Richard Russell On Gold
THE PICTURE: I don't believe most people understand the dilemma that the Fed has put us in - and I'm talking about you and me as investors. Of course when I refer to the Fed, I'm also talking about the whole central bank system, and the issuance of fiat currency, currency that can be created "out of thin air" at the whim of any central bank.
If you go to a party, and the party gets rather wild, and you drink more than you should have, then you get drunk - and you might even get very darn drunk. Probably a lot of my subscribers have been in this condition, and if you have, you know that "coming down" can be mighty painful - and you will probably be dealing with what is known as a " severe hangover." Is there any way of avoiding the hangover? Not that I know of - coming down after a "big drunk" is painful and very uncomfortable. Of course, if you are a confirmed alcoholic, you may prefer to remain high and thus avoid the pain of "coming down."
And that is where the Fed has put us. Following the third phase of the great bull market, 1996 to 2000, the Fed decided that there should be no pain - the Fed would just attempt to skip the pain by keeping the nation in a state that I would term as "high." The Fed did this by flooding the system with liquidity and driving short rates down to 45-year lows. Today a T-bill will bring you less than a 1% yield - money market funds even less.
In a "normal" market, you have a number of sensible or reasonable choices. You can buy stocks, a home, bills, notes, bonds or all of them. But look at our choices today. Because the Fed has driven short rates to ridiculous lows and because the Fed has flooded the system with liquidity, the Fed has forced investors either to speculate or to forego anything resembling reasonable income. The Fed has, as I see it, declared war on investors and particularly on savers.
If we buy stocks here, we are buying stocks at a time when the S&P is selling at 30 times earnings while yielding 1.7% before taxes. We are also buying stocks within the context of a primary bear market. Thus, we are buying overvalued stocks - and buying them against the primary trend. This is, to my mind, tantamount to gambling. It certainly is not investing. Since stocks pay little or nothing in the way of income, we are really buying expensive stocks in order to sell them to "a greater fool." Good luck.
If we want to be safe, normally we can buy T-bills. But today T-bills pay next to nothing, and we have the currency risk, meaning that despite the low yield we still have the risk that our money will lose value in international markets because the dollar is in a bear market.
How about income? For anything resembling guaranteed income we buy bonds, and, of course, the "safest" bonds are Treasury bonds. But here we have the twin-dangers of Fed-sponsored inflation, and a declining dollar. The Fed has announced that it's following a policy of inflation to thwart their avowed enemy, deflation. Our government has implied that it would be happy to see a lower dollar and will do nothing to try to halt the dollar's descent.
Knowledgeable investors opt for safety first, income second, and potential appreciation last. Is there any investment or vehicle that provides all three at this time? My answer is a flat "No." This places you and me in a very difficult situation. In the present situation, my answer is that we have to chose safety.
The Fed has greatly increased liquidity, and this has resulted in asset inflation. This has meant rising stock prices and rising home prices. Stocks and homes are now priced at dangerously high levels.
As I see it, the only "safe" investment today is gold. Gold is pure, unencumbered wealth. Gold is money, recognized as such around the world. If inflation continues, gold will do well, since it will simply take more dollars to buy a specific quantity of gold.
If deflation takes over, then the task of carrying the massive levels of debt in this country will cause such hardships and so many bankruptcies that we could see a run on the dollar as foreigners question the wisdom of holding dollars or dollar-denominated assets at all. The alternative to the dollar would be to hold other currencies or gold.
Up to now, the best bet has been a bet that inflation would continue. But very recently we have seen the turnover or velocity of M-3 slow down. In fact, last week M-3 broke below its 20-week moving average for the first time since July 1994. And some observers are now wondering whether the Fed has "run out" of its ability to stimulate the economy. To put it another way, the money is there, but the consumer may not be using it. God help us, consumers may be cutting back on their spending and even thinking of ways to save. If this happens, my guess is that the Fed would open the flood-gates even further, which would, if anything, send the dollar down to still lower levels.
