RICHARD RUSSELL ON THE MARKETSJune 14, 2007 -- (Bloomberg) -- Signs that China's economy is at a boiling point are hard to miss. Sparks rain down on Beijing from night-and-day construction. Inflation is accelerating. Investors clamor to buy stocks valued at 45 times earnings. Zhou and Ma must contend with a managed currency and an economy skewed toward exports. Record trade surpluses flood the nation with money, fueling asset bubbles and raising the risk of excessive factory investment and overcapacity. At stake is China's ability to prolong its economic boom, which constitutes a tenth of global growth.
China's economy has grown more than 10 percent for five straight quarters. Its trade surplus soared by a bigger-than- expected 73 percent in May to $22.45 billion, the customs bureau said on June 11. Inflation jumped 3.4 percent last month from a year earlier, the highest rate in more than two years, the National Bureau of Statistics said yesterday. As cash flows to stocks from bank deposits, the benchmark CSI 300 Index has soared 98 percent this year. That has strengthened the case for China's government to increase interest rates, the World Bank said in a report last month.
Russell Comment -- The dragon's unleashed -- 1.2 billion hard-working people who also love to gamble. Amazing, and just a bit scary
The weekly chart of the Dow is always worth studying. The Dow is still nearer overbought than oversold. RSI has just dropped out of the overbought zone. But it's the high level of MACD that has me watching -- and note that although MACD is in a descending pattern, it hasn't broken below its red 9-week moving average (that would signal rising selling pressure).
I guess from a directional standpoint, we can call gold the mystery metal. You can read opinions on gold by the hundreds on two of my favorite gold sites, 321 Gold and Gold-Eagle. But I prefer to just watch the action, and a point&figure chart is as good a place as any to start. And guess what -- I just happen to have a P&F chart of HUI, the "gold-bug's" index below.
The theory is that gold stocks move before the metal does. That's not always the case, but let's believe it for now. What we see on the P&F chart going back to May 2006 is basically sideways action. HUI has been as low as 272 and as high as 368. As I write, the last column of O's takes HUI up to the 332 box. At 316 we would have a bearish breakdown, but this hasn't happened yet. At 348 we have a bullish breakout, but this hasn't happened yet either. However, the last P&F signal for HUI was bullish with an upside "count" or target at 396.
HUI closed today at 330.98, and, of course, every gold bull is hoping to see HUI at 348 before the year is out. On a near-term basis, gold tends to move opposite the dollar. The dollar has rallied strongly over the last week, and this has put pressure on gold. But as I said, this is short-term pressure. I consider the long-term picture for gold to be bullish. Why do I say that? We have a central bank called the Federal Reserve. The Federal Reserve creates inflation. Over the long term, that's what the Fed does -- it creates fiat currency, and it inflates.
The Federal Reserve was established in 1913. Since 1913 the US dollar has lost 95% of its purchasing power. As night follows day, that trend will continue. Over time, as the dollar buys less, gold will buy more. It's as simple and sad as that. And I'd say that the whole process is accelerating.
I want to draw attention to a stock that I have repeatedly recommended. It's the giant Australian mining company, BHP Billiton. This is the world's largest mining organization. The weekly chart is shown below, and at this point BHP has finally become overbought. However, I consider BHP a buy on any weakness.
Billiton is a global leader in the whole raw materials sector. BHP is a leader in steelmaking raw materials, it's the world's third largest copper producer, second largest exporter of energy coal, third largest producer of nickel, fourth largest producer of uranium, sixth largest producer of primary aluminium and a significant producer of oil and gas. BHP also has substantial interests in diamonds, silver and titanium metals.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
http://ww2.dowtheoryletters.comJune 15, 2007
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.
