Richard Russell On GoldHere we are in 2004, the start of another year. And as I do every January 1st I marvel that I'm still here -- alive and kicking. I guess like a lot of us old guys, my thoughts go back 59 years -- to World War II. Frankly, had you asked me in early '45 whether I thought I'd get out of the War alive, I would have said, "I hope so, but I don't know."There's one instance that sticks in my mind -- or I should say that I've never been able to erase from my mind. It was April '45, and I was in the nose of a B-25, flying over the Brenner Pass in Italy. Heavy flak was exploding all around us. We were going into the bomb run, which meant that we couldn't take any evasive action. You just sit tight and "take it," and pray that you don't get hit. I said to myself, "Lord, get me out of here alive, please get me out of here, and I'll never doubt, I'll never worry, I'll never complain again."
I've often thought of that particular mission and those words of mine. Of course I've worried and of course I've complained since. But you know, they say "there are no atheists in fox holes." You can believe it. I do.
A lot of people celebrate the New Year with gusto. They drink it up and whoop it up, and they wave banners and flags in Times Square. Me, like a lot of us old survivors, I celebrate just being alive. I take it as a gift. I know that it didn't have to be.
Enough of all that -- 2004 is here, and what do we know for sure?
Here are a few more important items that I've been thinking about.
The US is the world's super-power. Our super-power status is based on two phenomena. The first if that we are the world's most powerful military power. That doesn't come cheap. This year in 2004 the US will spend more on our military than the rest of the world combined!
Secondly, we possess the worlds' reserve currency. We're the only nation in the world that can run up debts to foreign creditors and pay off those debts with paper currency that we manufacture "out of thin air." We don't have to pay off our debts with assets or sweat. We pay off our debt with a "high-speed printing press."
The US is currently the world's leading engine of growth. That's because we're the world's greatest consumer. The US is one giant consuming machine. The whole world wants to sell their goods and merchandise to the US. And so far, the sellers are accepting our paper dollars as payment.
But believe it or not, there are potential problems. One problem is that the dollar now has a legitimate competitor -- the euro. Foreign central banks can now hedge against a weakening dollar by buying euros. No central bank and no foreign holder of US securities wants to see the dollar "go down the drain." But central banks and investors will be tempted to hedge their bets, and the euro gives them that ability.
Then there's China. China constitutes a strength and a weakness for the US. China has been a huge accumulator of dollars. If China halted taking in dollars, that would be a giant shock to the global economy, because if China halted its accumulating of dollars, the dollar would plunge.
So the US depends on China to continue taking in dollars. Why does China do it? Because China wants to sell the US, and as long as China takes in dollars, the dollar will tend to hold together, and the US economy will theoretically hold together, and US consumers will continue to buy massive amounts of Chinese goods.
Ah, but there's another problem. China is playing for TIME. China is increasingly selling nations other than the US, and that includes other Asian nations. If China arrives at the point where it depends a lot less on the US, China could decide to cut way back on taking in our "printing press dollars."
Thus the US has an unwritten pack with China. We'll take in your Chinese goods, and we'll pay you with our paper dollars. You continue to accept our paper dollars, and things will go merrily along. -- until they don't.
Thus the "silent deal" continues. But somewhere along the line the deal will slow down or halt. It will halt if the dollar collapses or it will halt when China has had enough of the "deal."
In the meantime, the US has to address its twin half-trillion dollar deficits, its budget deficit and its trade deficit. And the question is -- can the world's biggest debtor nation continue to be the world's military super-power and the owner of the world's reserve currency?
It's worked so far. It's worked even though it's illogical. So the momentous question is -- how long will the whole illogical situation continue to work? I don't know, nobody knows. But the markets will tell us before anybody else will.
Some say, and I agree, that the danger signals will show up in one or all of the following -- a surging price of gold, an unraveling of the US bond market, or a collapse in the dollar -- or all three.
Wait, there's one more -- a decline in the spending of the American consumer. If this were to happen, all bets are off.
Which brings up another thesis, which I will write about next week. That thesis is the implications of the massive and growing US debt.
On to the markets -- The Dow opening up 50 points along with up 10 for the Transports -- this put the Dow at a new highs, but the Transports are below their December 29 high. The Utility Average is about even with its previous high, but as usual we'll have to wait for the close to see how things look after all the traders and hedgers have evened-out for the weekend. Remember, its only the CLOSING numbers that count.
The March Dollar Index is down .36 to a new low of 86.90 while the euro is up .56 and if it closes here it will at a new high.
