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Fantasy Money

Richard Russell
Dow Theory Letters
August 15, 2005

Extracted from the August 12, 2005 edition of Richard's Remarks

-- Yes, my older subscribers must remember that popular song, "It's only a paper moon." And now the 2005 version, "It's only a paper world."

What have they done to us? What have we allowed them to do to us? The central banks of the world, under Fed leadership, have huffed and puffed and blown up the global economy like some outlandish, unbelievable giant balloon. Credit has been extended beyond anything ever seen before in human history. And it's been both glorious and ominous. Glorious because it's fended off corrections (bear markets) and ominous because eventually the fantasy must collapse in the face of reality.

In its simplest terms, one fact stands in the way of the issue of "fantasy money" by the central banks of the world. You can not print wealth. Or let me put it this way, people will accept fantasy money for just so long. And then reality inevitably sets in -- and the panic to swap fantasy money for something real, something tangible, takes hold.

The only real money is gold or silver. Secondary money, in my opinion, is platinum and probably gem-quality diamonds with sapphires, rubies and emeralds close behind. Diamond prices have been going "through the roof" as has the price of emeralds. Oil ("black gold") is at record highs as is platinum. Yesterday, [Aug 11] gold broke out to its highest level in five months. And yesterday the US dollar broke out of a distribution pattern to the downside.

And all us old-timers felt just a tinge of alarm. We know that the great "House of Credit" (meaning the world) has been built on a bedrock of quick sand. By that I mean that the financing of the new world-prosperity has been built or financed by bureaucrats at the world's central banks -- rather than by the sweat and energy and brains of men.

And as gold breaks out to the upside, we old-timers mumble to ourselves, "Is this the beginning of the great unraveling? Is this the start of the destruction of the fiat paper system?" The safe answer is always "Probably not." The fantasy wealth system has been in place since 1971 when the US dollar went totally off gold. Two generations of Americans have grown up since then. Two generations have lived with, and never questioned, paper "money." So why should they start now?

Better still, why even bother with all the above questioning? We'll just keep watching to see if "reality time" has arrived. But how will we know when the so-called "reality time" has arrived? We'll know it when there's first a move, then a trot, then a run, and finally a panic to swap fiat paper for true wealth -- gold.

So we keep wondering, "How long can the fantasy system keep going. How long will people accept the intrinsically worthless creation of a central bank in return for their sweat and ideas and labor?

And the non-answer is that nobody knows how long or when. After all, why did the Dow top out on exactly September 3, 1929. Why that month? Why on that particular day? Why did the Dow hit a low in June, 1949? Why not in July, August, December? Who knows? It's part of the mystery and the mystique of the market. What's the trigger that sets off any trend in the market? If I knew, I'd have called Warren Buffett, and told him that his thinking was correct, but that he should hold off a while before placing his giant bet against the dollar.

Enough, let's get down to business. I'm talking now of weekly charts. And the first below shows weekly gold going back to early 2004. Starting in November 2004 gold began constructing a giant symmetrical triangle. In mid-July 2005 gold began to accelerate to the upside, and this week gold finally broke out above the upper trendline of the triangle. This should put gold in position to try for its November 2004 high of 456. but first, probably some much needed consolidation.

Below we see the weeklies on the US Dollar Index. Each rally has been weaker than the preceding, and it looks to me as though the most recent advance is in the process of topping out. The red arrows are self-explanatory -- I believe they tell the story.

more follows for subscribers...

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

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