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China... and Gold

Richard Russell
Dow Theory Letters
October 11, 2004

Extracted from the Oct 9th, 2004 edition of Richard's Remarks

Periodically, I like to talk about the big picture. As I see it, the big picture, the fundamental picture, is that the world is producing too many goods. The entrance of China and India into the global economy has changed everything. China and India entering the world economy has meant that one-third of the world's population has suddenly become part of the global economy. And these people will work for fraction of what US and European workers will toil for. Furthermore, China has 15 million new people coming into the work force every year, and I believe India has the same. These people want to work, and they'll take any job and do it for less than we will here in the US. That's a huge problem, and it's one reason why jobs are being lost here. It's not the President's or anyone else's "fault," it's global capitalism in action. Period!

The phenomenon described above is basically deflationary. It means the price of merchandise and goods are being produced for less. And they are being sold for less. If you don't believe it, take a walk through your local Wal-Mart some day.

Ah, but there's an irony. China and to some extent India are becoming more prosperous. Their 2.5 trillion population want more of what we in the US and Europe have. In China alone, the need for basic commodities is huge -- basic commodities for China's manufacturing and for China's own use. And the result is almost a panic for basic materials -- and fuel.

Oil is now priced at record highs. Goldman Sachs recently raised its oil price forecast to an average of $50 for the rest of this year and $47 for 2005. The three-month copper price hit a high of $3.115 a tonne on the London Metals Exchange, highest since Jan. 1989. Aluminum hit a nine-year high this week, lead reached an 11-year peak and zink touched its highest mark in five years.

What's driving up the metals? In one word -- China. China is not only exporting huge quantities of goods, it is building its own infrastructure. New highways and new cities are going up all over China. China is in a frantic rush to become the next world power. China is trying to do in a few years what it has taken other nations decades to do.

Can China do it? They're doing it. During WW II thousands of Chinese men and women and children cracked rocks by hand to build Allied air fields. They built runways long enough to land the giant B-29s. They cracked rocks with hammers until their hands were bloody. Guys who flew in the Pacific will attest to that. No, I wouldn't underestimate what's happening in China today.

Where does that leave us and why? The US is now living on credit. The US is paying for its massive imports with credits and paper. And that is unsustainable. The big picture today is how long the dollar can hold up under these conditions. The game will go on as long as the rest of the world continue to accept dollars.

Today there are two viable alternatives to dollars. One is another form of central bank paper -- the euro. The other is the only time-honored form of wealth -- gold. Both the euro and gold are now moving higher.

The central banks believe they can control the world's monetary system. They print the money, and most of the world accepts it. But there's a small segment of the world that has learned the lessons of history. This is the segment that is now accumulating gold.

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Richard Russell
Dow Theory Letters

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