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Where Are We?

October 2004

The Stock Market

Stocks are in a primary bear market, which started in early 2000. For the 2-1/2 years after the 2000 top, stock declines became front-page news as they devastated portfolios, postponed retirements, and ruined some retirements. But in early 2003, the Dow Industrials and Transportation Averages began rallying and climbed back nearly to their 2000 levels.

Although the Dow Industrials, and the Dow Transportation index, and the NYSE average have enjoyed strong rallies, NASDAQ and high-tech stocks have not enjoyed comparable gains. The NASDAQ is struggling to stay above the magical 1,800 level, after having topped 5,000 in 2000. The S&P 500 has recaptured only about 43% of its bear market losses.

However, Richard Russell, editor of Dow Theory Letters, says that stocks have completed a bear market rally and are headed lower. John Mauldin concurs: “On a long term scale, we are in a secular bear cycle.” When stocks were collapsing 2000-2003, Russell warned that when a rally came it would “look better than the real thing.” Certainly that has been the case.

On an economic downturn, Mauldin sees a severe drop in stock prices. “On average, the stock market drops 43% in a recession. That means a Dow in the 6,000 range. The NASDAQ will be ugly, as it is the most overvalued of the indexes.” The likelihood of a recession? Mauldin says it is not a matter of if but when.

Another indication that the next big move in stocks is likely to be down: According to Russell, there have been only four occasions in the last 25 years that the S&P 500 has traded in such a narrow range for more than the current six months. When stocks break out of their current trading range, they most likely will go down because stocks are generally overvalued, and Russell’s interpretation of Dow Theory says stocks have completed a bear market rally.

Many investors have forgotten the pain of the devastating 2000-2003 downturn and today again are optimistic about stocks. For instance, the first quarter of 2004 money flowed into stock mutual funds equal to the flow at the peak of the bull market in the first quarter of 2000. Tops come amid periods of optimism, which means few investors get out at tops. (Bottoms come when pessimism is at its worst, and few investors get in when stocks are real bargains.)

If Russell is right, the bear market rally is over. As stocks sink lower, more investors will be enticed by the glow of gold and shine of silver. As noted under Gold and Silver on page 3, we are in the early stages of a precious metals bull market, which could run ten to fifteen years, the latter more likely. The metals bull markets will not end until sanity comes to Washington. Gold and silver prices are volatile, and during declines investors will question the validity of owning gold and silver. But, the trend in precious metals prices is up, and investors should use intermediate declines as opportunities to add to precious metals positions.

The Economy

We are in the late stages of a credit-induced “boomlet,” which Alan Greenspan is working feverishly to keep going through the November elections. Considering the gargantuan number of dollars created by the Fed, you have to ask why the economy is not enjoying a major boom.

In the 52 weeks ended May 5, average weekly Fed creation of new money averaged $577 million. The 12 weeks between May 12 and July 21, the average weekly increase jumped to $1,395 million, nearly 2-1/2 times the pre-May 12 level. Over the last eight weeks of the 12-week period, the average weekly increase grew to $1,532 million.

The Fed is buying Treasury debt to compensate for lower purchases by Japan and China, as Fed statistics of foreign buying shows. This is inflation in its purest form: the Fed creating new money out of thin air to finance federal deficit spending. Despite the Fed having the throttle wide open, growth is slipping.

Administration supporters like to note that July marked the eleventh consecutive month of growing payrolls. However, in July only 32,000 jobs were created when more than 200,000 were expected. Going back to June, 112,000 jobs were created when the number expected was 250,000.

Through May, optimists could brag about 75,000 manufacturing jobs added in 2004.

But in June, factories cut 11,000 jobs, leaving only 64,000 new jobs created halfway into 2004. Now, service jobs, especially telephone centers, are being exported. And, software design and engineering projects are being done abroad. Since Bush took office, the US economy has lost 1.1 million jobs.

Considering the size of our economy and its population growth, the US needs to add about 200,000 jobs a month for healthy growth. Numbers are far short of that. Worse, most jobs created over the last twelve months are low paying, and many are temporary, which usually have no health care and few other benefits. These weak job reports are blamed for faltering retail sales.

