Lawrence Roulston: Gold Will Go Higher

July 01, 2009

The Gold Report


This The Gold Report recently caught up with newsletter writer and analyst Lawrence Roulston of Resource Opportunities, who's been travelling to learn more about the state of mining worldwide. In this exclusive interview, Roulston provides his thoughts on the outlook for the economy and what factors impact gold and other metal markets. "As the Western world gets back on track," says Roulston, "commodity prices will continue higher."

The Gold Report: Lawrence, you have just returned from trips to Dubai, Hong Kong and Europe. What does the rest of the world think of the health of the U.S. and European economies?

Lawrence Roulston: It is striking how different the outlooks are in different parts of the world. In North America, most people are totally focused on the U.S. economy, which is not looking that promising in the near term. Therefore, investors are quite gloomy. Europe is also not very upbeat. But, in Europe, they are more pragmatic and they tend to look a little further into the future. As a result, many European investors see this down period as a buying opportunity. Parts of Asia were hit hard by the slowdown, but there is still a lot of growth in China and India. China reacted quickly with an effective stimulus plan that is focused on building infrastructure. Growth there is forecast at 8% for this year. With enhancements to rail, roads, ports and the like, China will become an even greater economic force.

TGR: What is the Asian perspective on the importance of emerging markets to global economic turnaround?

LR: There is a myth that Asian growth depends mainly on exports to the West. Much of the economic activity in Asia is related to trade within the region. After the credit crisis, there was a severe shortage of export financing, which meant that exports plummeted. Now that financing is available again, activity is recovering throughout the region. Asians are far less concerned about the global situation than they are with what is happening in the region.

With China, which is the third-biggest economy in the world, growing at 8%, it doesn’t really matter what happens in other regions. Once upon a time, Asian growth depended on exports to the West. Now, the West will benefit from growth in Asia.

TGR: What do investors in other regions think about precious metals and the U.S. dollar?

LR: Investors are very nervous about the outlook for the dollar, but it remains the global currency. With uncertainty remaining about the U.S. financial system, gold has become more important as a currency hedge, as an inflation hedge. People can see the long-term downtrend in the dollar. As a result, the dollar is seen more as a medium of exchange. It’s held for the short term, by most investors. Of course, the Chinese government holds most of its $2 trillion dollars worth of foreign currency reserves in dollars. There is growing nervousness about that huge exposure and moves away. In part, the government is buying commodities.

TGR: It's been said that the Chinese government is buying commodities and stockpiling these commodities as a way to get out of the U.S. dollar. If this is true, should we expect commodity prices to fall when China has built up a significant stockpile and, if so, in what timeframe?

LR: The Chinese government is taking advantage of low metal prices to build strategic stockpiles. They are smart enough that they are not going to push the price up with their buying. Recovery in the West should dovetail with the Chinese buying so that the prices will not drop. The amount of actual commodities being bought for the stockpiles is small in relation to the total value of their reserves.

Much of the Chinese buying of commodities that we read about in the popular press is about Chinese companies in the private sector acquiring interests in metal deposits with the intent of developing mines. The Chinese mining industry is becoming quite large and it is only natural that they acquire resources.

TGR: What will be the impact on the U.S. dollar if/when commodity prices fall?

LR: I don’t believe commodity prices will fall. What we are seeing now are commodity prices that reflect weak demand as a result of the recession in the West. As the Western world gets back on track, commodity prices will continue higher.

TGR: What will be the impact on gold of a weakening dollar?

LR: Gold is denominated in dollar terms, so as the value of the dollar falls, the nominal value of gold rises in dollar terms. In addition, gold will appreciate in real terms as a growing number of investors turn to gold as a secure store of wealth.

TGR: Given your viewpoints, how should investors view gold/silver as part of an investment portfolio?

LR: Gold, silver and other commodities provide stability to a portfolio. But, owning bullion is not the most effective way to gain exposure to precious metals. A much more effective way to gain the currency hedge and the inflation hedge of precious metals is to own companies involved in the metals. Of course, that approach carries risk. It also means that one must do some hard work to identify suitable companies. If you own the right companies, you stand to profit from developments within the companies. In addition, you can actually get a far more effective exposure to precious metals by owning a company. What I mean is that if precious metals go up by some percent, then companies will increase in value by a greater percent.

TGR: There is a common thought that when an investment idea becomes part of cocktail conversation, that investment has hit the top and it’s time to sell. There is significant buzz around gold now. Has gold reached the top?

LR: North American investors have a very short outlook—often days or weeks. Gold and silver go through short-term swings. If you buy gold today at $930 expecting to profit when it hits $950 next week, you may be disappointed. My belief is that gold will continue to notch higher, exactly as it has for the past eight years, spiking up and then giving back part of its gain before the next up leg. Looking longer term, there is every reason in the world to believe the gold price will be higher. But, the gains may not come quickly enough to justify holding bullion. Back to my earlier comment: Gain the exposure to precious metals through owning companies that are adding value. The longer-term gains in bullion will come on top of what should be attractive returns from companies carrying out business plans.

TGR: Will there be any impact of Dubai shifting gold from London to Dubai?

LR: Not really. It’s part of the growing importance of gold to Middle East investors. It also shows the maturing of Dubai as a regional financial center and the growing wealth in that region.

TGR: Should we expect any impact with the authorization from the U.S. Congress for the IMF to sell gold?

LR: Central bank selling of gold has been an important part of the gold market for the past decade. Investor and consumer demand for gold exceeds the amount of gold mined each year. Central banks have made up the difference. The European banks have sold less than their quotas in each of the last three years. If handled properly, the IMF sales should not affect an orderly market. With the central banks selling, and now the IMF, it will continue to put a damper on the market. Those commentators calling for $2,000 or $3,000 gold in the near term seem to forget that there is a lot of gold that can enter the market. Gold will certainly go higher, but not necessarily at the pace that some would hope for.

TGR: Earlier you stated that a more effective way to gain the currency and inflation hedge of precious metals is to own companies involved in the metals. I assume you are referring to mining companies. The senior producers have had a significant increase in stock valuations from their recent lows. Given this recovery, is there still room for gains?

