Richard Russell On The MarketsThe idea is this. Inflation will heat up even further. The Fed will continue its "measured" rate of increases until the Fed Funds rate equals "equilibrium." At that point inflation will level off, but rates will not be so as to hurt the economy. Greenspan will see to that. He's got it all figured out.
At the same time the dollar will continue to fall ("it has nowhere to go but down"). The lower dollar will cause US exports to rise and US imports to fall. That will help the awful US trade balance. You see it's all part of a carefully laid-out plan.
But maybe, just maybe, the plan isn't working. For some crazy reason, a lot of deflationary "indications" have appeared. The dollar has risen to a high for the year, bond yields, instead of rising with short rates, have declined (what damn fools are buying bonds?). Oil prices have declined, steel prices have declined, the commodity indices have declined, gold and gold shares have declined, Dr. copper has declined. Nobody seems to have noticed, but the markets are evidently telling us something -- well, something a bit different.
Why has nobody noticed? Probably because the very concept of dis-inflation or actual deflation is so foreign that it just hasn't dawned on people that maybe something "different" is in the wind.
Now wait -- all the above are just "items" that I've noticed. I'm not saying that inflation is dead, I'm not saying that deflation is the new trend, I'm just bringing up some thoughts and considerations for my subscribers to ponder over. So please, keep an open mind -- and ponder.
Below we see a daily chart of gold going back to 2002. I can't say that gold has "broken down" based on this chart. Yes, gold is below its 200-day moving average, but gold has been violating its 200-day MA all the way up. Personally, I'm not selling any of my gold for paper dollars. Furthermore, if gold rises to 500, 600, 700 I still wouldn't sell gold for US government fiat paper. I don't trade gold, I only do one thing with gold -- I accumulate it. It's for the day when the US dollar finally becomes a museum piece, as ALL other paper currencies throughout history have.
Here's a closer look at the metal. RSI is at 35.8, close to being oversold, Yet gold is holding above its February low.
And the following is significant. The Commercials at the latest (May 10) reading have increased their bullish position from 67,836 gold contracts to 79,372 contracts while reducing their short position from 205,533 contracts to 187,821. That's their second reduction in shorts in two weeks.
Below we see the daily chart of HUI. This index has sunk to a new low, but RSI is now oversold since it is below 30 at 27.5. MACD has not confirmed its earlier low, although the price of HUI has gone to new lows. My conclusion is that the gold shares are severely oversold and way overdue to rally. If you are "too heavily" in gold shares, you might cut back on the next rally. Personally, I'm holding what shares I have, which is much less in percentages than what I hold in the metal.
Next, we see Newmont, the largest gold producer, and the only gold stock included in the S&P 500. I consider NEM the bellwether of the gold group. RSI for NEM is down to 26.5, meaning that NEM is very oversold. MACD for NEM is scraping the bottom, so NEM on both counts oversold. Note that the price for NEM hit a low, but the histograms are higher. The stock is severely oversold -- period.
If the deflationary forces that I "detect" continue, the Fed is going to do a major about-face. The Fed will stand on its head rather than allow anything resembling deflation to enter the US economy. The Fed's "re-flationary" action will be a major plus for gold, and a major minus for the US dollar.
In the meantime, the situation is becoming very dramatic. I see the stock market in major trouble. And this with Fed Funds at only 3%, and still below the official rate of inflation. I see this extended upward correction in the bear market in the process of "coming apart." The Greenspan plan to inflate the bear market away is not working. In his efforts to hold the bear market off, the Greenspan Fed has placed the US in the worst possible position.
What is that position? The position is that the country is up to its eye-balls in debt. Deflation is the dread enemy of debt. There's nothing worse than facing deflation when you're in debt. The Fed must and will fight the debt-monster that they have created. The Fed will have to open-wide the monetary spigots. Our job is to survive the mess that the Fed has put this nation in, and put us in.
If I'm correct and the bear market is still very much alive, everybody is going to lose something. The bear will "reach out and touch us" one way or another -- through our home-values, through our business, through our job, through our assets. I'm not being a gloomy-doomer. I'm simply talking reality.
I'm a Dow Theorist. And I know that as the night follows day, bull markets follow bear markets, and bear markets follow bull markets. The greatest and most speculative bull market in US history ended in 1999-2000. We haven't seen a major, corrective bear market yet, only the hints of one in the Nasdaq action.
I guess that's all I have to say on the subject, at least for today, here in the "Merry Month of May."
Richard Russell
Editor-in-chief - DOW THEORY LETTERSwww.dowtheoryletters.com/ServicesOnline.nsf/Subscription+Form?OpenForm
May 16, 2005
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.