In June, retail sales declined 1.1%, the biggest drop since February 2003. Auto dealers, clothing stores, and department stores posted big declines. Spending on durable goods declined by 5.9% in June, compared with a 3.7% rise in May. That is a 9.6% turn around, a huge number.

Richard Russell says that stock market action is the best indicator of future economic activity. As noted elsewhere in this issue, Russell believes that the bear market rally that started in 2003 is over. He advocates holding cash (T-bills), gold shares, and gold coins. His recommended mix of gold shares/gold coins is one-third stocks, two-thirds coins.

[Russell’s advocacy of holding T-bills may seem to clash with his position of owning gold. It does not. Russell is a stock investor primarily. He advocates owning gold as a hedge against financial disaster or massive inflation. Russell sees a major top in stocks and has warned his subscribers to get out of stocks, except gold shares. So, when you’re out of stocks, where do you put your money? Russell says in T-bills, acknowledging that there will be erosion of purchasing power due to inflation, but he says that loss will be small compared with staying in stocks and that profits from gold will more than make up for purchasing power losses.]

Despite two recent quarter-point increases by the Fed, home mortgage rates are hovering at fifty-year record lows. The consensus is that an “invigorated labor market” prompted Greenspan to make the increases. As discussed above, the labor market is not “invigorated.” What Greenspan did was react to increasing interest rates, increases fueled primarily by fears of inflation. Will interest rates continue to rise as inflation heats up? That is not a given.

The housing market and refinancing of home mortgages have seen frenetic paces. These two areas made big demands on the money markets, and if they slow, or turn negative, it will lessen the demand for money. The housing boom and the “refi” craze have been two conduits through which the Fed has funneled money into the economy.

If the housing market and the “refi” industry slacken, the economy will weaken, perhaps even sink into recession. It could mean “stagflation,” i.e., rising prices and interest rates during a period of recession, which we suffered in the 1970s. Some analysts assert that a 20% drop in home prices would produce the same negative results as a 40% drop in the stock market.

Greenspan has intimated that the Fed stands ready to increase interest rates further in the face of accelerating inflation (overall price increases). At other times, he has intimated that inflation (price inflation, not his massive injections of newly-created money) is tame, which leaves him room to maneuver if the economy slows.

CMi believes that any further rate increase in the immediate future will be small and carefully implemented, if at all.

The economy is too weak, especially for an election year, to endure such a shock. With consumers holding record debt, a recession could devastate the banking system.

The Fed, through low interest rates and a reckless monetary policy, has created a gorilla that must be fed. Consumers who only a few years ago could not meet the financial standards required to rent nice apartments are moving into homes with little or no down payments. Homeowners with equity have been encouraged to borrow and spend. Alan Greenspan and the other Fed members know that any tightening in the economy could result in an avalanche of home mortgage defaults.

In efforts to keep the economy going, Greenspan and Company will continue to pump money into the system, and any interest rate increases will be guarded. Only a lower, debased dollar will permit all this newly incurred debt to be paid. In the long run, this guarantees price inflation, which, of course, will propel precious metals prices higher.

Gold and Silver

Gold and silver are in the early stages of a bull market. Considering that gold bottomed just above $250 five years ago in August 1999 and recently pushed up to $430, some readers may be asking how this is the early stage of a bull market.

This gold and silver bull market is the result of investors’ recognition that fiscal insanity has become the norm in Washington. We are in the midst of a presidential election, but neither Bush nor Kerry will breach the issue of a federal deficit that threatens to cripple our economy and, perhaps, destroy America’s position as the world’s greatest economic might.

Logically, Kerry should hammer Bush on the issue. After all, it has been during Bush’s term that federal spending and the federal budget have grown in leaps and bounds. But, if Kerry raises the issues, he will have to offer solutions, and just talking about solutions would cost him votes. Obviously, Bush doesn’t want to make the federal deficit and budget deficit campaign issues. Consequently, the problems will grow until they reach crisis states, at which time some draconian measures will be forced on Washington.