LR: The seniors have outpaced the recovery in bullion from the lows earlier this year. Senior producers tend to trade at a premium to bullion, presently about two times net asset value. To explain that: If you valued a gold producer on an objective basis using the current gold price you would get some net asset value. The present share prices reflect a market value about twice that net asset value. Investors pay that premium in order to get the optionality of owning a gold company compared to bullion—the gold company will increase in value faster than bullion. The seniors will continue to track the gold price. But, you are paying a premium. There is far greater value in the smaller companies. There is also greater risk, but potential for much larger gains.

TGR: Is the risk/reward for near term-producers now tilted in favor of investment in the smaller companies compared to seniors?

LR: Each investor has to assess his or her own tolerance for risk. In my opinion, the smaller companies—that is near-term producers, small producers and companies with defined gold deposits—clearly represent a very favorable risk/reward profile. But, you have to assess these companies carefully. There are big differences among the companies.

TGR: Given the potential upside of the recent producers/near-term producers, should individual investors look at exploration companies?

LR: Exploration covers a huge range—from companies that hope to one day find something of value to companies that have made important discoveries and are now quantifying the size and grade of their deposits. At this time, I would tend to stay closer to the latter type of companies. There is still huge upside potential. Consider some numbers: a company that has the earliest stage of metal deposit, what we call an inferred resource, is valued in the order of $10 to $20 per ounce of gold in the ground. Once that deposit reaches production, it is valued in excess of $200 per ounce of gold in the ground. So, you can see the potential for ten-fold returns without taking on the discovery risk.

Resource Opportunities, which Roulston has published since 1998, provides objective commentary on the resource industry and emerging resource companies. Lawrence is a geologist, with engineering and business training, and more than 20 years of hands-on experience in the resource industry. Lawrence conducts frequent property visits as part of his due diligence and has toured mining and exploration projects in many parts of the world. He has worked in various roles for mineral exploration companies. Since 1997 he has been a resource industry consultant and independent mining analyst.

The Politics of Gold

by: Bruce Krasting

July 01, 2009

On June 18, I wrote a piece on gold. At the time I thought the Iranian election story could lead to an unanticipated source of demand for the yellow metal. I thought there were three possible outcomes. Either (a) peace and harmony would break out, or (b) the police and military would fail to shoot at the protesters and the Regime would fall or (c) the protesters would be crushed and talk that Israel would bomb Iran would come on the table. I guessed (c).

Approximately one month ago a leading Israeli newspaper, Haaretz, published portions of a report produced by Center for Strategic & International Studies (CSIS) titled Study on a Possible Israeli Strike on Iran's Nuclear Development Facilities. This link (http://www.csis.org/publication/study-possible-israeli-strike-irans-nuclear-development-facilities will take you to a page where the full report is available for download.

This 108-page report provides a detailed plan of attack. It contains aerial photographs of the likely targets, a description of the anti-aircraft defense capabilities by site, bomb payload requirements and even an estimate on direct and indirect death tolls. Not a summer read.

The report is from March 2009. I have no idea if the information and conclusions are accurate. It certainly appears to be. Two observations from the study:

I) The timetable for achieving bomb grade fissionable material is 2010.



II) The Iranian air defense systems are inadequate to protect the critical sites.

Iran has been attempting to purchase Russia’s very effective missile defense systems for some time. The deal was never consummated. Pressure from European leaders saw to that.

However on 5/15/2009 (the same day the study from CSIS appeared in the Israeli press) China agreed to provide Iran with its S-300 anti-aircraft missile system. This is considered to be one of the most advanced systems available. Once delivered to Iran the outcome of an assault becomes much less clear.

The results of the Iranian election will potentially alter the timing of the Chinese missile sales. This sets up a US/China issue. Regardless of that resolution, the 2010 time frame for achieving bomb capability is not far away.

The price action in gold shows that it is marching to a different tune than the events in Iran. Like most things, this is a ‘timing’ trade. This story is not going to go away.

(click to enlarge)

GOLD IS IN THE LAUNCH PAD


Dear Subscriber,

Gold supply is getting tighter and tighter! Despite higher and higher prices, gold mine output fell last year to a 12-year low!

Gold investment demand is hotter than ever. I’m talking both big investors and small. Central Bank mints around the world are running full blast trying to keep up with demand.

And it’s not just here in the U.S. The British Royal Mint increased its consumption of gold by more 75 percent during the first quarter "amid a surge in demand for bullion to diversify investments."

A flood of red ink in Washington is destroying the value of the dollar. The fiscal deficit could top US$2 trillion in 2009 — a whopping 15 percent of gross domestic product. That would increase by one-third the total stock of federal government debt outstanding. What’s more, the deficit will probably be even larger next year.

You know who’s disgusted by this? Our foreign creditors, that’s who. The U.S. dollar is sputtering and stalling, as foreign central banks around the world, led by China, say they want a new, supranational currency to replace the greenback as the world’s reserve currency.

Of course, after this kneecapped the dollar last week, the Chinese rushed to say, “Well, we don’t mean right away.” Some consolation that is!

But the U.S. dollar has been in trouble for a while. And in the past two years, the dollar’s slide is just one force that has helped gold rack up gains of 43 percent!

Does Doom Loom for the Dollar?




One thing’s for sure — such a development would cripple the dollar. And it would turn up the heat under already sizzling gold prices!


China is expected to buy gold bullion, using some of its $1.95 trillion in foreign exchange reserves. China has too many dollars, and too little gold! As of right now, China’s gold holdings are roughly 1.8% of its foreign exchange reserves — much lower than other dominant nations, like the U.S. at 78.3% and Germany at 69.5%.

The problem is the sheer size of China’s foreign reserves — $2 TRILLION worth. If China decided to hold 5 percent of its current reserves in gold (the international average is 10 percent) it would need to buy more than 3,000 tonnes of gold — or about one full year of global production.

What do you think that would do to the gold price? It would send it through the roof!

Some analysts even believe that China will sell some of its U.S. Treasuries to fund the purchase of gold to further drive the price of the commodity up. By selling U.S. Treasuries, the U.S. dollar will further weaken.

