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More Words of Wisdom from Richard Russell

June 6, 2001

One of the more objective newsletter writers on Wall Street these days is the veteran Richard Russell who has lived almost long enough now to have lived as a young man through the entire Kondratieff winter of the last cycle. I read his comments daily with a great deal of respect and I find that except for his views on gold, I am mostly in agreement with him. So I have begun to share some of Richard's gems with you on a fairly regular basis.

Here were some of the points Richard made last week that I think are especially worth taking note of.

1. With Americans so deeply in debt, as we the economy continues to slow, a premium will be placed on owning stocks that pay dividends because Americans will more and more be starved for cash.

2. When the S&P sells at 22 times earnings, the median total return for stocks for the coming ten years runs about 5%. Yet, with dividends so pitifully low at the present time, returns over the next ten years could actually be lower than that. Richard said, "In other words, I think it will be 'back to work' and back to saving' in America. The easy times of 20% or more appreciation in stocks will be part of history. 'More normal' markets are going to be a major problem for America's consumers."

3. The ability of the Fed to return our stock market to 'irrational exuberance' and our economy to rapid growth may not now be possible by printing money as was done throughout the 1990's because "The Fed is now dealing with a financial crisis. It is dealing for the first time with economic problems that may not react to flooding liquidity and declining interest rates. If you have just lost your job or if you are up to your eyeballs in debt and are struggling to keep up your standard of living, are you going to step up your buying because interest rates are lower? Are you going to take your family on a 'fun vacation' because your bank is loaded with liquidity? If you are running a business in a very competitive environment, are you going to increase your inventory just because rates are lower?

4. "The market is still trying to solve the puzzle of INFLATION or DEFLATION. We're receiving an increasing number of 'hints' that inflation is not the worry, and that deflation may be in our future." The hints Richard noted were the following: a) declining yield between the 10 year T-Bond and the TIPS, thus indicating the bond market is having second thoughts about inflation. b) The T-Bond futures shows a double bottom at 98.13 and c) the collapse in the price of gold last week. I would agree with Richard on all but the first two points, but not that a declining gold price is indicating deflation. What Richard is not factoring into this thinking is that the gold market has not been free to reflect economic reality because it has been rigged. Also, the rise or decline of gold prices vis-à-vis any fiat currency is not necessarily a function of inflation as defined by price indices, but rather a function of confidence or lack thereof of currencies.

WHAT HAPPENED TO GOLD LAST WEEK?

I suggested last week that the week just passed could be "gold's week". Of course what I had in mind was for gold to finally cut north of $300, not to slide back into the $260's.

Richard Russell and most other analysts suggest the decline in the gold price last week resulted from deflationary forces gathering around the globe. As discussed above, I do agree that deflationary forces are gathering around the globe, but that is not the reason gold is declining. It is declining because of continued manipulation by the sinister banking forces who work through the Fed and our government to force it lower so as to falsely enhance the viability of the dollar. I believe the end of that game is drawing near so we may soon learn that despite the fact that prices of virtually everything is declining, gold will rise because people will opt for gold in place of paper as a store of value and an asset based money rather than the phony liability money that has been forced upon us.

But what happened to gold last week? I asked one GATA's leading spokesman where he thought all the gold came from to hammer the price down so hard last week. The person I spoke to said he did not think there was any significant increase in new physical gold hitting the market. Rather he suggested it was just paper. Otherwise, he reasoned that the lease rate would have fallen rather than remain stable or even rise slightly for the week. In other words, what we had last week was a barrage of derivatives hitting the market that created the appearance of a weak gold market without any negative change in the fundamentals of the market.

And with respect to the fundamentals, what we must not lose sight of is the fact that demand is outstripping supplies from the mines by something over 1,500 tons per year. And, as long as the gold price is being maintained at artificially low levels, that will be true because the amount of gold that must be dishorded from central banks and/or derivative games that must be plaid will need to rise in order to offset the shortage of supply to meet demand.


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