INVESTMENT POSITION: All of this comes down to the following. The rich man, the fellow who doesn't need any income is in the best position, because he can load up on gold. Gold is ultimate safety, but gold pays no interest. Everybody else is faced either with speculating for total return or opting for income which means buying bonds or possibly utility stocks. Here are two gold funds that I like American Century Global Gold Fund -- 1 800 345 2021 (no load) and Tocqueville Gold Fund -- 1 800 697 3863 (no load).
But underlying all US investments is the problem of the declining dollar. So aside from gold, this leaves us with one other choice. Investments denominated in foreign currencies. Foreign currency funds that I like are ING Russia Fund -- 1 800 526 0056 (no load), Mathews Pacific Tiger Fund -- 1 800 789 2742 (no load) and Morgan Stanley India Fund -- closed-end fund traded on the NYSE as IIF. Here we have a collection of open-end and closed-end funds. Take your choice. Personally, I've recently bought limited positions in GIM and FCO. Other closed-end funds that I like are GRR, APB and TDF.
I continue to receive e-mails from subscribers who wonder how to buy gold. Call my old friend, Leon, at 858 459 2228. If you happen to visit Leon here in La Jolla, be prepared. He doesn't shave a lot, but he's honest, knowledgeable, and I've known him and dealt with him for 30 years.
CHINA: China, India and Asia are changing the economy of the world. Let's check out some facts and statistics on China alone. In this year alone, China's exports are up 32 percent, now passing France's total exports. China's economic growth is somewhere between 8 and 11 percent.
China is becoming a big importer. And as prosperity hits China, imports are rising. This from today's Wall Street Journal - "China Saps Commodity Supplies. From steak to iron ore to cotton to diamonds, China's rising urban incomes, exports are reshaping the world's commodity markets. The country's emergence as a major importer of raw materials is driving global prices higher and catching some suppliers flat-footed."
Scores of multinational firms are moving their production facilities to China. Since 1990, foreign investment in China has surged from $25 billion to more than $450 billion.
In 2002 the US accounted for $125 billion or about a third of China's export total. This veritable flood of cheap Chinese goods has put a ceiling on many prices in the US. Pricing power is dead.
All Asian nations look for trade surpluses with the US. In 2002 China's surplus with the US was $103 billion, Japan's was $70 billion, Taiwan's was $14 billion. But more and more, China is trading with other Asian nations.
The US has been putting pressure on China to revalue the renminbi, claiming that China is taking away millions of US jobs. But better than 60% of China's exports are from goods stemming from US and other nations' factories.
Will the Chinese give in to the pressure to revalue? China's Communist leaders naturally want to stay in power. To do that these leaders must create jobs. Check this out - every year 22 MILLION Chinese come into the Chinese work force. Thus, China is faced with the unbelievable job of employing ever-growing millions of young Chinese. Will China give in to pressure to revalue the renminbi and thus make Chinese goods more expensive and less competitive? You be the judge.
Russell opinion - in due time the renminbi will be made convertible. I believe it will have gold backing, making the renminbi one of the strongest of all currencies and directly competing with the fiat US dollar.
I'm not even going into the question of India, which shortly will have a greater population than China. Two items, however, stick in my mind. Unlike the Chinese however, most Indians speak English. And India has 200,000 engineers. Mull that over.
WAR OF CURRENCIES: As I write, the Reuters CRB Commodity Index stands at 247. Gold is down over three dollars and is holding at 380, copper is near its highest level in three years, and the base metals such as aluminum and zinc have been surging.
Yet there is another war going on, and it's the war of the currencies. So far the winners have been the currencies of the "commodity countries," Australia, New Zealand, Canada. The major loser has been the currency of the world's greatest debtor nation, the US.
Yet the situation is unclear - very much in flux. The world depends on US prosperity. The US is the world's economic engine. The driver of the US economic engine is the US consumer, who is responsible for 70% of the US Gross Domestic Product. The latest figures show that the turnover of money in the US is declining - we see that in the velocity of M-3, the broad money supply. Sure, there's plenty of money, plenty of liquidity, in the US. But the question is - will people continue to use that money? Or is it just going into assets, inflating assets such as the stock market, commodities and the housing?
