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...Floating on Money

Richard Russell snippet
Dow Theory Letters
April 11, 2006

Extracted from the April 10, 2006 edition of Richard's Remarks

My opinion on housing -- The Fed knows that housing MUST hold up -- a housing collapse would be a disaster, Housing has been the KEY to the US economy. To hold up housing, the Fed must keep the nation floating on liquidity. We don't know what the broad M-3 money supply is now, because the Government has taken away the figures. But I believe the precious metals are giving us the answer -- the answer is that liquidity is HUGE. The country is floating on money, and that's the way the Fed wants it.

The cover-up to this Fed-created inflation is those mini-boosts in Fed funds. The little boosts give the false impression that the Fed is "fighting inflation." But inflation is a product of too much money chasing too few goods. Without M-3 we can't prove it, but gold is telling us that the Fed is creating huge amounts of liquidity. Above everything else, the Fed is intent on keeping housing UP.

In my opinion, the housing bubble is still intact! If nothing else, I see it in the action of the home building stocks.

Gold, silver, platinum. The precious metals are all in bull markets. Platinum today rose to a new record high above 1100 an ounce. The ratio of gold to silver dropped today to 47.9, meaning that one ounce of gold buys 47 ounces of silver. In January, gold would buy a large 62 ounces of silver. Thus silver is certainly outperforming gold, although both metals are rising. Rumors are that there is a short squeeze in silver. The once great silver supply is shrinking. A further bullish force for silver is that a silver Exchange Traded Fund will soon come out, meaning that investors will be able to buy a fund that is backed by actual silver.

A question I'm often asked is, "What would happen to gold shares if the broad stock market sinks into a bear market?

My answer is that a bear market in stocks would be basically deflationary. The Fed is mortally afraid of deflation, Therefore, in the face of deflationary action, the Fed would open the monetary spigots wide and bring rates down to 1% or even 0.5%. In other words, the Fed would move to the edge of destroying the dollar rather than deal with the forces of deflation. Under these conditions, I would expect gold to resist or outperform almost everything else, since the Fed's counter-deflationary action would place the viability of the dollar in doubt.

The metals might not respond immediately to a bear market, but as investors realized what the Fed was doing, the metals should rise. As the metals rose, this should rub off on the metal stocks.

Apr 10, 2006
Richard Russell
website: Dow Theory Letters
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