The twin to the federal deficit is the trade deficit, which is a result of “globalization.” We joined the World Trade Organization and formed NAFTA with Mexico and Canada. Congress passed laws that encouraged and facilitated the transfer of technology to countries where lower labor costs would generate greater profits. It is difficult to name a Fortune 500 company that does not manufacture abroad and export back to the United States. Now, we are suffering a trade deficit equal to 5% of our Gross Domestic Product. Such high numbers have sunk other nations’ currencies.

A study OECD economists concluded that to narrow the US trade deficit by two percentage points, the dollar would have to lose 25% of its current value as measured against the currencies of our major trading parties. Getting us out of this mess is going to cause someone a lot pain.

If this were another country, the IMF and the World Bank would write prescriptions for cures, but this is the United States of America, with the largest economy in the world (and the largest, most deadly military machine.) The IMF and the World Bank do not have the nerve to even suggest that Washington take steps to cure its woes. And, when the problems reach crisis states, the IMF and the World Bank will be impotent in dealing with the crises.

This means the medicine for America’s illness (an insatiable appetite for cheap money) will be forced down our throats by market forces. There will be nothing that the IMF, the World Bank, or the Fed can do as the dollar sinks lower. The decline of the dollar will come as investors worldwide recognize that the bitter medicine of our woes is a lower-valued dollar. This recognition will be the driving force behind higher gold and silver prices.

Over the next three to five years, we are probably looking at a still further dollar drop of 30% to 50%. Sadly, though, this decline in the dollar will lower Americans’ standard of living. In today’s economy, we import huge quantities of goods-and especially oil. With a cheaper dollar, imports will cost more, which will mean Americans will be able to buy and consume less, resulting in a lower standard of living.

Certified Mint

CMi is gearing up for a precious metals bull market that we expect to run ten to fifteen years. In May, we moved to the 14th floor where we increased our square footage by 50%. Further, the space was for designed for our needs, which enables us to operate more efficiently.

When the public comes to this market, the present quarters will become our operations center and we can rent additional space in the building to bring on more staff for taking orders and answering questions. Readily available additional space is a benefit of being in a twenty-one-story office building.

When discussing our plans with some longtime clients, a few have asked if we are not a little too optimistic about the metals markets. I don’t think so.

I was there in 1980 when silver climbed to $50 and gold topped $850. We had not planned for such a bull market. After all, Americans had just regained the “right” to own gold five years earlier. There was no precedent for what happened. We were stuck with limited space, with clients standing around trading among themselves before we could help them. We will see a similar gold rush before this is over, but one that probably will be bigger.

Bigger, you ask?

No investment medium-be it the stock market, real estate, or gold-puts in a top without first drawing in the public. It is the public that eventually provides the profits to the investors who had the foresight to get in early. The stock market is a perfect example.

As stocks topped in 2000, stock investors were drunk with dreams of the easy road to wealth. Dot com stocks reached astronomical levels and IPOs ran wild. Blue chip stocks sold at record levels.

This happened because the public had entered the market. And, as noted under The Stock Market on page one, investors are pouring money into mutual funds at rates comparable to pre-2000 rates. The housing market is another example where the public has come late to the party.

With few exceptions, every region of the country is seeing a housing boom. We think it is a mania. Without massive public participation, we would not be seeing this bubble.

Someday, undoubtedly after the dollar has suffered a precipitous decline and gold and silver have risen much, much higher, the public will decide that gold and silver are the right investments for the time. Then, surging into the metals, the public will push prices still higher.

The key to understanding markets is recognizing that no investment medium makes a top until after the public comes in. And, here’s a bit of inside information: the public is nowhere near the precious metals markets.

Monetary Digest

We admit misjudging how much our clients like this letter. We (actually, I, Bill) thought that with the proliferation of articles on the Internet, our letter was not needed. After all, how much can precious metals investors stand to read about gold, the dollar, silver’s production deficit, and political chicanery? A lot, I guess.

We have received many calls asking why no issue since last year. Many who called thought they had been dropped from the list. They had not been dropped; the last issue was July 2003. With this issue, we’d like to think that Monetary Digest would be published at least quarterly but maybe semi-monthly. Still, we wonder if Monetary Digest will be read, considering the vast amount of material available on the Internet.

