Russell on Gold
OK, for the sake of argument, let's say Bob is right and gold goes to 200
>>When the US public finally becomes interested in gold, they won't buy the metal, they will buy the gold shares. That hasn't happened yet. In time it will -- when the second phase of the gold market arrives, we will see the public come in, and at that point we will see the gold shares join the parade, join it big time. But all that lies ahead.<<
Richard Russell
Dow Theory Letters
5 February, 2003
January 5, 2003 -- Some interesting facts and statistics. Investor's Intelligence's latest poll of advisors shows that 50% of advisors remain bullish while 26.1% are bearish. So what in the world would ever turn the majority of advisors bearish? My guess -- only a violation of the October lows.
The "Commercials" (gold banks, hedged gold mining companies) on the latest week have raised their gold shorts by 5,000 contracts to a new high of 149,177 contracts sold short. And yet gold continues to rise. Could the Commercials be in one of those extremely rare situations where they are just plain wrong? We'll see.
The total volume of the entire US equity market is roughly $10 trillion. The 30 Dow Industrial stocks are valued at about 25% of the $10 trillion. So is the Dow worth following? You bet it is. My old friend, Bob Prechter has been saying that what we're in is an upward correction in a basic gold bear market. Bob has a wide following, and he's as smart as they come. Bob has also been saying that gold is now topping (although he concedes that gold over 390 will cause him to revise his thinking). Finally, Bob believes that "the gold bear market" will end with gold selling at around 200. OK, for the sake of argument, let's say Bob is right and gold goes to 200.
Bob is also talking about the bear market in stocks taking the Dow to below 1000. If the Dow sinks to below 1000, it will have lost around 87% of its current value. If gold sinks to 200 it will have lost 45% of its current value. In other words, you would still be better off holding gold than common stocks, and we're talking about the Dow, not the general run of stocks that would probably do a lot worse than the Dow.
Furthermore, if the Dow were to sink to 1000 the Fed would be on its way to literally destroying the dollar (which they're doing now anyway) in its effort to reinflate. The Fed has already stated that it has a "printing press" and it will use it, if necessary, to fight deflation. Since gold is denominated in dollars, how could gold drop to $200 in the face of a dollar that is being literally wiped out? The answer -- it's impossible -- unless the Fed turned around and embraced deflation.
Conclusion -- I don't see any way that gold could sink to $200, and if somehow it did, it would still be the best thing to own. How about other currencies? If the Dollar was destroyed, since most nations own the dollar as reserves, the entire world would be in a state of severe deflation, in which case I would still rather own gold.
Right now investors are divided into two camps -- those that believe that inflation is our future, and those who believe that deflation is our future. Those who believe that deflation is our future are buying the "safest" bonds, which are US Treasuries. Thus, the rising 30 year T-bond, which is confounding all the experts (including the Pimco crowd) by pushing close to recent highs.
But deflationists are also buying gold on the thesis that if we go into deflation, the huge towers of debt will crush the nation, and in which case the safest place to be would still be gold.
As for those who believe our future is Fed-generated inflation, they are obvious buyers of gold on the thesis that the dollar will ultimately go to hell.
Thus both inflationists and deflationists can make a case for buying gold.
Here's the Russell case for buying and holding gold
Each year there is less production of gold, meaning the actual supply/demand equation is favorable for gold.
China and Asia are exporting deflation, while the Fed is fighting deflation by inflating the US money supply.
The US trade deficit is going through the roof. This is putting increasing pressure on the dollar. The Bush administration will be generating massive deficits as far as the eye can see, at least $1trillion over the next five years.
The existence of terrorism will mean that the US is on the path of endless spending for security.
The dollar is in a bear market that promises to take the dollar vastly lower over a period, not of months, but of years.
US citizens, cities, counties, states, and the federal government are up to their eyeballs in debt. The only financial item around that has no debt against it is gold, the only real money.
Third world nations are not honoring their debts, thus faith in debt and paper money is declining rapidly.
All the above point to an almost unique situation in favor of real money -- gold.
Further comments -- I'm asked how high I think gold can go? My answer is that I don't know, I can only guess.
One guess is based on the thesis that I believe we are still in the first phase of the gold bull market. This is the accumulation phase. At this point the public doesn't even know how to buy gold. How do I know this? I know because I receive e-mails every day from younger subscribers who ask me how or where to buy gold.
When gold went into it climactic bull market phase during late-1979-1980, gold topped out at 850. To convert 1980 dollar to current dollars multiply by 2.1819. Thus gold at $850 gold converts to gold today at $1,853.
Thus if the current gold bull market was to take gold to a comparable 1980 high, gold would rise to above $1,800. But in my opinion, the current situation is far more serious than it was in 1980 -- and far more bullish for gold.
This gold bull market is still in its first (psychological) phase. It still most go through its second phase which will see the entrance of the public and the funds. Then in the final phase gold will become highly speculative as in late-1979. How high could the third phase of this gold bull market carry the yellow metal? You make the call.
My thought -- based on my own experience with bull markets -- gold will ultimately carry farther than anyone today thinks possible.
The problem for my subscribers who own gold and gold shares -- to have the guts and faith to hold their gold coins and shares through all the threats, corrections, rumors, and scares that will materialize all along the way -- until the gold bull market ultimately "blows its top."
Final question -- Why aren't the gold stocks keeping up with gold? Aside from the fact that first one, then the other, makes its move, the gold shares are more of a public item. Big money tends to buy the metal. Nations buy the metal for their reserves. Indian women wear the metal on their bodies.
When the US public finally becomes interested in gold, they won't buy the metal, they will buy the gold shares. That hasn't happened yet. In time it will -- when the second phase of the gold market arrives, we will see the public come in, and at that point we will see the gold shares join the parade, join it big time. But all that lies ahead.
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