Russell on real money, better known as Gold
Richard Russell
Dow Theory Letters
March 18, 2003
Gold - There are two main scenarios regarding the future of the US, at least two which I take seriously.
The first is held by a number of highly intelligent people such as Bill Gross. This scenario holds that the US is headed for increasing inflation as the Fed is forced to print new oceans of money to cover our continuing deficits and debts.
The other scenario held by such analysts as Bob Prechter and James Dines is that we face a deflationary depression, as the bear market bears down relentlessly on the mountains of debt that is built into the US economy at every level.
Assuming that one of these scenarios is correct, what is our salvation as investors? In both cases, I believe the salvation of investors is real money, better known as gold.
In a major inflation, the purchasing power of the dollar is sure to decline. If that happens, the case for gold is obvious enough. As the value of paper money declines, the value of real money (gold) will become clear, even to the most stubborn anti-gold element.
In a major deflation, the pressure on business would be relentless. In this case, the Fed would go all out to fight the forces of deflation. Fed Governor has already announced that the Fed would not hesitate to use its chief weapon, its "printing press" to fight deflation. The Fed would also bring interest down to zero or even to a negative level, and it might even turn to buying stocks if necessary. So in the case of a deflationary depression, the Fed would flood the world in liquidity, putting massive pressure on the dollar -- and here again investors would turn to the safety of gold.
I continue to see this area as the accumulation area for gold. I believe that history will look at the wide fluctuations of gold and gold stocks in this area as "minor" and unimportant. The real moves in gold lie ahead, perhaps many months and even years ahead.
Right now, I suspect that there is a great deal of manipulation in gold. Mines that are hedged are trying to unwind their hedge positions and they therefore have an interest in gold holding steady or certainly not rising. Large investors and governments who are in the process of accumulating gold don't want higher gold at this point. Central banks, who view gold as the enemy, certainly don't want higher gold. Thus gold is fighting important interests, none of which want higher gold prices.
These interests have a problem, however. The problem is that they are pitted against the most powerful force in the market, the primary trend. The primary trend of gold is bullish, and in due time this will become obvious to the investing public. When that happens, gold will be moving into its second psychological phase.
April is the active contract for gold. The 200-day moving average for April gold stands today at 330.90, and the 200-day MA for gold is in a rising trend. The stochastics for gold are just turning up. It continues to be accumulation-time for gold and gold stocks.
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