Although many Internet articles are very good, sometimes they are far off the mark. This seems to be especially true at, which adds articles daily, thereby increasing the chance of bad articles being posted. Still, is the best-known, most prolific site for gold bugs. Other sites are,, and

CMi’s Daily Prices

If you are connected to the Internet and have not yet signed up for our Daily Prices, you may want to do so. As the name suggests, daily we email spot prices as illustrated in the box above. In a glimpse, you get an update on the metals markets.

The second column gives spots as of the close of trading in New York, one of the two most important markets in the world. (The other is London.)

The third column shows changes from the previous trading day. The last three show closing prices a week ago, a month ago, and a year ago. Daily Prices emailings are popular with CMi clients who regularly access their email. There is an easy to use Remove at the bottom of each email.

CMi’s Websites

Presently, CMi has five websites, but work is being done to roll all the sites into one. We are confident that the consolidation will result in the material being presented in a cogent manner. It is our goal to make the Internet resource for precious metals investors.

We know that many CMi clients have not visited any of our websites in sometime, and we understand why. Our sites are basically information sources for new investors, and many clients long ago learned what they needed to know in planning their precious metals investments. Our new site, however, should be visited regularly.

We will have “featured” coins that are basically bullion items that will offer unique opportunities. For example, occasionally large quantities of Franklin half-dollars become available at small premiums over dimes and quarters. Franklins are unique in that all were minted 90% silver. Kennedy halves, in contrast, were minted with three different alloys. The 1964s are 90% silver, 1965-1969 coins are 40% silver, and 1970 to date Kennedy half-dollars are a copper-nickel alloy. When the public comes to the metals markets, Franklin half-dollars should pick up big premiums over dimes and quarters and the 1964 Kennedys.

And, right now we have a few thousand 1-oz Silver Libertads, Mexico’s equivalent of the US Mint’s Silver Eagle. If these coins were being imported from Mexico, they would sell at Silver Eagle prices. However, a major silver dealer bought 70,000 from an investor who needed to sell quickly. Of the 70,000 coins, less than 10,000 are available, and they sell at 1-oz silver bullion prices. Libertads will be the type of featured silver coins presented on our redesigned website.

Until they sell out, the featured gold coins will be the year 2002 Perth Mint 1-oz Gold Horses, for reasons explained under Lunar Series Gold Coins on page five. However, other coins will be featured when they provide unique opportunities for our clients. And, as discussed under Lunar Series Gold Coins, we expect the Horses to sell out soon.

Before the Internet, this letter was CMi’s primary means of conveying ideas and opportunities to clients. The Internet has changed all that. It is a near instantaneous means of communicating with thousands. Investors without access to the Internet are at a big disadvantage.

Many older clients have told us they don’t want to have anything to do with the Internet. Too complicated is what we often hear. Still, we have a lot of older clients who have found the Internet to be a joy in their lives.

The Internet is a convenient way to stay connected to the world. And, email, the most popular feature of the Internet, is an easy way to communicate with friends and family. Readers without Internet service should talk with someone who can get them connected. Grandchildren would be a good place to start.

Lunar Series Gold Coins

The 1-oz gold coins of The Perth Mint’s Lunar Series Coins continue to grow in popularity as collectors worldwide add them to their collections. This speaks more to the excellence of the coins than to The Mint’s promotion of the Series, which has been weak. If the Mint were to vigorously promote the Series, the 1-oz coins, which are collector favorites, would sell out quickly.

This may sound as if CMi is dissatisfied with The Mint’s support of the Series. Actually, we’re not because it works to our advantage. If the Series were strongly promoted, the 1-oz coins would sell out in a matter of months and only a few CMi clients would get them. Because the Series is not highly promoted, CMi can sell the Lunar Series coins to many clients instead of a few.

The Lunar Series is a limited production series based on the Lunar Calendar. Each year The Perth Mint releases a coin that coincides with the Calendar. Although the Mint is now producing various sizes for each coin, we recommend only the 1-oz coins, which sell at bullion coin prices.

But, the primary reason for recommending the 1-oz coins is that they are the preferred sizes with collectors. The 2000 1-oz Gold Dragon, which is the only coin in the Series to sell out, now trades above $500 as collectors worldwide are scrambling for the coin.

