The situation can be likened to the building pressure of magma that lies unseen beneath a smoldering volcano just before it erupts. As Jim Sinclair recently declared at his Gold-oriented website: The next two years could be best years of your life, if you have the discipline.

This is our wish for you...

Trade Well

Savant   The New Golden Bull: A Big Picture Glance  Derek Van Artsdalen

Since the inception of our current gold bull market back in '01, I have been maintaining a database of price movement as compared with the Great Golden Bull of the late 70s and into the famous blowoff top of January 1980. Here's a brief update—the first I've done in almost a year—on the gold market from that historical perspective…

First, the London PM (Gold Cartel-adjusted) fix on the gold price Friday was $639.50, the highest fix in nearly four months and one of the top 40 high closes since November 1980. As a side note, silver's Friday London PM fix was $13.36—not as high as this past May's peak at $15, but easily among the top 25 highest closes since 1980.

When I wrote my last update just after the new year, I included the following paragraph:

"Obviously something big is happening. Ironically, there's little to no excitement in the mainstream world, nor apparently the least concern by the average Joe Six-pack about the stability (much less the likely endurance) of the world's fiat currencies. It seems the clueless market analysts are tripping over themselves to call a top in the metals."

Pretty ironic, eh? Those words are no less applicable today, which tells me that we still have a LONG way to go in our current commodities boom. The systemic problems we gold bugs have been talking about for many years are only now creeping into public awareness, and it seems most folks still have no idea what's happening to the value of their paper currency. How can anyone reasonably proclaim the metals bull market is over (much less declare it a "mania") when the public never even got involved!??

Volatility has nearly doubled

Also in my last update, I wrote:

"The average monthly fluctuation in the price of gold during its great advance from August 1976 to January 1980 was 7.56%. The average for the final six months was 17.33%. The average for the final three months (during the blowoff stage) was 20.4%, and the last month, January 1980, the price fluctuated an incredible 52% (even more if you count intra-day peaks). Now, that's what you call volatility! [But]…our [modern-day] bull is still a calf; it hasn't even found its legs yet. Our average monthly price fluctuation to date (starting from the commencement of this gold bull in April 2001) has been a mild 5.04%. But here's what's even more amazing: since April 2004 when gold topped out on the London PM fix at $427.25 and then fell to a low of $375.00 in May, our average monthly volatility has been a puny 4.66%, which is well below even the overall average since this bull began… In the 42 months of the Great Gold Bull of the seventies, the average monthly gain in the gold price was 3.01%, which is impressive by just about any standard… However, since this modern gold bull's inception, the average monthly gain has been only 1.31%... As of the end of 2005 the average monthly gain since this new gold bull began back in '01 turns out to be 1.35%. That compares with 3.01% for the Great Bull of the late seventies.. Also, the average monthly price fluctuation for gold to date has been a relatively skimpy 5.10%. The late seventies bull had an overall monthly price fluctuation of 7.56%. The difference doesn't appear all that significant at first, but the seventies number is nearly 50% greater than our modern-day figure. Which means that, to catch up, our own gold bull would have to put in some serious volatility upwards over the next couple of years."

And that, my friends, is exactly what has begun to happen. Until a year ago, the volatility in the precious metals was mostly contained. But not anymore.

I realize I'm spitting out enough numbers to bring an accountant to orgasm, but here's another round of stats to consider…

The average monthly gain in our present-day gold bull is still a modest 1.43% (it had climbed to nearly 1.8% back in May when gold was screaming). But that's still a reasonably impressive return compared with your average bond yield or CD (certificate of depreciation) interest from a bank.

So gold's climb has been nothing short of relentless. But here's a statistic I think is far more important: The overall monthly price fluctuation figure. The previously mentioned 5.10% included only the first 57 months of the current gold bull as of December 2005. Adding in the results since January, that number has now increased to 5.61% overall—a significant increase in less than one year and clearly attributable to this year's gold price explosion.

But that's nothing. To really get a feel for how things are progressing, you've got to look at particular "windows" of time and then compare them. Here are the fluctuation numbers for each 12-month period of our present gold bull market, using the low of April 2001 as the bull's inception and the beginning of Year 1 (Year 6 includes only eight months to date):

Year 1: 4.52% (Little gold interest. Bad guys well in control.)

Year 2: 5.58% (Things heating up, but still quite manageable.)

Year 3: 5.66% (Greenspan starting to sweat but still smiling.)

Year 4: 4.76% (Prices tame, but cartel now thoroughly irritated.)

Year 5: 5.56% ("Uh oh, Mr. President—they're still buying.")

Year 6: 8.60% ("Goldman, we have a problem.")

Look what's happened. The monthly price fluctuation in the gold price has now practically doubled from its first-year low of 4.52%. That 8.60% figure is quite astounding when you think about its implication to the stability of the gold market. After all, volatility means movement; creates interest; and interest spurs participation. In a bull market, high volatility ultimately means more excitement and much higher prices—in this case, a gold manager's nightmare.

In a bull market, big plunges lead to big advances

I have explained in the past that during gold bull markets, double-digit declines (drops of 10% or more) in the gold price have always been followed by powerful advances. The gold bull of the 70s had only five or six double-digit declines, but each one led to AT LEAST a 27% increase—usually much more.

Thus far in our modern-day bull (which is about 90 days away from six years of age, already well older than the 42-month long bull that terminated in January 1980) we've experienced about nine of these gut-wrenching price drops. But true-to-form, each cliff dive has been succeeded by new highs—except, of course, for the most recent heart stoppers which took place during the rollercoaster ride following the $725 top in May. But these have not yet had sufficient time to redeem themselves.

Incidentally, there was only one double-digit decline of 20% or more back in the Great Gold Bull of the 70s, and ironically it also bottomed in November. The year was 1978 and the low was $193.40. I'm sure all the newsletter writers calling a top in gold back then were selling subscriptions at a pretty fast clip. But we all know what happened less than fifteen months later.

I mention this because to date we too have experienced one gold price decline of 20% or more (21.79% to be exact). It culminated in June, immediately after May's peak at $725. (Question: does anyone remember how many top-callers a few months ago were quick to declare the commodities boom dead and buried? I personally lost count.)

Admittedly, though, the last several months have been brutal for gold investors. In addition to that merciless twenty-percenter I just mentioned, we've also suffered through a faith-testing 15.45% price decline from the top of the bounce in July at $663.25 to last month's low of $560.75. Previously we endured a 15.9% drop that bottomed in April 2003. (By comparison, there was only one 15% decline in the late-70s bull—at just about the midway point in April 1978.)

Will our own severe price declines of late eventually lead to new highs in the price of gold? I firmly believe they will. Keep in mind that the gold price climbed more than 75% without any serious setbacks between the low of $411.10 during February 2005 and the $725 mark registered six months ago. So now, as in the late 70s, a lot can happen in fifteen months.

If history is any guide, my guess is that fifteen months from today, gold's newest critics will be just as stunned (and just as wrong) as were their predecessors in November 1978, February 2005 and May 2006.

Many Thanks to Derek K. Van Artsdalen for this insightful analysis

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