But the good news is there is a great way to protect yourself against the coming financial hell-storm: GOLD.

Irresistible Forces Are Lined Up to Push Gold Higher!

Importantly, this is just one of multiple forces I see lining up to push gold higher. Any one of them is bullish for the yellow metal — together, they could send gold smashing through overhead resistance to soar to $1,300 an ounce — and beyond!

Is Gold the Ultimate Currency? Yes!

Gold has been used as money throughout history, and has some great things going for it ...

1) Permanence — Gold does not tarnish and is immune to the ravages of water and even most acids. Unlike paper money, it will not decay, shred, break or be eaten by mice in the basement.

2) Convenience — Can you carry a little more than eight pounds in a bag? Then you can walk around with $100,000 of gold. Not that you would want to do that, but it shows how handy gold is. Try walking around with $100,000 worth of real estate in your pocket.

3) Real wealth — Most importantly, the good-time Charlies in Washington can’t print gold.

Ride The Coming Rally in Precious Metals

If you want to protect yourself from the global economic earthquake bearing down on us, and if you want to potentially maximize your profits in gold, don’t wait around.

Sean

Debt is capitalism’s dirty little secret

By Ben Funnell

Published: June 30 2009 19:14

Just why is there so much debt in the Anglo-Saxon world? Bankers and regulators know well that it is in nobody’s long-term interests to have allowed borrowing to escalate to a position where the US now owes far more, as a multiple of the economy, than at the start of the Great Depression.

The answer is capitalism’s dirty little secret: excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite.

The amount by which the elite has benefited is startling, and illustrates the problem with lightly regulated free markets: the rich get much richer while the rest do not get richer at all. According to Société Générale economists, the inflation-adjusted income of the highest-paid fifth of US earners has risen by 60 per cent since 1970, while it has fallen by more than 10 per cent for the rest. As was recently pointed out in the New York Review of Books, the Walton family, of Wal-Mart fame, is wealthier than the bottom third of the US population put together – about 100m people. These are staggering statistics, confirmed by measures such as the US and UK’s ever-rising Gini coefficients, which estimate income disparity. Another way of putting this is that the share of profits in gross domestic product is at a 100-year high, or was until very recently.

Put simply, the benefits of economic growth have gone into the pockets of plutocrats rather than the bulk of the population. So why has there been no revolution? Because there was a solution: debt. If you couldn’t earn it, you could borrow it. Cheap financing was made widely available. Financial innovations such as the asset-backed securities market aided this process, as did government-sponsored agencies such as Fannie Mae and Freddie Mac. Regulators welcomed it all while perhaps taking insufficient account of the moral hazard problem it posed: that ever-increasing leverage meant the authorities had to keep interest rates low, otherwise the debt burden would cripple consumption. This prompted more leverage, which exacerbated the problem.

A walk in any low-income area in the UK confirms this. There are BMWs in the driveways, satellite dishes on the roofs and furniture delivery vans on the streets. In both Britain and America the jobless were encouraged to buy their own homes. No one begrudges anyone else the right to own a home or buy luxury goods. The problem is that the luxuries need to be paid for out of earnings and the houses out of equity topped up with an affordable amount of debt.

The question is whether the debt load – total US credit market debt outstanding was $53,000bn (€38,000bn, £32,000bn) at the end of March, or 3.7 times GDP – is at all sustainable and, if not, how it can be lowered without sinking the economy. Those pushing extra debt in an effort to boost the economy via increased consumption point to the scale of assets backing the debt. The net worth of US households, including their houses and after counting debt, was $50,000bn in March, according to the Fed. Not a bad tally for 306m people: $165,000 each. However, the cost of servicing this debt as a proportion of income, even with record low rates, is at a 30-year high, above 15 per cent, as incomes have stagnated and the total level of debt has risen.

The debt burden has to come down, which means more saving and lower economic growth for many years to come. Along the way inflation is likely to return, probably sooner and more violently than most expect, which will prompt investors to demand a higher return and make it even harder for governments to tackle the debt. At best the debt will fall slowly over many cycles and simply trim otherwise resilient growth. At worst it could cause growth to lurch upwards before tumbling again, with all the attendant uncertainty that entails. At this point, no one can know which is more likely I incline to the more benign view because of the size of household assets but, if the dollar’s reserve currency status should come under serious attack, rates would have to rise to defend it and that could itself cause a consumption crisis.

What can be done? First, although it is not ideal, we should not be too hasty about abandoning the capitalist model. It is less bad than any other system yet invented. But we should redouble our efforts to increase productivity through innovation and creating new markets; simply squeezing lower-income workers is a bad option, which helped get us into this mess in the first place. This requires investment in education and research. Second, we have to learn to live within our means. This means spending less than we earn, perhaps doing without the BMWs, flat-screen television sets and leather sofas. Third, we should be careful in distributing the higher tax burden that we will inevitably have to bear over the coming decade. Very high marginal tax rates did not work in the 1970s and will not work now. That said, income disparity at current levels is a political time-bomb that needs to be dealt with.

Finally, we should all come to terms with the fact that these are structural issues needing structural solutions; they need to be enforced over a longer time period than any one government’s term. So we need a new political consensus, one aimed at reducing overall debt levels while reducing inequality by encouraging education, entrepreneurship and investment in innovation.

The writer is an asset manager at GLG Partners

Copyright The Financial Times Limited 2009

Gigaton - some Big Energy ideas

Jun 26, 2009 01:53 pm

The Gigaton Throw Down has published a 150 page report on their view of the big energy bets for the next ten years. (see it at http://gigatonthrowdown.org/files/Gigaton_EntireReport.pdf

They analyze nine energy technologies that have the potential of displacing at least a billion tons of CO2 each within the next ten years. A gigaton by their calculation is 205 gigawatts of installed power, which is about 5% of US energy consumption. Some of their analysis is pretty good, some a bit over-optimistic, and they forgot a few biggies.

Their rundown:

Biofuels: yes, but a close reading shows that ethanol, in any flavor, really does not make much economic sense on a macro scale.

