RICHARD RUSSELL ON GOLD & US$
November 22, 2006 -- I just placed a one dollar bill on my desk, and next to it I placed a hundred dollar bill. What's the difference between the two bills?
Both bills are composed of the same thing -- linen and cotton. So what's the difference. The difference is the writing on the two bills. Both say they are legal tender "for the payment of all debt, public and private." The only real difference between the two items is that the Treasury states that one will pay off a dollar of debt while the other will pay off a hundred dollars of debt.
Thus, this nation's money has been degraded to the point where the writing on a piece of paper tells you what the thing is worth. This is money by government edict or by fiat. Intrinsically, neither bill is worth a damn thing. And ultimately, they'll both end up as bookmarks or museum pieces.
A measure of a nation's wealth, historically, can be gauged by the true value of its money. I've seen our money change drastically and fundamentally during my short 82 years on this earth. When I was seven years old in 1931 my dad could take his dollars and turn them into a bank for real Constitutional money -- gold. The dollar in those days was a call on gold -- the dollar was, in fact, "as good as gold."
After 1933 you could no longer turn in your dollars for gold, although foreign governments could still demand gold for their debts. In 1971 Nixon arbitrarily closed the gold window, because France was continuing to demand gold for settlement of debts. From that day on foreign governments could no longer settle their debts with the US with gold. After 1971 the dollar became a fiat currency, a claim on absolutely nothing.
Today the US government is absurdly split in its attitude towards gold. If gold is just a relic, then why did the US close the gold window and thus prevent foreign governments from calling in any more of our gold? Today, the US hoards its gold. But the US government doesn't want you to believe that gold is as valuable as the free market suggests that it is. How do I know that? I know it because the Treasury still insists that its own gold is only worth 42.22 dollars an ounce.
Yes, believe it or not, $42.22 an ounce is the price the US places on its entire stock of gold. Why not mark our gold to the market? Oh, the government can't do that, because that would mean that the US was conceding that the dollar was being devalued -- in terms of gold. You see, a rising price for gold in terms of dollars is tantamount to a devaluation of the dollar, and the US government doesn't want that, or I should say, it doesn't want that fact to be known. Keep the public dumb and passive, it's the government's way.
Over recent years the US Treasury has removed the silver from of our coinage. All our money is now composed of base metals. Recently, the government has even tried to steer people from paper to base-metal dollar coins. The reason -- metal coins last longer than "paper dollars." First we had the Susan B. Anthony metal dollars. Nobody wanted these undersized junk coins, and the mint is still sitting with millions of these klunkers. Next came the faux-gold Sacagawea dollar coins. The Treasury couldn't give those duds away.
But the geniuses at the Treasury don't give up easily. The latest scheme by these cone-heads is a series of dollar coins featuring a rotation of deceased Presidents. The new Presidential base-metal dollars will be 9.2% larger than our current junk quarters. The first of the new dollar series will feature George Washington. I can't wait to see this latest item -- maybe I'll even buy a few, and become a coin collector.
Speaking of precious metals, it's important to realize that silver is used industrially while this is not the case with gold. All the gold ever mined is probably above ground (except that which has been lost at sea), but silver is actually running at a deficit, meaning more silver is used and used up than is mined annually. The US strategic stock of silver is now gone.
Be that as it may, the ratio of gold to silver has been declining dramatically in waves over the years. The most recent down-wave began in May 2003. At that time an ounce of gold would buy 80.4 ounces of silver. As of yesterday, an ounce of gold would buy 48.04 ounces of silver, a huge drop in the ratio. This brings up the question -- should subscribers buy silver? Personally, I think it's a good idea, and the easiest way to do it is through the silver ETF called SLV. Each share of SLV is equal to 100 ounces of silver. SLV closed today at 130.30. The daily chart below follows the gold-to-silver ratio.
Below we see the Dollar Index (daily), and it looks as though it's breaking down. However, if it's really breaking down I was surprised that gold didn't move higher today. Mystery? However, I did think the Dollar Index plunging below its lower trendline was the most significant move of today. I'll be watching this whole picture carefully on Friday.
Editor-in-chief - DOW THEORY LETTERS
November 23, 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.