Taylor on Gold

December 2, 2002

China May Let Local Investors Trade Gold 1st Half 2003 - China is likely to allow individual investors begin participating in gold trading at its recently launched Shanghai Gold Exchange in the first half of 2003 according to a Chinese exchange official.

How Soon Will Gold Take Off? - Listen to Richard Russell

There are four publications I make a point of reading each day. In the order of importance they are: "The Bible," "Richard's Remarks," the "Financial Times" and "The Wall Street Journal." Of course, I read many more articles, mostly from the Internet and I read some books too. But the four publications named above are most important in helping me make sense out of life.

For those of you who may not be familiar with Richard's Remarks, this is the daily publication put out by Richard Russell, now the most experienced, wisest and smartest of all Dow Theory practitioners who remain alive and practicing their trade. Richard also publishes "The Dow Theory", a monthly newsletter that is equally excellent. We urge you to consider buying a subscription to this excellent letter. You can do that by going to www.dowtheoryletters.com.

We are now convinced that Richard Russell understands gold about as well as any major independent analyst writing today, including yours truly. To give you a sample of where this famous analyst stands on the issue of gold, here are two excerpts from Richard's Remarks taken from his Friday and Saturday work.

"NEXT QUSTION:- What do you do with gold shares or gold, the metal, for that matter, if the stocks go down and you're sitting with a loss? After all, most of the gold shares pay little or no dividends. If the stocks go down, you're sitting with stocks at a loss, and you've not even collecting dividends.

"I look at gold and gold shares differently than I look at any other stocks. I regard gold and gold shares the way I do an insurance policy. Year after year you pay premiums on your insurance policy. And as each year goes by you receive nothing in return.

"Isn't that a rip-off. You pay your money annually and you get zip in return. And my answer is that this is the cost of insurance. In the case of gold or gold shares it's insurance against a dollar-disaster.

"Look at it this way. Your home, your business, your savings your life insurance, almost everything you own is denominated in dollars. The dollar today is simply an invention of the Fed. There's nothing behind the dollar, yet the Fed continued to grind out more dollars, and the world continues to accept them. But the world's reserve currency "has no clothes." It's simply computer money. There's nothing of any intrinsic value behind the dollar. At some point, the world will cease accepting fiat Federal Reserve Notes, and the so-called dollar will embark on a long slide to lower levels.

"As doubts increase about the worth of the dollar, gold will move into the limelight. At that point people will want gold; there'll be a panic for gold. In these circumstances, gold might even be difficult to obtain, and the gold shares will be going wild.

"When will this time come? I don't know. If I knew, I'd tell you to be in cash or bonds or stocks or anything else, but that the time was not ripe for holding gold. Sadly, I must confess that I don't know when gold will be ready to move.

"So the best I can do is to say, "Buy whatever quantity of gold and gold shares that you feel comfortable with, put it aside the way you put aside you life insurance policy. Stop driving yourself nuts about gold or gold shares, because if gold surges higher you're not going to sell, and if gold "falls out of bed " you're not going to sell. In brief, you're not speculating in gold, you're buying protection against Greenspan and a Federal Reserve that will stop at nothing in order to stave off deflation."

More on Gold from Richard Russell - 11/30/02

November 30, 2002 -- Inflate or Die -- I've warned about this for a long time, and now, finally, it's happening. It's very important that you understand what's happening, and unfortunately, I can't write it all, and I can't tell it all. Therefore, you'll have to do some reading on a regular basis if you want to understand the extraordinary trends and events that are taking place today.

The Fed is now in what I call a "death struggle" to stave off the forces of deflation. Part of the problem is the bursting of the great stock market bubble. Part of the problem is the rise of the Chinese low-cost manufacturing colossus. Part of the problem is the many years of monetary inflation that has been sponsored by the Fed and most recently by the greatest inflationist in all US history, Alan Greenspan.

If you truly want to follow this unfolding drama, I suggest that you read John Mauldin's weekly column, www.2000wave.com. I also suggest that you read the Daily Reckoning. Both of these columns come free, and I strongly recommend them.

A great drama is now being played out, and in some ways we are all innocent victims. But we are all free to at least try to protect ourselves in this fierce battle. As I see it, the ultimate protection lies in the ultimate repository of true wealth, real money. At the base of the monetary pyramid lies gold. But gold is reviled, hated and feared, by the central banks of the world. Running the central banks are men (many of them well-meaning but misguided, others simply power-driven or ego-driven) who believe they can control the natural forces of the free market.

But like life itself, free markets inhale and they exhale. The central bankers in their obsession with controlling the breathing of the markets, believe that they can cause the markets and the economies to only exhale. They believe that inhaling is a thing of the past. Deep in their hearts they know that they now face a great force of "nature," and to combat this force they know they must INFLATE or DIE.

The tell-tale barometer of the situation is the trend of gold. The central bankers must hold back the barometer (of course, they would really like to outlaw the barometer or reduce it in the public's mind to trash).

As new billions of dollars are created, this process should normally push gold higher. Since gold is at the base of the monetary pyramid, the Fed can expand the money supply but it cannot expand the relative quantity of gold. In reality, the price of gold should reflect the wholesale expansion of the monetary base. Since gold cannot expand in quantity, it will somewhere ahead expand in price.

But so far, gold has been held back. Somewhere ahead, the compressed spring which is gold, will "un-spring," and a tell-tale rise in gold will begin. What the central banks will do then I really don't know. Deep in his heart Alan Greenspan knows the story. Many years ago when he was younger and honest, he wrote extensively about gold. Now, out of fear, he never mentions the yellow metal. To mention gold to Greenspan would be tantamount to waving a cross in the face of Dracula, the vampire.

I don't know how this incredible story will unwind. But I do believe in fundamentals, and I do believe in the truth (at my age, you stop lying, it's too late to lie, there no point in lying). I advocate owning gold and gold shares because gold is true money and therefore the truth - while fiat money, money that is intrinsically worthless, is therefore a lie.

At any rate, the great battle against the forces of nature is now on, and it can all be boiled down to three words -- INFLATE or DIE.

Enjoy the show, but be sure to be on the right side of the war. In this war, ultimately, truth will be the victor.

Gold is perfect for use in coins and jewelry as it does not react with air or water like many other metals.