Ignores/understates the additional cost of erosion and fertilizer for cellulose ethanol, assumes a near zero cost for those feed stocks, and assumes a huge amount of currently non-agricultural land can be used in the future with some unspecified technology. Does not address that simply burning the feed stocks of cellulose alcohol produces more energy (as electricity) than ethanol, and a lot less expensively.

Biodiesel is mentioned, but no explanation of how it will become an important part of the energy picture energy. Algae is considered a lot father away than ten years.

Building efficiency: yes, major requirement is change in the building codes.

Concentrating solar: yes.

Construction materials: yes, mostly focuses on concrete manufacture which consumes huge amounts of energy. Talks of low-energy cement, but with little background of how that would actually work or be implemented.

Geothermal: qualified yes. I think it overstates some of the risk associated with it.

Nuclear: qualified yes. Does not discuss "mini-nuclear" (sub 10 MW plants) for distributed energy production at lower risk. Also does not mention waste disposal issues, or the use of the Mariana trench.

Plugin electric vehicles: big no, and quite realistic analysis.

Solar photovoltaics: yes.

Wind: strong yes, underestimates wind resources of deep water offshore wind and high altitude.

Does not include any information on OTEC (Ocean Thermal Energy Conversion), which can produce many times current world total energy.

Does not include any information of hydrokinetic (waves, tides, and currents). The estimates for the amount of capturable energy in these resources vary tremendously, but the high estimates are many times the entire world's requirements.

Does not include any information on anhydrous ammonia. While not technically a fuel but an energy carrier, it can bridge the gap from making electricity and using it as a transportations fuel. Ammonia can run in most internal combustion engines with some modifications. Ammonia burns cleans; it's exhaust is water vapor and nitrogen gas. Ammonia and its byproducts are not greenhouse gases, and already is produced in a huge scale. One hundred and twenty millions tons were produced last year, about 50 pounds per capita worldwide. It is the most produced chemical in the world, other than petro-fuels. The technology of storing and distributing is already well known, and there is a significant infrastructure in place already. There are over 3,000 miles of ammonia pipelines in the US - compare that to zero miles of ethanol pipeline. The biggest use of ammonia is as a fertilizer, and it is used very widely as a refrigerant gas.

Since the report limits the horizon to ten years, it does not mention extra-terrestrial solar, or fusion (cold or hot). There are, of course, many niche energy solutions that may have good investing opportunities, but cannot be expected to produce a substantial amount of energy.

HEARD ON THE STREET


JULY 1, 2009.


New World Order for Sovereign Debt.


By RICHARD BARLEY

The financial crisis is forcing investors to look at the world through new eyes. A case in point: emerging-market government bonds. When emerging-market bond spreads tightened to record lows in 2006 and early 2007, it was seen as evidence that risk appetite had run too far. Having blown out following Lehman Brothers' collapse, spreads are narrowing again -- only this time, the balance of risks is no longer so stark.

The history of emerging-market sovereign debt has been littered with crises. The past decade or so alone has seen the Asian crisis, the Russian default and another round of restructuring in Latin America. Populist politics, poor fiscal management, a reliance on foreign-currency borrowing and fixed exchange rates were a magnet for trouble.

Could it be different this time? Scarred by those crises, many emerging markets entered the credit crunch in a stronger position. Governance has improved, many countries run current-account surpluses, foreign-currency reserves have grown, the middle classes are expanding and savings rates are high. Countries such as Brazil and Turkey have been able to cut rates during the crisis and still attract money.

Credit concerns are muted. In fact, investors are more focused on the fiscal strains on triple-A-rated sovereigns like the U.S. and U.K. Debt burdens among the biggest triple-A borrowers could rise above 90% of GDP by 2011, whereas emerging-market debt is set to remain flat at 40% of GDP, according to Fitch forecasts.

In addition, emerging-market liquidity may be less of a problem in the future. One reason is the ability of some sovereigns to issue more local-currency debt, tapping into domestic savings. For international investors, these bonds offer the added appeal of potential currency gains. Indeed, institutional asset-allocation moves should further underpin liquidity: Fund manager Ashmore estimates the emerging-market share of world GDP could hit 50% within a decade from 35% now, forcing investors to reconfigure their portfolios.

Of course, not all emerging markets are emerging equally. Eastern Europe looks worse off than some of Asia or Latin America, partly because of currency pegs, long since abandoned by many other countries in the late 1990s. That has made some Eastern European countries vulnerable to devaluation and default. Meanwhile, perennial defaulters, such as Ecuador and Argentina, have yet to convince the markets they have shaken the habit.

Even so, the asset class still offers value. The spread on J.P. Morgan's EMBI Global index has halved from its peak to 4.5 percentage points over Treasurys. It is still way above 2007's lows of around 1.5 points. Yet what has really changed since the crisis is that now developed government-bond markets also look risky -- albeit reflected in inflation or currency risk rather than outright default risk. That casts emerging markets in a new light.

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

Wednesday Outlook: Liquidity + BS = Positive Quarter

CLICK ON : http://seekingalpha.com/article/144736-wednesday-outlook-liquidity-bs-positive-quarter?source=email

AND

CLICK ON : http://seekingalpha.com/article/146355-wednesday-outlook-commodities-global-markets

Solving the Timing Mystery, Part 1

by Martin D. Weiss, Ph.D.


Dear Subscriber,


Now, to help you prepare for tomorrow's webcast, Solving the Timing Mystery Part 2, I am dedicating this issue to the edited transcript of Part 1.

Martin Weiss: We're going to begin today's briefing by traveling back in time to the worst years of the Great Depression. I was not there, but my father was. And ever since I was six years old, he told me the story of those days and how he predicted some of the major events.


A Brief Journey to the Past

The year is 1931. The U.S. economy has contracted a staggering 25 percent. Millions of workers have lost their paychecks. Consumers are hoarding money, delaying all but the most essential purchases.

Every month, more manufacturers, wholesalers, and retailers are failing, pushing unemployment ever higher, intensifying America's economic agony.

