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A light goes on in Russell's brain

Richard Russell
Dow Theory Letters
written Sep 8, 2009
posted Sep 11, 2009

September 9, 2009 -- As the great Bob Dylan song goes, "There's a battle outside, and it's raging, it will soon shake your windows and rattle your walls, for the times are a'changin'"

The battle is obvious -- it's the primary forces of overproduction and deflation vs. the Fed's obsession ("whatever it takes") to fight deflation and to produce asset inflation. The one "signal" for rising inflation that the world understands is rising gold. The central banks do not want to see the gold signal which tells the world that inflation is "in command." What the Fed really wants is asset inflation in housing. Housing is collateral for almost everything in the nation, and the Fed and Treasury are frantic to get housing prices heading higher.

Yesterday, most assets got the message. Oil was higher, the base metals were higher, the stock market was higher, but gold (pressured by forces we know not from where) failed to close at the highly significant number of 1000 an ounce or better. Incredibly, after being as high as 1009 during yesterday's session, gold closed at 999.80 -- just twenty cents below 1000. Coincidence? Mistake? Random chance? Hardly, to me it was obvious that the Fed did not want to see the following headlines in today's newspaper, "Gold closes above 1000!" Whatever it takes, it seems, will be utilized to hold the only Constitutional money down.

When a can is placed on a stove burner, the pressure builds up inside the can. At some point, we know not exactly when, the can will explode and the pressure will be released. That, I believe, is where gold is.

You can threaten gold with forthcoming central bank sales, you can sell gold in quantity, you can smother gold with short sales, but the primary trend of gold will win out. It will be expressed today, in a month or in 2010. The trick for us is to hold onto our position -- don't trade it, don't move in-and-out with it, don't hold so much of it that you get the heebie jeebies every time it dips ten dollars. The primary trend of gold is up. We're riding the bull. The bull will try to shake us off his back. We'll hang on.

The word is that China wants to "load up" on gold while diversifying out of its huge position in dollar-denominated securities (T-bonds). China's problem is how to accumulate gold secretly without driving the price up. This has led to what is now called "the China gold put." Every time gold backs off, China is in there to scoop up what is offered. On top of that, China is urging its over 1 billion population to buy gold and silver. Finally, China is now the world's biggest miner of gold. China, in its patient way, is preparing for the future. The future that China sees is a world without fiat currency or a world in which its own renminbi is the world's reserve currency.

Gold --Below you see a monthly chart of the great gold bull market that started in 1999. Note how the low was seen in 1999, then the low was "tested" again in 2001. From there, the great bull market started up in earnest. The first and second psychological phases of gold are over.

I have never seen a bull market of this size end without a highly-speculative third phase explosion. What we see on the chart over the last few years is a huge accumulation pattern in the shape of a head-and-shoulders bottom. The breakout would or will come if gold can climb above 1000 and then to a new high above 1005. Somewhere ahead I expect to see a worldwide panic-scramble for gold as it dawns on the world population that they have been hoodwinked by the central banks' creation of so-called paper wealth.

You can't create wealth out of a computer -- you create wealth from the sweat, intelligence and risk-taking of men. Gold comes from a gold mine. A gold mine represents the expenditure of capital, risk-taking, the sweat of hundreds of men -- and courage. A gold mine's product, gold, has represented timeless wealth since Biblical times. No central bank has ever produced a single ounce of gold. Nor has any central bank ever produced a single element of true, sustainable wealth.

In their heart of hearts, men know this. Which is why, in experiment after experiment with fiat money, gold has always turned out to be "the last man standing."

Below, a close-up picture of gold daily from Oct. 2008 to the present.

A light goes on in Russell's brain -- Driving back from a restaurant last night we were listening to National Public Radio from China. They were interviewing many Chinese who had lost their jobs in the big cities and were heading back to be with their families in the country. We noted what terribly hard lives these Chinese lead. The problem the Chinese leaders have -- is to keep the populace employed or at least semi-content and not in a revolutionary mood.

I have been wondering why the Chinese government has been almost pleading with the Chinese people to buy and hold gold and silver. And it suddenly occurred to me that the Chinese government sincerely believes that gold and silver are heading substantially higher. The Chinese leaders want the Chinese people to benefit from any higher prices of the precious metals.

The idea is that if the people are happy and richer by holding gold and silver, the leaders will be that much safer. The one thing the leaders of the Communist party want is a peaceful, contented (and richer) population.

So far, the leaders of China have been very smart, and it occurs to me to tell my subscribers -- "Do likewise."


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

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