RICHARD RUSSELL ON GOLDI guess the most decisive action today was seen in the gold and bond markets, so let's check 'em out. Gold broke out of its "head-and-shoulders bottom" pattern today when it hit the 400 level. In so doing, August gold pushed above both its 50-day and its 200-day moving averages. However, note on the chart that the (blue) 50-day MA is still well below the (red) 200-day MA -- the real move will start when the 50-day rises above the 200-day MA.
However, the move into the 400 area is a major technical plus for gold. As an aside, my gold advance-decline line rose to a new high today. The gold shares, as you know, are now lagging the metal. Relative strength between gold and the gold shares moves back and forth, usually each phase taking many months. Gold has been outperforming the gold shares on a trend basis ever since last February. Note on the lower section of the chart that the histograms for gold are turning positive.
Strangely, there are similarities between the gold action and the bond action. Today the interest-sensitive 30 year T-bond gapped up above its May 27 preceding peak. The histograms for the bonds have turned positive, and today the bonds surged above their (blue) 50-day moving average. Note, however, that the 50-day MA for the bonds is still far below the 200-day MA, which means that major upward momentum for the bonds is still lacking.
What so interesting about the bond action is that it has come in the face of the almost universal opinion that interest rates are headed higher. Of course, the bonds are down considerably from their March 17 peak, and this might only be a correction. Still it's interesting action and certainly opposite what's been expected.
Comments -- A fascinating situation today. Gold strong, long bond up almost a point, and dollar weak. Markets are acting as if they're still under deflationary pressures -- but like all markets they're looking ahead. What are they looking at? It appears to me that the Fed is actually not pumping enough liquidity into the system to ward of deflation. With durable goods down two months in a row and commodities now well off their highs or correcting -- this is probably what is rallying the bonds.
The Greenspan solution -- the Fed has to increase its inflationary activities, otherwise, the forces of deflation will gain the upper hand. And that's what the advancing gold senses. The need for "even more inflation from the Fed" is also what the dollar senses as it sinks lower today. Remember, the one thing the Fed cannot control is the international value of the dollar -- because the dollar is subject to international forces.
The strength of the world forces of deflation can be seen in that it's requiring such massive monetary and fiscal stimulus to ward off deflation!
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsfJune 24, 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.