President Herbert Hoover could not have dreamed of a more adverse environment to begin planning his re-election campaign — not even in his worst nightmares.

The public and the press demand to know who or what was to blame for this catastrophe. To survive, the Hoover administration would have to give them answers.

But the president knows that just ANY answer will NOT suffice. Only a credible, exhaustively documented, scientific answer could have a chance of restoring the public's faith in his administration and in the U.S. economy.

And so, Hoover turns to a scientist he trusts — a chief economic analyst in the Hoover administration named Edward R. Dewey.

Later, Dewey will create a nonprofit foundation. And with this foundation, he and his successors will continue a 78-year quest for the mysterious forces that drive the economy and investment markets, joined by many of the best minds from Harvard, Yale, Princeton, Oxford, Temple University, Western Reserve, and other globally respected institutions.

The Foundation's mission is championed by men at the very pinnacle of the scientific establishment — Charles Greeley Abbott, the head of the Smithsonian; William Cameron Forbes, the chairman of the Carnegie Institution; and Wesley Claire Mitchell, the founder and director of the National Bureau of Economic Research.


A former Vice President of the United States — General Charles G. Dawes — joins Dewey's Foundation. So does Senator Everett M. Dirksen and Michael G. Zahorchak, Vice President of the American Stock Exchange.


America's greatest industrialists, philanthropists, and investors finance Dewey's quest: Men like W. Clement Stone of AON Insurance ... Clarence Coleman of the Coleman Corporation ... Ned Johnson, the founder of Fidelity Investments ... and Alanson Bigelow Houghton, a distinguished congressman, a U.S. ambassador, and the chairman of the Corning Glass Works.

In the years that follow, the time-tested tools for timing the markets developed by Edward R. Dewey and the distinguished scientists who continued his research are used by major corporations, banks, brokers, and investment analysts worldwide.

Back to the Present

In the next hour, we will see how the Foundation's monumental discoveries can help you make more accurate and profitable "buy" and "sell" decisions — even in today's volatile markets.


The moderator of today's event is Larry Edelson. Larry is the editor of our Real Wealth Report and deserves the credit for introducing us to the work of Edward R. Dewey and to the nonprofit foundation Dewey created.

Larry has more than thirty years of experience working with investment timing tools and has developed his own tools based largely on the Foundation's vast body of research.

And we are especially proud to have with us today the Foundation's top analyst, Richard Mogey.

Richard Mogey is the Research Director of the Foundation and the successor to the distinguished line of three scientists who have held that position since Dewey.

My role today is to do my best to represent you, the investor, and to ask some of the questions you have been asking or would be asking — to be the skeptic and to probe for any deficiencies I may see in this approach. Go ahead, Larry ...

Larry Edelson: Richard, your Foundation is the repository of one of the longest term databases in the world. Its market information goes back as much as 5,000 years. Its scientists and contributors have made the study of this data their life's work. But before you tell us more about their work, first tell us exactly what Dewey and his team of experts learned about the causes of the Great Depression.

Richard Mogey: They learned something that came as a surprise to economists of that era.

Larry: And could also come as a shock to economists of this era!

Richard: Yes. They learned that, back in the 1920s, before the Crash, if any serious researcher had simply examined the historic data coldly and objectively, if any of America's corporate or political leaders had merely dropped their agendas and biases, they could have forecast the Great Depression well ahead of time.

Larry: And they could have done that by ...

Richard: By simply recognizing the patterns of history. Dewey discovered a very simple reality — that in modern, industrialized nations, economic expansions and contractions occurred in regular, oft-predictable patterns.

Larry: In regular waves — CYCLES!

Richard: Exactly!

Martin: I want to ask you the same question I asked Larry when he and I first began discussing this many months ago: If the pattern was so predictable, why did the Crash of '29 and why did the Great Depression come as such a shock to virtually everyone?

Richard: For the same reasons they're surprised by the economy's devastation today:

First, because no one with any influence was looking back at this historic data. And second, like today, even some of the smartest people in the world often believed only what they wanted to believe — that good times go on forever. But take a look at the pattern Dewey first saw in the 1930s.

We don't have the exact chart he was looking at, but if you go back to 1789, 140 years prior to the Crash of '29, here's what you see.

This is the rate of growth and contraction of the U.S. economy (black line) with an important cycle Dewey discovered — a major peak in the economy hitting regularly every 20 years (red line).



The actual peak came a bit earlier, sometimes a bit later. But the overwhelming bulk of the decline coincided almost exactly with the decline predicted by the cycle.

Larry: Can we focus in on the 1900s?










Richard: Sure. The 20-year cycle predicted a major peak in 1906; and sure enough, the economy began weakening in 1906.

The 20-year cycle then predicted another major peak in 1926. And that's precisely when the economic growth began to slow down. The key point is that the huge decline of that era coincides almost perfectly with the decline predicted by this cycle analysis.


With this research, someone living in the 1920s could have known not only that the economy would decline in the late 1920s, but also that the decline would be one of the worst in history.














Richard: By looking at the 60-year cycle in the economy (blue line in chart). This blue line predicted a Great Depression in the economy. It predicted that the Great Depression would hit its ultimate, rock bottom in the mid-1930s. And it predicted that, after the Great Depression, the economy would enjoy a massive, long-term boom for years thereafter.


Larry: All this was evident in the cycles Dewey saw in charts like these.


Martin: Imagine that! Imagine how the lives of so many people could have been so different if only they had some of this knowledge at that time in this format.

Larry: And imagine how the lives of people today could be so different if they had something like this before.

Richard: Just look at their 401ks!

Larry: But let's go back to the period before the Crash of '29. If I were sitting right here — in the 1920s, I could have looked at this chart ... and I concluded that a massive economic decline was imminent, I would have been absolutely correct.

Richard: Yes. Absolutely.

Larry: This is huge. Yet if we were living in the Roaring '20s, with the euphoria all around us, we would have had a tough time believing that a Great Depression was around the corner.

Martin: And an even tougher time convincing others!

Larry: Just based on one indicator — one chart?

Richard: No. The data Dewey discovered also predicted the collapse in consumer spending, a force that was vital back then and even more so today.