My take is that up to now, the stock market is rebounding from its brutal bear market decline of 2000 to 2002. Much of that rebound was automatic, simply corrective behavior. I believe that we are now at the point where the stock market is beginning to get serious. The market is now deciding whether there's really an upturn in the economy or whether the economy, like the stock market, could merely have been enjoying what some call "a dead cat bounce."
I've said all along that I believe the 50% Principle becomes critically important here in indicating how much strength is in the market. If the Dow can hold above 9504 it will be impressive, because that will mean that the Dow has been able to retain half or more of its bear market losses. However, if the Dow breaks below 9504 and holds below that level, I think we can begin to look for a resumption of the bear market forces. The "fun," in other words, will be over.
The Nasdaq took the worst beating during the initial phase of the bear market, and in reaction the Nasdaq did best on the rebound from its 2002 low. As I write the Nasdaq is sitting above its 50-day moving average, which stands today at 1875. The Nasdaq broke below its 50-day MA for three days during last August. But so far, the Nasdaq has held above its 50-day MA since March of 2003. Thus, the juxtaposition of the Nasdaq and its 50-day MA will be extremely helpful in gauging the strength of this highly speculative Index.
PAPER VS. GOLD: In the battle of competitive currency devaluations, it's not clear who the ultimate winner will be. My own guess is that almost ALL paper currencies will eventually lose to real money - gold. But this will take time, maybe time in terms of years. Today we see December gold at the 381 level, and in fact it's been above its intra-day. I'd like to see Dec. gold close at 390, but as I've so often said, "they don't run the markets for Richard Russell."
I also must add that I don't want gold to surge and make the headlines. I'd much rather watch gold struggle higher one dollar at a time. The higher gold rises with struggling-type action, the more bullish, since this is typical early bull market action.
Remember, advances with the primary bull trend always look difficult and somewhat tedious - at least until the third phase of a bull market, at which time the action speeds up. Conversely, corrections in bull markets tend to be sudden and rapid, often violent. The idea here is to frighten the "unbelievers" out of their holdings.
I believe the gold bull market will end like all bull markets - and that is with frantic, emotional and explosive action to the upside. I'll remind subscribers that gold bull markets are different than other bull markets in that in their third phase, stock bull markets are spurred by GREED while in their third phase, gold bull markets are propelled by FEAR (and fear is the strongest of all emotions).
REAL STORY: "We pretend to pay them, and they pretend they're getting paid." That's the real story of what's going on in the financial world today. Think of it, the US taking in billions of dollars worth of merchandise and services - and paying the sellers with paper that the Fed grinds out at will - in any quantity needed.
It's "monopoly money," and our foreign friends know it. But if they know it, then why in God's name do they accept our fantasy payments? They accept it simply because they're willing to keep playing the game. Our foreign friends take in our junk paper, and then they turn around and invest that paper in US Treasury bonds or in other US assets such as businesses, real estate, land, armaments, you name it.
It's a giant scam - with a difference. The difference is that the scam-ers and the scam-ees both accept it. It's the ultimate insanity of the central bank system, and the ultimate victims will be those who count their wealth (assuming they have any savings) in financial items.
As the scam continues, an increasing number of sophisticated investors will see through the scam, and they will move to insure their wealth by buying tangibles with their monopoly money. The tangibles include homes, precious stones, art objects, jewelry, collectibles, and above all - gold. Let me put it this way - we're entering a period where the lust for financials will gradually evolve into a lust for tangibles. We're early in this "transfer," and it will intensify in the months ahead.
The flagship for the tangibles is gold - gold because it's priced in all currencies and is quoted every minute and every hour of the day. Gold because gold has a 5,000 year history of being accepted as real money. Gold because it's accepted without question anywhere at any time any where in the world.
Rising gold constitutes a dreaded red flag to the central banks. If the price of gold is rising, the obvious question arises - "Why are people trading our pretty fiat currencies that pay interest - trading them for gold that pays no interest?" This is the question that frightens the central banks. It frightens them because they know that a rising price of gold is telling the world that acceptance of paper currencies is coming into question.
So I'll repeat it - we're in the early stages of a trend away from financials and into tangibles.