As noted, despite being collector coins, the 1-oz Lunar Series gold coins sell at bullion coin prices when released. The year 2002 Gold Horse, for instance, sells at the same price as new 1-oz Gold Eagles. However, production of the 1-oz Gold Horses will be limited to 30,000, whereas production of Gold Eagles is unlimited.

So far this year, more than 300,000 1-oz Gold Eagles have been sold. Last year sales topped 400,000. No one reading this letter will live long enough to see 1-oz Gold Eagles achieve collector premiums. The Lunar Series is another story. Already Gold Dragons carry hefty premiums.

Although we thought that the 2002 1-oz Gold Horses would sell out earlier this year, that did not happen. However, the Gold Horses should reach their production cap of 30,000 within a few months.

The 2003 Roosters will be released mid-September. Like the other Lunar Series coins that have not sold out, Roosters carry a premium of about $8 over Horses. The Horses are cheaper because The Perth Mint is meeting US Mint prices for Gold Eagles in an effort to sell out a second coin in the Series. An announcement that a second coin in the Series has sold out will attract even more collectors to the Series.

After the Gold Horses sell out, they should pick up premiums, as did the Dragons. Bullion coin buyers should make the 1-oz Gold Horses a first consideration when buying gold bullion coins.


Historically, silver has always outperformed gold in precious metals bull markets. That is because when the masses come to the market, they prefer silver to gold because they get more metal for their money. And, in the aggregate, the masses have many times more money than the wealthy.

This time, however, we expect silver to produce a bigger percentage gain because the growing industrial demand, which has resulted in a “production deficit.” Therefore, we recommend silver to those investors who can handle its bulk and weight.


Presently, circulated 90% silver coins carry premiums of about $0.10/oz, which is the lowest in years. A good reason for choosing 90% coins is that they often pick up high premiums in precious metals bull markets and during periods of heavy buying, even without a bull market. In 1999, during the Y2K buying frenzy, circulated bags sold at 50% premiums over the value of their silver content.

For investors wanting a pure silver play and wanting silver in a convenient form, 100-oz bars are recommended. As this is written, 100-oz silver bars are selling for $.40/oz over spot. In a market in which the public is buying, 100-oz bars sell for $.60/oz premiums.

Investors wanting pure silver and “survival coins” should go with 1-oz silver rounds. As noted elsewhere in this letter, we have a limited supply of Mexican 1-oz Silver Libertads, which in quantities of 1,000 sell at $.80 over spot. Additionally, we have generic 1-oz silver rounds at $.40 over.


The 1-oz Gold Eagles remain the most popular gold bullion coins. Krugerrands are popular because they usually sell at a discount to Gold Eagles. Krugerrands are the same size, weight, and purity as Gold Eagles.

As discussed under Lunar Series Gold Coins, CMi recommends that long-term investors consider the 2002 Gold Horse, which is the seventh coin in The Perth Mint’s 12-coin Lunar Series. The 2000 Dragon has sold out, and the Mint would love to announce that a second coin has sold out. Therefore, the Mint is offering Gold Horses at the same price as Gold Eagles. Less than 2,000 Gold Horses remain to be sold.

Some investors, on hearing about the Lunar Series coins, say that they want only to invest in gold bullion coins, that they want the “most bullion for the money.” Many of these investors opt for Krugerrands, which often sell $10 a coin back of Gold Eagles. That is understandable.

Still, others elect to invest in Gold Eagles, despite the $10 per coin higher price. Frankly, investors who are investing in Gold Eagles should go with the 2002 1-oz Gold Horses. Both Eagles and Horses contain exactly one ounce of gold, and both are turned out by mints recognized around the world.


CMi believes that platinum is too high compared with gold and silver and should be avoided at this time. We have said this for more than three years.


When palladium soared above the price of gold in 2000, we were skeptical. But, we were wrong. Less than a year later, palladium topped $1000; however, just as quickly as palladium went up, it went down. Now, with palladium trading below $250, it looks cheap.

Maybe palladium is cheap here, and if clients want to buy we will not try to talk them out of it. However, investors need keep in mind that only a year ago palladium traded at $175. This metal is more volatile than silver, and buyers should expect a roller coaster ride. One-oz bars are the best form for most investors.