Russell On Gold & US DollarThe money supply continues its recent steady decline (really). For the week ending May 16, M-3(the broad money supply) was down $3.3 billion. M-2 fell $7.5 billion.
Yesterday Treasury Secretary Snow told the Senate Banking Committee that China should move "without delay" to revalue the yuan. Russell Comment -- It won't happen.
The Fed will meet five more times in 2005 and each time it will address the Fed Funds rate, The five meeting dates are June 29-30, August 9, Sept. 20, Nov. 1 and Dec. 1. If the Fed increases the Fed Fund rate by 0.25% at each meeting, they would be adding 1.25% to the current rate, bringing the Fed Funds rate to 4.25% by the end of the year. But the yield on the 10 year T-note is currently 4.07%. If the T-note rate holds steady, and the Fed boosts the Fed Funds rate to 4.25%, the yield curve would be inverted. Which brings up an interesting situation for the Fed. Will they keep increasing the short rates through to the end of the year? I'd be surprised if they do. Remember, an inverted yield curve is usually a "prediction" of recession.
The chart below is a ratio of the Dollar Index to the euro. The dollar reached its peak of strength against the euro in January 2002. From there the dollar weakened against the euro, a weakness that continued until December, 2004. But from December 2004 the dollar was stronger than the euro. Recently, the dollar broke above the 200-day moving average of the ratio.
Currently, the Dollar Index appears overbought. What about the French vote on the Eurozone constitution this Sunday? I think a "no" vote is already discounted. Thus, we could now see some dollar weakness as the Dollar Index corrects its recent rise and the euro rallies.
The surprise of the year has been the decline in longer-term interest rates even while the Fed was steadily boosting short rates. The daily chart below follows the bellwether 10 year T-note. This week the T-note closed at a new high for the year, but as you can see, RSI is in the overbought zone and I sense that the notes may be ready to stall out. Part of the steady move into the notes (and the bonds), in my opinion, is the near-frenzy to lock in yield better known as INCOME. Remember, many pension funds must receive some safe, reliable income, and Treasury notes and bonds fill the bill.
Gold -- Gold shares often lead the metal at important turns. The daily chart below is a ratio of HUI to gold. As you can see, gold has been stronger than gold shares ever since last March, and thus the ratio has held below the blue trendline. But the ratio hit a low a few weeks ago, and this week the ratio broke out above the declining trendline. This should be a good omen for the whole universe of gold -- the metal and the stocks.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsfMay 28, 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.