With just one exception in the late 1800s, the cycle declines coincided with the actual declines in consumer spending. Look how closely it matched the decline in the 1920s and 1930s!

None of these indicators are perfect. There's some variation, as always, but despite major wars that you'd think might disrupt the cycle, the periodicity — the time between each cycle — was quite consistent.

Larry: Bottom line, if I were an investor in the late 1920s, I could have simply looked at these economic charts and deduced that since the U.S. economy was due for a major downturn, it was time to take my money off of the table.

Richard: Well, if you had used strictly economic indicators, you probably would have taken your money off the table too soon. But you could have done a lot better if you also looked at the pattern of history in the stock market itself.

Martin: Then why didn't anyone do that?

Richard: We don't know if anyone did or not. All we know is that, even if they did, the overwhelming majority of investors paid no attention to them. The key is that anyone trying to predict the next big stock market cycle would have needed to look back beyond just the recent ups and downs. They would have needed to compile a composite of the Dow and other stock indexes in the U.S. and the U.K. going back to the late 17th century. And that's the type of analysis Dewey conducted.















From the 1700s through the 1920s, there were five major booms and busts; and at this point, Dewey saw several cycles. He saw the 20-year and 60-year cycles we talked about for the economy. Plus, he saw a shorter term, 40-month cycle, known today as the Kitchin cycle.

Most important, he saw how the cycles could have predicted the Crash of '29. That, combined with the economic cycles I showed you a moment ago, is what could have allowed you to truly pinpoint when to take your money out of the market — shortly before the Crash.

Larry: Or you could have done what Martin's father did — profit from the market decline itself.

















Richard: Yes. But if you think that's impressive, take a look at what the stock market cycles were saying in 2007!

Larry: When Wall Street was having a grand party ...


Richard: Yes, when the Dow was making new all-time highs at 14,000 ... and when most investors expected that party to continue forever. This is what we saw — and what anyone else could have also seen had they merely bothered to look at our chart. An obvious peak in the cycle in September 2007!

Martin: And you had this chart before the fact or after the fact?

Richard: Three years before.

Martin: Can you prove that?

Richard: Yes. We emailed a similar chart to our members in 2004. Then, we updated it and posted it online in 2007. This chart was shorter term oriented. But it showed the same cycle and it made the same forecast of a peak in September 2007.

Martin: Where online?

Richard: Barron's online.

Larry: Just before the bear market began, right near the highest peak of all time.

Richard: Yes.















Larry: So an investor who had $100,000 in Dow stocks at their peak in 2007 could have simply looked at this chart — right there on Barron's online — spotted the coming decline, sold near the top, and kept all or most of his $100,000.

Richard: But someone who held on to his stocks until the recent low would have lost about 55 percent of his money or $55,000.

Larry: And still another investor could have bought an inverse ETF on the Dow at that time, and more than doubled his money. So you're talking about one investor ignoring the cycle signal in your chart on Barron's online winding up with $45,000 in his account versus another, paying attention to your chart on Barron's and walking away with over $200,000 — all thanks to the work of Dewey, the people who came before him, and the work of your Foundation.


Richard: Provided people pay attention to what we have to say.

Larry: Richard, what never ceases to amaze me is how much data, how much brainpower, and how much serious, disciplined research has gone into this over the years. And what amazes me even more is how little attention the establishment in Washington and on Wall Street pays to this material today. Why do you think that is?

Richard: I don't know for sure. One reason may be simply that we have not done a very good job of publicizing our ideas. We are scientists and researchers. We are not marketers. Another reason may have something to do with our big-picture conclusions.

Our big-picture conclusion is that virtually all the cycles of history, going back thousands of years, are now coming into alignment and predicting a perfect storm — a cataclysmic crisis in the global economy like none other in centuries. And like their counterparts of the 1920s, the powers that be don't believe what they don't want to believe.

Martin: Or they think they can prevent it, that they're bigger than cycles.

Richard: Which is even worse. They discard the conclusions. So they discard the science and the data that support the conclusions.

Martin: This is a topic I'd like to explore in depth in Part 2 of this series.

Larry: I'd love to as well. But Richard, what I think would be more important at this juncture would be to give our viewers a fundamental sense of why these cycles exist and why they are so regular.

Richard: That takes us beyond the realm of economics to the very nature of our existence.

Cycles exist in all aspects of our universe. Every physical science fully recognizes cycles and studies them meticulously. The entire universe is driven by regular, rhythmic patterns: The pulsation of distant stars called pulsars and the rotation of our galaxy; the rotation of the Earth around the sun dictating seasons, the rotation of the Earth on its axis creating sunrise and sunset; the phases of the moon dictating the ebb and flow of tides; and the countless ways the human body and our entire society have internalized these cycles in culture, behavior patterns, and possibly even in our DNA.

Larry: Science recognizes this. Why don't investors?

Richard: Chiefly because investors are so subject to crowd behavior. So it's hard for most investors to step outside of the crowd and to recognize how they are being affected by the crowd behavior.

Larry: This is probably the most fascinating aspect of your work, and I know your Foundation gathers contributions from scientists in all fields — not just economics. But let's bring this discussion back to practical solutions that many investors have asked me about.

In essence, their question is: Does this cyclical behavior strictly drive the broader economy and stock market? Or does it also drive individual investments along their own paths, each with a unique cycle? And if so, can you use cycles to predict the tops and bottoms of individual stocks?

Richard: The answer is both. Step number one in our analysis is always to study the cycle pattern for the broader economy and stock market. Step number two is to look at the cyclical pattern of sectors, each of which has its own typical characteristics.

Larry: Such as an infrastructure cycle, a construction cycle, a technology cycle.

Richard: Good examples! The third step is to drill down to each individual company, which can have its own cyclical pattern driven by its special history, its natural long-term swings from aggressive to conservative business practices, by the R&D cycles, and more.

Larry: What I find so intriguing about this is that you can tell me what the expected cycle is for each and every stock or commodity for which there's historical data. And that cycle forecast is a tool I can use every day to help me time my "buy" and "sell" decisions.

Martin: It's not perfect.