TRENDS: In my experience, primary trends always take much longer than anyone thinks possible - and ultimately, they go much further than anyone thinks possible. This applies to the stock market, the gold market, the money market, the currency market.
What does all this mean for stocks? Are stock certificates financials or tangibles or something in between? As I see it, when you buy a stock you're buying part ownership in a business. That business can do well, it can do badly, but above all that business can go bankrupt. This is why bear markets ultimately inspire such fear near their lows. The fear has to do with the belief that the stock you own (it can be any stock) can go belly-up.
Not so with tangibles. The diamond you own or the gold you own or the Picasso you own can not go bankrupt, not if you own it free and clear. This is the essence of a tangible that is wholly owned - it can't go bankrupt. It is intrinsic wealth. And that's what separates financials from tangibles.
Question - what about your home? My take on homes is that the bank owns your home and the bank is lending it to you - unless you own your home free and clear. Half the homes in the nation are owned free and clear, and the other half are saddled with mortgages, mostly big mortgages. If your home has a mortgage, your home is worth something to you, but it's not a real tangible in my opinion, because if you don't keep up payments you can lose your home. Thus, I see a home as a sort of part-tangible if it's mortgaged, and a tangible if owned free and clear.
One problem with treating a home as a tangible. It's value can be down-graded if a lot of people in your neighborhood lose their homes, in which case, the neighborhood itself can be downgraded. As for a co-op or a condo, hmmm, that's a different story, because in hard times people drop out and you may have to carry some of their expenses.
Maybe memories play too much a part in my thinking. In 1933 during the Depression my parents had to sell my grandmother's home in Far Rockaway, New York. The house was within walking distance of the ocean. Here's what they got for that house - $2,500 - that's two thousand five hundred dollars. It was a nice little house. I still remember the cherry tree in the back yard. How I loved those cherries. I can still taste them.
Yesterday at the Fed meeting Greenspan made it known that interest rates would remain low for the foreseeable future. The market celebrated, because this was the Fed's way of saying, "Inflation in assets - inflation in homes and stocks, that's the Fed policy - count on it."
Here in California it was just announced that the median price of a home was up 17.9% in September against the same month a year ago. Asset inflation - it's what the Fed is promising you and me.
So my subscribers and I have to decide what to do with our money. Pile it into the stock market, pile it into gold and gold stocks, keep it in cash meaning T-bills or short notes, or buy foreign currencies as a bet against the dollar? I've suggested gold, gold shares, foreign currencies in the form of say German notes denominated in euros, and some cash with maybe a sprinkling of AAA-rated muni bonds. Then there are also the global bond funds such as closed-end funds FCO and GIM.
NOTES & QUOTES - In June 1999 I noted that some of the gold shares were selling at such low prices that they could be bought as "perpetual warrants" on gold. In other words, some of the gold shares were literally being "given away." I obviously have no way of knowing how many of my subscribers took advantage of those ridiculously low gold prices, but I believe many did.
In late-July of 2003 I noted that many of the smaller gold-mine shares were selling at attractive prices, and I suggested that subscribers buy a "package" of six gold stocks that I chose. These six have done well, and last week (Oct. 31) the average of the six were up over 80%, that in a period of three months. The record of the six are shown below, the run-down provided by a very nice subscriber.
Symbol % of Change Since July 03
BGO +96.88
EGO +65.20
GSS +93.65
CBJ +68.31
WHT +68.84
CDE +94.97
Does this large appreciation in so short a time mean that the gold shares are now over-bought? There's just no way of knowing. Since the gold bull market has a long way to go, in my opinion, I continue to suggest that subscribers who have not done so take a position in gold and gold shares.
Meanwhile, the bond market is saying "higher inflation ahead." The spread between the yield on the 10-year T-note and the yield on the inflation-adjusted T-note (TIPS) has now widened to 2.48, its largest spread in a few years. This is the bond market saying that it sees an average of 2.48% inflation over the coming ten years. This, of course, means continual attrition in the purchasing power of the dollar, just another reason to hold real money - gold.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsf
November 3, 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.
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