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Gold: The 50% Principle

Richard Russell
Dow Theory Letters
May 14, 2004

Extracted from the May 13, 2004 edition of Richard's Remarks

Gold ...Meanwhile gold, having risen from its 1999 low of 253, to its April 2004 high of 432, backs off to the 372-375 level, and consolidates as it decides which way to go.

Applying the 50% Principle to gold, the rise from 253 to 432 means that gold rose 179 points. Half of that is 90 points. Subtracting 90 from the high of 432 gives us 342.

According to the 50% Principle, as long as gold holds above 342 it remains long-term bullish. This means that gold, in due time, will rise to test the 432 high. If gold breaks out above 432 it will probably head higher to test the 1980 high of 860.

Gold and gold shares becoming increasingly oversold. Gold has been outperforming the shares since Dec. 1, but histogams for HUI are close to turning up.

Question from a subscriber -- You mentioned that you bought more American eagles. My question is you pay a premium to buy them and you sell at a discount. Is it viable for anyone to have a plan to buy and sell them with the rise and fall of the price of gold or is it simply your intention to hold permanently?

Russell answer -- My thinking is that any gold I buy I'll hold permanently regardless of price. There might be one exception that would cause me to sell gold. If we have wild inflation and gold goes to some high price and interest rates rise to say 15% on Treasuries... If that happens, I might be tempted to swap gold for Treasuries as per the situation back in 1980. Otherwise, my gold is a permanent possession.

Of course, there's a problem with the above scenario -- if we have wild inflation, it becomes extremely hard on the nerves to swap real money (gold) for depreciating paper dollars that conceivably could become worthless in time.

Richard Russell
Dow Theory Letters

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