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Gold, the great drama

Richard Russell snippet
Dow Theory Letters
Mar 5, 2008

Extracted from the Feb 29, 2008 edition of Richard's Remarks

The Great Drama Unfolds -- Gold coins can be a bit difficult to handle. They are heavy, they are visible, and must be stored in a safe place. But for most people, gold coins (actual gold in one's possession) has one great advantage -- you're not tempted to sell your coins on every decline or correction in gold. For this reason, many people have done better holding a smaller number of Krugerrands or American Eagles than have larger traders who have moved in an out of gold in an attempt to "beat the market."

Some History -- In January 1980 gold topped out at a price of 850 US dollars per ounce. Down goes gold -- down and down, year after year until gold reaches a low of 256 in August of 1998.

There, despised and ignored, gold sinks to its historic bear market low. From its ignominious low of 256, a new primary bull market is born. But 28 years of decline has soured the US public on gold. If they are interested at all, they abide by the wise men of the government and the Federal Reserve. "Gold is history," they are told. "Gold is a story whose time has past." "Gold is a relic from another era, a useless metal used in fancy dentistry and in jewelry.

Under a cloud of disinterest and false tales, gold starts up again. Slowly, almost surreptitiously, gold rises to 300, then to 400, to 500 and 600. Nobody is interested. Some of the old gold mining stocks move higher. They pay no dividends. Nobody is interested in them. Names from the past appear and are taken over. Dome Mines, Homestake and Campbell Red Lake. Skeletons dancing into view and then disappearing.

Gold works its way still higher. A few people remember that gold is money, and they suggest that gold be purchased. But frequent sharp declines and occasional deep corrections frighten the early buyers of gold. They take their profits. Nevertheless, the metal reaches the 700s. A small group of admirers known facetiously as "gold-bugs" urge their followers to buy gold. "It's cheap," insist the gold-bugs, "gold is as cheap as dirt -- buy it."

Then, in January 2008, gold does the impossible. It breaks out above its old 850 peak-level of 1980. After 28 years of being held back, gold bursts is chains and breaks free. Gold pushes above 850 into space never seen before by the yellow metal. It's like a prisoner who, having been held in a dungeon for 28 years, suddenly escapes from the darkness of his cell and emerges into the glare of sunlight.

Twenty-eight years of compression has been released. The advance above the 850 level is still quiet, almost eerie -- but relentless. "It's speculative nonsense," growl the analysts, "it's manipulation by a crazy element that is living in the past." But gold continues to work higher. By February gold is nearing the thousand-dollar-an-ounce mark.

In the meantime, silver, the other monetary metal is pushing towards twenty dollars an ounce. Silver, that sold as low as 23 cents an ounce in 1932, is now selling close to twenty dollars an ounce. "Lowly silver at twenty bucks a pop, I don't believe it."

In the meantime, the US is dealing with an incredibly difficult situation. The nation is straining under the onus of a potential housing collapse. The new Federal Reserve Chairman, Ben. S. Bernanke, is fearful that the housing disaster will send the nation into recession and worse -- deflation. Bernanke is well aware that the two thirds of US families own their own homes, and that consumer buying is responsible for 70 percent of the Gross Domestic Product of the US. On top of everything else, the great banks of the US are in trouble. Bernanke must save the banks and he must hold back the forces of deflation.

But good Lord, what about inflation? The Fed has made its decision. Their first task is to keep the US out of the grip of recession. This allows gold and silver to further express themselves. The lid is off 28 years of compression and imprisonment. The great bull market in precious metals pushes higher. In the background, twenty central banks from around the world print their fiat paper in an orchestrated effort to insure prosperity.

Meanwhile, the great gold bull has broken free of its chains. A strange and unprecedented union of forces has emerged. The US public is unaware of the great phenomenon that is playing out before their eyes. Somewhere ahead, the US public will enter the bull market. Will it be in 2008, in 2009, in 2010? The timing, as we might suspect, is known only to the mysterious gods of the market.

lots more follows for subscribers...

written Feb 29, 2008
Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters

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