Richard Russell On GoldBefore I forget, since the Scudder gold fund is closed to new-comers, here are some gold funds that I like.American Century Global Gold Fund -- (no load).
Tocqueville Gold Fund -- (no load).
The three charts below are charts of three gold stocks that I like, and although they have already come a long way, I feel that every "gold-bug" should own all three.
These three gold shares are in bull trends and have been working higher ever since 2000. I wrote yesterday about the psychological phase of the gold bull market that we are now in. We are now in the early phase that tests the patience and guts of those who hold golds.
Actually, I liken holding gold stocks today to holding common stocks in 1975 or in 1980-82. Of course, these were very advantageous times to be buying and owning stocks, but those of us who were doing the buying and holding at those times suffered many a stomach-churning moment or I should I should really say stomach-churning days or even weeks.
As a general rule, if you're not sweating when you're buying stocks, you're not buying "right." Buying values when nobody wants them is never easy. It's generally profitable but never easy.
As for today's stock market, we're getting lots of hype and help now -- hype from the Fed via weekly pronouncements of "better times a-coming," and help from the Fed in the form of freakishly low short rates and copious quantities of liquidity.
The formula for investment returns is that when the S&P price/earnings ratio is 20 or higher, the expected median rate of return going ten years out is about 5%. Since the trailing P/E for the S&P is now just below 30, my guess is that those who purchase stocks here will be lucky to show any positive returns at all over the coming ten years.
Dr. John Hussman uses a multiple of record earnings over the last ten years in valuing stocks. When stocks sell at or near 20 times record earnings, history shows that stocks are drastically overpriced.
According to Barron's, the year 2000 saw the Dow produce record earnings of 485.14. With the Dow opening today at 9624, the Dow is selling at 19.94 times record earnings. This puts the market in the area of extreme overvaluation.
Long-term gains depend on what price you buy your stocks at. If you buy stocks with the Dow or the S&P selling at or near 20 times record earnings, you are asking for trouble. At great buying areas near bear market bottoms, the Dow and the S&P were selling at single-digit times record earnings.
I suggest that subscribers turn to John Hussman's site, and read his material on values and when to buy. I have found it the best and most informative information on values that is available. Be sure to read Hussman's article, "The Two Essential Elements of Wealth Accumulation." And it's free. (www.hussmanfunds.com).
The two "essential elements" that Hussman is referring to are right in line with the Russell thesis of COMPOUNDING. Hussman's two "essential elements" are the number of years that an individual has been saving and investing -- and the proportion of funds that the investors has allocated to higher return investments.
And here the problem is that it is very difficult in this overvalued stock market to find high-return investments. After all, the yield on the S&P is down to a mini 1.7%. Thus, when buying stocks today for total return you have to depend to a large degree on price appreciation without the help of dividends (a great number of stocks today pay NO dividends at all).
But it is well to remember that over the years, half of the total return from stocks has come from dividends. So where does that leave us now, as far as picking "higher-return" investments? It leaves us in a very difficult place. Actually, you could make a case that muni bonds paying 5% or even long-term government bonds paying 5% doing better than common stocks over the next ten years.
Or you can make a case for simply staying in T-bills and waiting for the bear market to "ripen," rather than trying to make money investing in stocks that are selling at current sky-high valuations.
Along these lines, I note in Bloomberg news that Warren Buffet has made "significant" foreign currency purchases in the last year and a half in a bet that the US trade deficit will erode the dollar. In a letter published in Fortune.com, Buffett said that "our trade deficit has greatly worsened, to the point that our country's 'net worth' so to speak, is not being transferred."
Dollar vs. Euro -- There's a silent war going on between the dollar and the euro. In the background is Russia, and note that Putin has recently declared that Russia is part of Europe. Note also that Russia has stated that it is thinking of selling its oil in euros instead of dollars (almost all the oil in the world is sold for dollars). The Arab nations have also talked about selling oil for gold or for euros, but that's another story.
The fact is that two-thirds of the reserves of the world's central banks are in dollars. And as the dollar declines, thoughts of "diversification" come to the fore.
There is weakness in the fundamentals behind both the dollar and the euro. The weakness of the euro stems from the stagnation in the euro-zone economy, and the over-regulations and union power. Nevertheless, Germany just announced that its exports hit a record, leading the world and now ahead of the US. And the euro-zone has a positive trade balance.
The US weakness comes from its huge twin-deficits -- a budget deficit of half a trillion dollars and a trade deficit, also half a trillion dollars.
Of the two, I believe that the US position is the weaker, since it is a dollar and cents deficit, and it's hard to envision the twin US deficits improving over the foreseeable future.
There are elements in Europe that would like to give the US its "comeuppance," known as knocking it off its thrown. This is impossible from a military standpoint, but it is possible from an economic standpoint. Remember, the reason the US remains relatively prosperous is that the US owns and creates the worlds' reserve currency. This allows the US to get away with "economic murder" by paying off its debt with paper that it turns out at will and at no cost.
Any attack on the dollar is also an attack on US world supremacy. Since the US has the ability to "print" its own prosperity, it's the Russell view that this process is both outlandish and unsustainable. When you think about it, it's truly illogical. Thus, I say the dollar's happy life as a reserve currency is limited. It will not last. Ten, twenty, fifty years from now when the dollar is just a memory, economists will look back at this period and say, "What in God's name was the rest of the world thinking?"
The new "paper era" began in 1971 when Nixon slammed down the gold window and the world went off anything resembling a gold-backed currency. The world in 1971 entered the new world of fiat-paper with the US as king. Never had one nation received such an incredible gift, the gift of creating prosperity without work or sacrifice.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsfOctober 30, 2003
The inimitable and venerable Mr. Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.
