RICHARD RUSSELL ON GOLD
Where to be? Relative strength tells us what's strong and where to position ourselves from an investment standpoint. Subscribers know that I have advocated holding gold and gold shares ever since 1999. And from e-mails and letters received here, I surmise that most of my subscribers have at least some portion of their liquid assets in gold or in gold shares or both.
The chart below is a relative strength chart, specifically a chart showing gold divided by the S&P Composite. For years following its 2000 peak, gold either headed down or languished while superior relative strength resided with stocks and bonds. The chart below shows that relative strength for gold vs. the S&P hit a recent low in June 2004. From there gold's relative strength bounced up and down until a recent very important relative strength low was reached in July 2005.
From that low, something unusual occurred. Gold again started to outperform the S&P (series of red arrows). But this time, gold's relative strength broke out to its highest level since 2003. This is important, and it tells us that something is changing. I believe we are now seeing a primary trend change away from financial assets and towards tangible assets. Or to put it another way, I believe we are seeing a primary trend change away from items denominated in paper dollars and towards gold or real money.
Consider this -- all your US stocks, all your US bonds, all your US financials are denominated in fiat dollars or more accurately Federal Reserve Notes. Nothing stands behind these notes except the words, "In God We Trust." Without meaning to be blasphemous, I submit that the preferred alternative to this would be -- "In gold we trust." And that's exactly what this chart is telling us. It's telling us that the desire to own gold is beginning, on a trend basis, to outperform the desire to own dollar-denominated financials.
As I've said many time before, I believe the gold market is just beginning to "warm up." Ultimately, the bull market in gold will end the way all major bull markets end, and that's with a panic to the upside. When could that occur? My guess and it's simply a guess -- within five years. In the meantime, in terms of the amount of paper money now sloshing around the world, gold is dirt cheap. In terms of the number of dollars in the world, my position is that they're "giving gold away at these prices."
An aside -- Alan Greenspan was a gold-man in his younger days, and once you understand the fundamentals of gold as money, you are always a gold-man. Greenspan knows well the meaning of rising gold, although he will never admit it. But as long as gold is rising, my bet is that Greenspan will continue to increase short rates. The next Fed meeting is November 1, at which time I'm sure the Fed will increase short rates again by another quarter of a percent. What Greenspan's successor at the Fed will do I don't know. But I do know that Greenspan has the utmost respect for gold. He's never in his later years openly admitted that only gold is real money -- but at the same time he's never denied it.
I'm obviously fascinated with the action of both gold and oil at this juncture. Let's check out the daily chart of gold below. My quick opinion is that oil "may have" bottomed, but gold is still heavily overbought and will have some correcting to do.
As far as correcting, if an item is very strong but also overbought, on some occasions the item will work off the overbought condition by moving sideways for a length of time. Oil may have done just that, and it remains to be seen whether gold will correct down closer to its moving average (which stands at 453) or whether gold will just move generally sideways for a few weeks or even more.
Below you see a daily chart of gold. Note on RSI that gold was overbought in late September but since then RSI never declined to below 50. At the same time, we see gold rising to a new high in October, but MACD failed to confirm. Thus gold is vulnerable to a correction.
The next chart is a weekly chart of gold. The weekly action often overrides the daily action. On the weekly gold (RSI) remains overbought. Also, MACD is high and at a level where, in the past, gold has suffered sharp correction. If gold can work off this overbought condition without giving up too much in price, it will be an indication of impressive strength. In the meantime, hold off on buying any gold coins or gold shares until we can see how far this gold correction is going to go.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsf
October 20, 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.
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