Larry: Of course not, Martin. But the study of cycles adds a major dimension to timing — not just in the long-term horizon like we saw a moment ago, but especially with short-term trading. Richard, last time we spoke, you said you would bring some illustrations. Can you go through those with us?

Richard: Sure. I have three recent examples here that we've been tracking. First, consider Apple Computer. If you had started in 1997 and you began investing with $10,000 trading this stock based on its cycle pattern, you could have turned $10,000 into $363,729.























Martin: I assume that performance comes with risk of loss.

Richard: Of course.

Martin: When did you discover this cycle in Apple? Was it well before that period or are you using 20-20 hindsight?

Richard: We found it in the 1980s and we first published our findings in 1988. I also want to clarify that I used a 2 percent stop. So if the stock fell 2 percent below the entry price, we would count that as an exit point.

Larry: Hypothetically, let's say I bought Apple on November 19, 1997. How much could I have made?

Richard: Actually, your first trade would have been a loss. You would have lost about $2,800, leaving you with only $7,194 in your account. But you would have recouped that loss in the next trade. Going forward, you would have had 17 losing trades and 38 winning trades.

Larry: Can you give us some other examples?





Richard: Aeropostale, a big national retail firm. In this stock, we discovered a nine-week trading cycle — and it's been so consistent, you can almost set your watch by it. If you had you invested $10,000 in the stock back in June 2002 and if you had bought and sold on every cycle turn — today you could have turned $10,000 into $69,208. 39 trades, with 12 losers and 27 winners.


Or consider Green Mountain Coffee Roasters, where cyclical analysis could have transformed $10,000 into $337,849!


Larry: Despite the worst economic crisis since the Great Depression!


Richard: Yes, despite the worst crisis since the Great Depression.


Larry: All of the results we've shown so far are without any reinvestment of profits, taking 100 percent of your profits OUT of a hypothetical account after each and every trade, and setting that cash aside. But I've worked with Richard to show how much you could have achieved with reinvestment of profits after each trade.

Martin: That's truly aggressive and high risk.

Larry: It is, and we are not advocating that approach. But I just wanted to give our viewers a sense of how powerful this form of trading could be.

Martin: Only in theory. Because in the real world, it might not be feasible to trade the large quantities of shares you'd have to trade as you build up a larger and larger position in the shares. Nor would you want to put that much money into just one stock.

Larry: Correct. But I want to convey the idea that if you did want to grow your positions with some portion of your profits, you could have done a lot better.

Martin: That's fine. As long as we don't raise investor expectations to lofty heights.

Larry: Agreed.

Martin: What about broker commissions? Have you taken them out?

Richard: No. That varies from broker to broker.

Martin: How representative are these examples?

Richard: They're not representative of the entire universe of stocks because we've selected stocks with high volume, good capitalization, high relative strength, and consistent cycle patterns. But they are fairly typical of those stocks that meet those parameters. I didn't pick them for how much profit they'd make. I picked them based on those objective criteria.

Martin: Plus, everyone should understand that short-term trading may be too aggressive for some investors. My next question: Is this real money or is this hypothetical?

Richard: It's hypothetical. Our Foundation is a non-profit research organization. We are not trading advisors. And we do not issue buy/sell signals.

Larry: But I do, and in recent months, I've been using the Foundation's work.

Martin: How do you use it?

Larry: I don't use it as my exclusive indicator. I have not tried to trade stocks in and out like Richard has illustrated with these examples. But I have used it to help me time market decisions I am already considering based on my fundamental and technical analysis.

Martin: And how has it helped you?

Larry: So far, I am extremely pleased and I believe my subscribers are as well. May I give you some specific examples?

Martin: Go ahead.


Larry: Back in March, I felt China's economy was about to spring forward again. Then, when I ran some studies using the Foundation's work, it confirmed that the Shanghai Composite Index would bottom in mid- to late March. Since U.S. investors cannot buy the Shanghai Composite, I use FXI, which is the U.S.-based exchange-traded fund that tracks a portfolio of similar Chinese stocks.

Richard: The red line on this chart is the Foundation's forecast. The black line in the chart is the actual stock price.

Larry: Right. And as you can see right here, it signaled a bottom in mid-March.

Martin: So that was the time to buy?

Larry: Based exclusively on the Foundation's cycle work, yes. But I waited for a confirmation. I waited for the market to break up through its downtrend line, which happened about a week later. To me, that confirmed the cycle low, and that's when I published a buy recommendation on FXI. End result: The FXI is now up over 46 percent — in just two and a half months.

Here's another example: the gold stock, Goldcorp.




My work, along with the Foundation's, showed a breakout due in late March, followed by a re-test of lows in late April. See that spike on the chart, where I've drawn the arrow.

That's where the cycle low in January was confirmed, and that's where I recommended Goldcorp. After a little zigzagging in April, the stock is now up almost 22 percent, in less than three months.



And then there's oil, where the Foundation's work helped me peg the low for oil back in late March/early April. I used this chart to position my readers in an oil ETF. And that ETF rose by more than 30 percent, also in less than three months!
Martin: Did you recommend leverage in those cases, or just stocks and ETFs?

Larry: Those were just stocks and ETFs. I also recommended options in similar instruments, and naturally, those did even better. I use cycle analysis as a market timing tool. I don't use it to tell me what to buy or sell. Nor do I use it to tell me how far the market will move. I just use it to help me answer the all-important question of WHEN! But that's precisely the missing piece I need.

Martin: So you don't recommend using it in isolation from other analysis.

Larry: No, I don't. But don't underestimate its importance there either. The Foundation's work provides an overarching, unifying theme that can cast a whole new light on virtually all economics and technical analysis.

Martin: For stocks.

Larry: No matter what I'm investing in — stocks, bonds, commodities, currencies — and no matter what economic indicator I'm looking at — unemployment, GDP, leading indicators — unless I know what cycle we're in and unless I know at what stage of the cycle it is, I feel lost, a ship without a compass.

Richard: So before you start investing, you should always ask those two questions:

What kind of a cycle is this? It could be a long-term cycle, a medium-term cycle, or a short-term one. And ...

