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Gold - New reason for optimism

Richard Russell snippet
Dow Theory Letters
Posted Aug 14, 2013

Shifting gears somewhat, it’s worth taking a look at the U.S. dollar again. As with interest rates, the health of the dollar is a key to future movements in many markets, including the two we’re most interested in: stocks and gold. Dollar bulls think this chart is bullish, while dollar bears see only weakness. To me, with no dog in this fight, it looks rather constructive. After putting in a double-bottom at 73, the dollar initiated a nice uptrend a couple of years ago. Since then, it has established a clear uptrend (as indicated by the blue line) and has broken through one of the two downtrend lines (indicated in maroon). It has also set up a potential triple-top breakout, which, if completed, would be very bullish action in itself, while also taking the dollar above its remaining downtrend line.

We’re now testing that uptrend line, but as long as it holds, the overall picture for the dollar is bullish. If we subsequently get a move to 85 or 86, that would give the stock market even more support, while keeping gold on the defensive. Of course, if the buck doesn’t do that and instead breaks convincingly under 80, that would imply trouble for the stock market and should give gold a real boost. Not surprisingly then, this is an important chart to monitor in the coming days and weeks.

When you go into the woods, sometimes you get the bear and sometimes the bear gets you.” That was one of my brother-in-law’s favorite sayings (RIP, Bob). After a couple of days bear hunting in southern Oregon, the animal rights’ crowd can be happy that the former didn’t happen this year. My wife is relieved that neither did the latter. In the investments business though, it’s pretty much guaranteed that someone’s going to get hurt in bear markets. Is gold still in its 13-year bull market these days, or in the early stages of a bear market? Gold’s supporters would have you believe it’s always bullish; gold haters believe just the opposite. Neither are correct. But for those looking dispassionately at the technical evidence, there is no clear answer yet. So we wait for the market’s verdict. And by the way - to answer that age-old rhetorical question: Does a bear "poop" in the woods? Yes, yes they do.

But whether gold is bullish or bearish in the long-term, there’s new reason for optimism about its intermediate-term (the next few months) trend. Same goes for the mining shares, and even silver, which finally filled the gap around $21 that it left several months ago as it collapsed. Gold needs to hit $1350 to confirm a run at the $1540 area (prices we’ve discussed in more depth in prior weeks), and XAU needs to get to 104 to confirm it’s off and running. Those things look more likely after the positive action of Thursday, Friday, and especially yesterday (Monday).

By getting above $20, silver broke above its clearly-defined downtrend line (in maroon), the first real sign of life in this market in months. It’s still far below the 200-day MA, but rate this market as bullish in the near to intermediate term, like the rest of the precious metals complex.

CONCLUSIONS: The stock market continues to hold up surprisingly well, given the seasonal summer shenanigans. The current minor concerns seem no worse than any of the dozens of similarly problematic times since this bull market started in 2009. “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” Warren Buffett said that about 10 years ago. Since then, we’ve seen a lot more troubles, and yet the Dow is even 35% higher than in 2003. Bull markets climb a wall of worry – that is a fact of life.

Hold all stock positions as recommended in the past. When it’s no longer a Dow Theory bull market and the PTI turns bearish, then another course of action will be appropriate. We’re far from either of those happening. Hold all precious metals positions and continue to give those markets the benefit of the doubt. They may finally be off and running, even if this doesn’t turn out to be The Big One.

Jon S. Strebler
Monday, August 12, 2013

Russell Comments -- When I was a kid, my dad worked five days a week and half a day Saturday, and my mom stayed home. We had a live-in maid, and a woman who came once a week on Sunday to cook and do the laundry. As I said, it was only my dad who worked.

Today, in most cases, both parents work to support their family. Families often survive on fast food and food stamps, and nobody gets the daily newspaper. Kids are "tended" with endless TV programs because the parents, after work, are too exhausted to play with them.

As I predicted a few years ago, in the new world of super-deficits and high debt, the one thing I'm certain of is that living standards will be heading down. And they are.

As Josh Boak in the Fiscal Times put it, "We're creating an economy full of low-paid, part-time workers, while we face a stagnation in manufacturing jobs."

It's all part of the new economy, which I've predicted would change the face of the US. So far, it's obvious that the Fed's QE, Twist and ZIRP are not working. And it's equally clear that Obama wants Bernanke OUT as soon as possible. In the future there will be new and exciting changes, all of them moving towards what I believe will be a better and more peaceful and loving world. Many of the old and non-functioning institutions will be crushed or eliminated in favor of new and improved institutions. As for money, I think the world will have to jettison the inflationary central banks and somehow return to a version of the gold standard.

Russell prediction -- As the years go by, I look for a rise in spirituality across the face of the earth, and I look for an international cessation in violence (in cities and among nations). One hundred years from now, the period we're living in will be looked at as wild, violent and primitive. In the future I think peace will break out all over the world,. Mankind simply cannot afford these never-ending and barbaric wars. One major task will be feeding seven billion people in a world where agriculture is in trouble.

I'm including below a P&F chart of gold. We've witnessed a good rally, which brings gold right up to an important spot on the chart. Now we need a price of 1350 to give us a bullish buy signal. This may be too much to ask right after this rally, so I'd give gold a few more days in case it wants to back off and consolidate, but I believe we will shortly see 1350 gold. If gold hits 1350 this should frighten many of the huge group of gold shorts and propel gold into the 1400s.


Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters

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