Outlook for the U.S. stock markets and interest rates
1999 Stock Outlook: Review and Update
Outlook for Ex-Soviet Equities
Outlook for Gold
Outlook for Small- and Microcap Sectors
Outlook for Initial Public Offerings
Outlook for Global Stock Markets
Outlook for Gold
In November of 1997, I raised a few eyebrows at the 1997 Taipan Annual Conference when I called for a collapse in gold to US$280 per ounce. I raised even more eyebrows when I called for a new bull market in gold -- after the catastrophic plunge to US$280.
But at the 1998 Blanchard conference in New Orleans, just a year later, I couldn't find anyone who was interested in gold. And Blanchard used to be to precious metals what Monte Cassino was to the German Wehrmacht...the last bastion of the goldbugs. Former goldbugs have disavowed the metal. Geniuses (who missed the entire 35% decline to US$280) are proclaiming the "death of gold."
I have never seen more pessimism, apathy, and antagonism towards gold among its most fervent disciples -- just what you would expect to occur at the bottom.
Damned if you don't
When markets are at significant turning points, market sentiment is always caught the wrong way. After taking the goldbug fanatics to the cleaners for decades, gold is about to crush the gold shorts...
Gold has a massive short position. Between gold producer hedging and speculative selling, gold has a short position equivalent to five years of production. Any kind of sustainable rally will trigger a mind-boggling frenzy of short covering.
The death of deflation
In a monetarily functional economy, booming money supply and falling rates tend to stimulate inflation. When people are more willing to spend than save, prices of goods tend to rise.
If an economy is flush with cash, credit is cheap, and return on deposits is low. People tend to spend now and defer savings. This can become self-reinforcing, since rising prices punish savers and reward spenders.
But inflation is coming back. Money and credit are loose. Central banks all around the world are creating liquidity. If the economy were not monetarily functional, then the stock market would not be booming. Loose monetary conditions are doing their trick.
It's only a matter of time before inflation shows in headline economic statistics. And at the first sign of inflation, gold will enjoy a massive rally as it plays its traditional role as an inflation hedge.
The New York Times recently ran a front-page story in its business section on the coming of deflation. Again: Just what you would expect at the to tail end of a deflationary cycle.
Last year, Taipan predicted that deflationary pressures would trigger one final collapse in gold to the US$280 level. Now that the deflationary cycle has ended, now that gold is dirt cheap, mainstream investors (and fringe goldbugs) won't touch gold. In fact, the New Yorker magazine ran an article about the favorite investments of celebrities. One of them was to "short gold futures."
Y2K panic
I don't believe that the dreaded Year 2000 computer bug will destroy civilization. Yes, there will be some inconveniences. Maybe even tragedies.
What's far more likely to happen is this: a short-lived Y2K panic. Apparently, Hollywood is releasing a summer blockbuster about Y2K next year, probably in early summer. My guess is that this will be sufficient to take the Y2K doom-mongers away from supermarket tabloid prominence in the Weekly World News, and out of the newsletter kook corral -- and put them smack dab into the public limelight.
PR-sparked public panic could easily hit in the first weeks after the movie's release, and could result in short-term hoarding of oil, food, and gold...at least until the suspiciously bad-looking 1999 summer blockbuster Star Wars, the Early Years hits a movie theater near you.
My chips are on a Y2K-triggered run on gold and other commodities. To position your portfolio for a huge run in commodities late next year, I recommend building up positions in gold and commodity-related plays.
Sign of things to come
Gold stocks
usually lead the metals. The stock market is a "discounting
mechanism". You would expect gold stocks to firm in front
of a gold rally. Since gold is still trading below US$300 per
ounce, you need to look at the top-tier gold stocks for any signs
of changes in market dynamics.
Blue-chip gold stocks are strong. If gold were going down the toilet, the blue-chip producers would be weak. But stocks like Ashanti Goldfields (ASL-NYSE) are firm, suggesting that an upside breakout in gold may be imminent. (For my specific recommended buying range of Ashanti, please turn to Page 14.)
Once gold breaks out, it will be too late for contrarian value investors to get in. The time to buy is when gold is weak. By accumulating a position now, you will be in an excellent position when momentum traders start chasing gold up to ridiculous levels.
Taipan's Forecast for 1999:
Taipan predicts a rally in gold to US$330 per ounce by mid-1999. By early 2000, gold will trade as high as US$380. The initial breakout may be imminent. The money will be made by buying before the breakout.