Why Gold Must Inevitably Rise
In Richard Russell's View
To my mind, the key to the consumer and therefore to the US economy lies in housing. Since 2001 US consumers have extracted $2.5 trillion dollars in equity from their homes, spending half of it and thus contributing hugely to the US economy. In many areas of the country, the West Coast and much of the East coast, home prices have risen substantially over the last few years. The price of a medium home is up an inflation-adjusted 50% over the last five years, an unprecedented national increase. I've suspected that the Fed has sought to slow or even put a lid on the frantic rise in home prices.
However, there's a problem. There are almost $9 trillion in mortgages outstanding in the US. A good portion of this mortgage money is backed by shaky financing. In the next two years, $2 trillion in mortgages rates will be reset. By raising rates, the Fed is putting pressure on millions of mortgage holders. Defaults are now rising, and they will increase as rates increase. The Fed obviously is aware of this, but nobody knows at what level of rates the housing "bubble" may be pricked.
The chart of Toll Brothers, a major home builder is typical of most of the other major US home builders. After an initial decline from January through mid-February, TOL has rebounded and moved well above its 50-day MA. Thus TOL has given an initial caution signal, but I would not say that it has topped out yet. To truly top out, TOL would have to break below its February 13 low of 29.35. And that has not happened.
Are the charts of the home builders the key to the housing picture? I think they are one sensitive key among others, but I can't envision the housing boom falling apart while the home builders are still trading above their recent lows. Let me put it another way -- if the housing boom is really over, the home builders should be breaking support and heading to lower levels.
My opinion on housing -- The Fed knows that housing MUST hold up -- a housing collapse would be a disaster, Housing has been the KEY to the US economy. To hold up housing, the Fed must keep the nation floating on liquidity. We don't know what the broad M-3 money supply is now, because the Government has taken away the figures. But I believe the precious metals are giving us the answer -- the answer is that liquidity is HUGE. The country is floating on money, and that's the way the Fed wants it.
The cover-up to this Fed-created inflation is those mini-boosts in Fed funds. The little boosts give the false impression that the Fed is "fighting inflation." But inflation is a product of too much money chasing too few goods. Without M-3 we can't prove it, but gold is telling us that the Fed is creating huge amounts of liquidity. Above everything else, the Fed is intent on keeping housing UP.
In my opinion, the housing bubble is still intact! If nothing else, I see it in the action of the home building stocks.
Gold, silver, platinum. The precious metals are all in bull markets. Platinum today rose to a new record high above 1100 an ounce. The ratio of gold to silver dropped today to 47.9, meaning that one ounce of gold buys 47 ounces of silver. In January, gold would buy a large 62 ounces of silver. Thus silver is certainly outperforming gold, although both metals are rising. Rumors are that there is a short squeeze in silver. The once great silver supply is shrinking. A further bullish force for silver is that a silver Exchange Traded Fund will soon come out, meaning that investors will be able to buy a fund that is backed by actual silver.
A question I'm often asked is, "What would happen to gold shares if the broad stock market sinks into a bear market?
My answer is that a bear market in stocks would be basically deflationary. The Fed is mortally afraid of deflation, Therefore, in the face of deflationary action, the Fed would open the monetary spigots wide and bring rates down to 1% or even 0.5%. In other words, the Fed would move to the edge of destroying the dollar rather than deal with the forces of deflation. Under these conditions, I would expect gold to resist or outperform almost everything else, since the Fed's counter-deflationary action would place the viability of the dollar in doubt.
The metals might not respond immediately to a bear market, but as investors realized what the Fed was doing, the metals should rise. As the metals rose, this should rub off on the metal stocks.
Question -- Is it possible to have a situation where the dollar would be wanted here in the US but avoided everywhere else?
Answer -- I think so. In the event of a US recession, there could be almost a frenzy to collect dollars -- dollar needed to pay off debts and to stave off bankruptcies. But at the same time, the dollar could be weak in the FOREX markets, meaning that the dollar could sink against other currencies, particularly in those countries that possess a positive trade balance.
…. Gold wrestling to hold above 600 on the June contract. May take some more back-and-filling, but I believe gold is going to move up and away from 600. Silver is a tiger. How'd you like to be short this baby? The old expression, "Born with a silver spoon in his mouth" may be coming back."
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsf
April 11, 2006
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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