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Gold: When the picture becomes misty...

Richard Russell snippet
Dow Theory Letters
May 22, 2006

Extracted from the May 19, 2006 edition of Richard's Remarks

Gold -- Again let's keep it SIMPLE via a P&F chart, as seen below. My opinion -- one P&F chart is worth all the talk of all the advisors taken together.

The long vertical row of Xs took gold to 730 in what we call a "high pole." If a decline succeeds in wiping out over half of a high pole, that's considered bearish action, and often the entire high pole will then be retraced.

After the high pole, a row of 0s took gold down to the 675 box, which was OK and still bullish for gold. Next, gold rallied, recording a row of X's to the 715 box. Today gold fell below the preceding 0 at 675 to a low at 660, which turned the P&F chart bearish (today's low is not shown).

Thus gold is in full correction mode with the "support" coming in at the 645 area.

I've been reading dozens of dissertations and analyses on gold and gold action. The simple and sad fact is that none of these "experts" really know where gold is going over the short or even the intermediate term. It's all talk, speculation, hopes and fears. Which is why I tend to turn to point & figure charts when the picture becomes misty. Obviously, no chart will tell what's going to happen to any stocks, bond, commodity or precious metal. Charts, and specifically P&F charts, tell you in concentrated form what has happened. And they also tell you that "if this or that happens, this is probably what will happen next."

The long-term picture is a different story. The long-term picture in any item depends on values and supply and demand. I've often said that there's only one reliable "cycle" in the stock market, it's the long cycle of stocks moving from undervaluation to overvaluation and back to undervaluation again.

In gold it's a different story. Under the central bank system, we know that all fiat currencies lose purchasing power over time. It's time that is the big variable. Gold is the stable king-pin and all paper currencies revolve around gold, which is the only intrinsic money. Currently, the US dollar is the world's reserve currency. Today there exists no definition of a dollar -- the dollar is simply worth so many liras, so many reals, so many pounds, so many euros. So all currencies can be expressed in terms of dollars, and the dollar is expressed in terms of gold.

Gold stands alone since it is not controlled by any government and it's nobody's liability. Gold's value is intrinsic and backed by thousands or years of history. There has never been a time in the last 6,000 years when gold was not treated as a value or as a form of money. Therefore, holding gold is a matter of timing. Under the fiat money system, you can hold gold for decades (1980 to 2000), and the dollar's loss of purchasing power will be ignored. But now we are in the period where because of the recent enormous rise in deficits and debt liabilities, intelligent investors realize that these debt and debt liabilities must either be reneged on or paid off in devalued dollars.

This has centered attention on gold again. The rise in gold in terms of dollars is simply a function of the market looking ahead and discounting dollars in terms of gold. The market sees what must happen, and the market has been taking action accordingly.

I take the gold move from 250 to 735 as the first major phase of the gold bull market. This is the phase where gold once again enters the thinking and early buying of informed investors. The second phase will be the one in which the public enters wholesale into the gold market.

In a major bull market in stocks there will usually be a major correction which separates the first phase from the second phase. It's that correction that I believe we're now experiencing in gold.

As I see it, the dollar/gold/debt situation will be the central economic story of our times.

lots more follows for subscribers...

May 19, 2006
Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters

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