• Where are we in this cycle? Near the beginning, in the middle, or near the end?

Larry: It's a total paradigm shift for most investors. For years, they've been told about fundamental analysis and technical analysis. And for years, although helpful, those tools alone have not been helpful enough. Now, by adding this third dimension — this timing dimension — you're on track to solve the part of the puzzle that fundamental and technical analysis alone cannot solve.

Richard: As Edward R. Dewey said, "All science that has been developed in the absence of cycle knowledge is inadequate and partial."

Larry: Exactly. But by combining fundamentals, technicals, and cycles, you can get the whole picture. You can figure out WHY a stock is likely to make a move ... you can judge how FAR it's likely to go ... and often most important, you can get a good reading on WHEN it's likely to move.

Martin: Last week you told me that, in this
event, you were going to review the Foundation's record for each of the major markets — gold, stocks, bonds, etc. So before we run out of time, can you focus on them?

Larry: Absolutely. I've put together a short list of some of the most outstanding calls in other major markets. Here it is:

• Soybeans: Giant top in June 1973
• Silver: Historic high, January 1980
• Crude oil: Historic high, March 1981
• Interest rates: All-time high, September 1981
• Stocks: Big bottom, August 1982
• Stocks: Great Crash of 1987
• The massive bull market in stocks between 1995 and 2000
• The February 1999 low in oil
• The June 2001 low in commodity prices
• And as we said a moment ago, the September 2007 high in the stock market!

Martin: Can you give us some illustrations of the practical value of this for investors?

Larry: Are you kidding? Do you want me to tell you right now how much money you could have made if you caught those huge moves?

Martin: I get the point. But I assume there were some false calls as well.

Richard: Of course. Now you're talking about error metrics, and that's something we take very seriously. It's a critical aspect of our analysis and the continuing development of our software tools.

The first type of error is when the timing is off. The cycle bottom or top does come, but it comes sooner or later than expected. That's usually not a big problem.

The second issue is when we predict a major turn and only get a minor turn. That's also not a serious problem.

The third type of error, which can hurt unsophisticated investors, is what we call a "cycle inversion." The timing is accurate. And a major turn does happen around when we expect it to.

But instead of a top, it's a new bottom; or instead of a bottom, it's a new top.

Larry: The market moves, but the wrong way. Even there, though, I find the Foundation's forecast still has value because it helps me pinpoint when the move is likely to begin.

Richard: Yes, and that's especially helpful for more sophisticated trades, such as in options trading, straddles, spreads, etc.

Larry: Richard, given this remarkable track record, everyone watching this presentation, ourselves included, is anxious to get some of the Foundation's current forecasts. Let's look forward a little bit.

Richard: I'll start with stocks. Our short-term cycle work is showing U.S. stocks are due for a correction to begin right now. Our big-picture cycle work, like I said earlier, is predicting the perfect storm and a huge bear market in stocks.














Martin: That's in sync with my thinking.

Richard: I know it is. But let me show you something that may not be in sync with your views.

Martin: OK.

Richard: Our medium-term work shows that, after a correction, stocks will stage a rally that could continue until year-end.

Martin: I can see that plainly from this chart. But do you really think stocks could go that high?













Richard: No.

Martin: So you don't believe your own chart?

Richard: I didn't say that. It goes back to what Larry said earlier. This work is very helpful in telling you when a market bottom or top is likely. It should not be used to tell you how high or how low it will go. It's good at picking turns. It's not good at picking price targets.

Martin: That's your medium-term work. What's your long-term outlook for stocks?

Richard: After a failed rally, you'll see another three-year bear market taking us into new lows, and hitting rock bottom in 2012, which comes with our perfect storm scenario.

Larry: Fascinating. Let's talk about the dollar.
Martin: This is extremely important. The future of our entire country revolves around, or can be measured by, the future of the U.S. dollar.

Richard: For years, the Foundation has been predicting a major decline in the dollar beginning in 2001 ...

Larry: Which is when the dollar began a big slide.

Richard: Right, and ending in 2013. In other words, we're looking at a massive 12-year decline in the dollar that still has three more years to go. The only good news for the dollar is that we think it will eventually recover after this massive decline.

Larry: Although I have seen these charts many times before, no matter how often I see them, it's always intriguing to see the future drawn out with such precision. We all know we cannot predict the future. We all know we have no crystal ball and this certainly isn't one either. But still, it gives us something far more concrete to hang our hat on than we're used to having. It helps you visualize the probability of future market moves.

Richard: As long as you don't let the precision of the charts fool you into thinking it's written in stone ... as long as you remember the error factor.

Martin: Gentlemen, I appreciate your frankness regarding the errors and regarding some of the limitations of this analysis. But despite any limitations, I am convinced it is an extremely helpful, sometimes absolutely essential, timing tool.

Now this brings me to one of the most exciting announcements we've ever made in the 40-year history of my company:

Weiss Research has just acquired the exclusive distribution rights for all of the Foundation's economic and financial data going back thousands of years, and for all of the research or tools built on that data.

And two months ago, we kicked this project into high gear. The experts and principals of the Foundation flew to the Weiss Research offices, and all the Weiss Research experts flew in from across the globe. We held one of the most amazing workshops and most intensive learning experiences of a lifetime. Now, we are finally getting ready to make it available to our members.

Larry: Congratulations, Martin. This is a major coup for Weiss Research and for you personally. No one else has the access you have to this data and analysis on the markets, on thousands of stocks, hundreds of commodities and natural resources, like you do now. And given the crisis the world is experiencing, the timing couldn't be better.

We have the obvious failure of establishment economics to predict this crisis. We have the failure of technical black boxes to make money, even for supposedly sophisticated hedge funds. So under this dark cloud of uncertainty, you and we now have what it takes to help provide better clarity of vision for investors and traders.


I think our readers are anxious to start using this missing piece of the puzzle to gain a big strategic advantage in the markets.

Martin: And that's exactly what we're going to do next. But we've run out of time today. So on Tuesday, June 30, we're hosting Part 2 of Solving the Timing Mystery to show you how.

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