The COMEX (metals) is closed today, but gold overseas is up a dime. Most of the gold and silver stocks are mixed, but most gold shares are down fractions.
I thought today's news was really centered in the bonds. The March 30 year T-bond came down hard this morning, As I write this bond is now below its 200-day MA, which stands at 109.06. The 50-day MA of the March bond is below the 200-day MA -- and stands at 108.09.
When the 50-day MA is below the 200-day, and the item in turn breaks below the 50-day -- that constitutes my "sell signal." As I write, the March 30 year T-bond is down 111 ticks to 107.31 -- and below its 50-day MA. If the March long bond closes here, that's my "Sell Signal." So far, the sinking bond has not put any real pressure on the stocks. Nor has the declining dollar -- at lest not yet.
As long as the declines are "polite," the market may continue to ignore bond and dollar weakness. But if the declines accelerate, or if they continue down -- that would be a different story.
Meanwhile, the stock market possess extraordinary upside momentum, and it takes a lot to turn momentum around.
Gold Notes -- American Barrick (ABX) hit a new high today, this despite its well-advertised huge gold hedge position. What's happening here -- have they cleared out a lot of their short position? ABX acts well, as does NEM, PDG, GLG, DROOY, and in silver CDE, HL, SIL and PAAS.
With the South African rand now looking toppy, most of the S. African gold shares are looking better (remember, the S. Africans have been paying their miners with "expensive" rands and selling their gold for "cheap" dollars. A declining rand will therefore help S. African gold mine profits.
TODAY'S MARKET ACTION -- Whoops, now you see why I say that only the closing figures count. My PTI ended up 2 to 5410. The moving average was 5360, so my PTI remains bullish.
The Dow turned around and ended down 44.07 to 10,409.85. There were no movers in the Dow today.
Feb. crude was down .27 to 32.52.
Transports were up 1.11 to 3008,16.
Utilities were down .45 to 266.45.
There were 1730 advances and 1535 declines. Up volume was 51.7% of up + down volume, barely an up-day.
There were 466 new highs and 16 new lows. My High-Low Index was up 450 to 33258.
Total NYSE volume was 1.08 billion shares.
S&P was down 3.52 to 1108.40.
Nasdaq was up 3.31 to 2006.40.
My Big Money Breadth Index was up 3 to a new high of 773.
March Dollar Index was down .33 to a new low of 86.93. March euro was up .42 to a new closing high of 125.76. March yen was up .57 to 93.75.
German DAX up 53 to a new high of 4018. March Nikkei was u 150 to 10,900.
Bonds were sharply lower. March 30 year T-bond was down 113 ticks to 107.29 and on a "Sell Signal." Yield is 5.17%. March 10 year T-note was down 29 ticks to 111.11 to yield 4.37%.
COMEX was closed today. Gold closed in the international markets up a dime.
My gold advance-decline line was unchanged at 1383.
XAU was up .64 to 109.48. HUI was up 2.09 to 245.02.
ABX up .27, ASA up .05, AU down .17, DROOY up .13, GG down .06, GFI up .30, GSS up .06, NEM up .03, RGLD up .07, SSRI up .23, PAAS up .16.
Gold and gold stocks continue to do OK despite most of the gold advisories call for a correction. Ignore them and watch the action and the statistics.
STOCKS -- My Most Active Stock Index was up 11 to 286, a new high.
The 15 most active stocks on the NYSE were -- LU up .24, MOT up .40, NT up .27, GE up .18, PFE up .22, TWX up .17, NOK up .20, CPN up .11, EMC up .32, C up .40, ABC down 2.29, XOM down .44, MRK up .84, BMY up.73, AWE up .08.
VIX down .01 to 18.30.
McClellan Oscillator down 19 to plus 69 and looking kinda weak.
CONCLUSION -- This is a tough one. We got a key reversal in the Dow today in that it went to a new highs and then closed lower. But there wasn't much volume and my PTI did gain 2 points. Also, breadth made a new high. I write today off as a complete "puzzle." But next week could be very interesting, particularly if the market starts churning or makes no progress on rising volume. But no sense jumping the gun and talking nonsense -- let's wait to see what happens.
Tomorrow's site will be a little different. Check it out.
Wife Faye returns from Paris tonight -- that is if they don't cancel her flight. Travelling today is such a pleasure. Which is why I stay in La Jolla.
Signing off for Friday. And wishing all my subscribers a great, relaxing weekend.
Hmmm, San Diego Chargers have first pick in the draft. Believe me, they need it. I wonder if Southern Cal could beat them?
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsfJanuary 2, 2004
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.
