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"Non-Dollar" Money

Richard Russell
Dow Theory Letters
Jan 6, 2004

Extracted from the Jan 5, 2004 issue of Richard's Remarks

Question -- Should I hold gold coins?

Answer -- Yes. If we have a world crisis, if the dollar collapses, if US consumers pull back on their buying, if the bear takes over again, if "everything goes," then one thing is certain -- gold will still be money. Gold is the one item that cannot go bankrupt -- it can't go bankrupt because it depends on no group, no plan, no nation to say it's money. Gold is pure intrinsic value, accepted as money everywhere at any time over thousands of years.

Gold is the ultimate insurance. If everything else goes, if the current monetary system falls apart, gold will still be money. Therefore, everyone should own some gold, even though gold pays no interest. The safer the item, the less interest it must pay. Since gold is totally safe, it needs to pay no interest. With short rates at a 45 year low, the "opportunity cost" of owning gold today is at a minimum.

Question -- Should I own gold and silver stocks?

Answer -- I would, and I do, but remember, the stocks are not the metal. The stocks have the leverage, but they also possess risks that the metal does not.

Question -- Should I own assets denominated in foreign currencies?

Answer -- I recommend it. Many of the smartest investors in the world (Templeton, Soros, Buffett) have moved into non-dollar assets. You can buy CDs denominated in other currencies through Everbank on the net. You can buy German notes denominated in euros. You can buy euro futures, although this is more of a professional play. Gold is another easy way of buying and holding "non-dollar" money.

Question -- What's the psychological difference in investing say in euros vs. investing in gold?

Answer -- Excellent question. Note that when you read the magazines or newspapers or listen to the advisories, they have no objections to diversifying out of dollars into euros or other currencies. But not so with gold. No, we hear, gold is dangerous and volatile.

The real difference is that when you diversify into euros, you are "playing" within the central banks' paper money system. And that's OK. Even the central banks themselves diversify into euros if they believe they have too many dollars.

BUT -- when you diversify out of dollars into gold, you THREATEN THE CENTRAL BANK PAPER CURRENCY SYSTEM! If investors start to move out of paper, any paper, into gold, the whole basis of the central bank paper currency system is threatened, and that is something the central banks can't abide.

Gold is international. It depends on no government or central bank to state that gold represents wealth. Gold is independent of the whole central bank system, and as such it represents a danger to the paper system.

Question -- Will the US outlaw the possession of gold by Americans?

Answer -- I can't see it. The US is issuing gold coins for its citizens to buy and accumulate. Gold is now being distributed to people around the world via ETFs and by other proxies. Many Americans own gold in foreign accounts. Gold ownership by its people is being encouraged by China and other Asian nations. I think it would be nearly impossible for the US to outlaw the ownership of gold. It would be too difficult, too embarrassing, and above all it wouldn't make sense. And what about gold stocks? Would the US outlaw ownership of US gold stocks, foreign gold stocks? It's all too ridiculous -- I don't see it happening.

Question -- Russell, what do you make of the stock market's reaction to the sinking dollar?

Answer -- The current reaction to the lower dollar is obviously bullish -- a lower dollar makes US goods cheaper and more attractive to foreign buyers.

But if the dollar CONTINUES to decline, at some point the decline will frighten our foreign holders of US securities. If this happens (it's already happening in a "polite" way) foreigners will panic out of US bonds, rates will rise in the US, and that in turn will put pressure on the huge mountains of US debt. At that point, the squeeze will be on stocks and US business.

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Richard Russell
Dow Theory Letters

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