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...This may be the time to buy the mining stocks

Richard Russell (BIG) snippet
Dow Theory Letters
posted Oct 16, 2009

October 15, 2009 -- Gold has closed higher for nine consecutive years. And yet, the great majority of investors continue either to ignore or be sceptical of gold. All rallies in gold are labeled by Wall Street and the media as "speculative," all declines are labeled as "overdue." This is the result of 96 years of Federal Reserve propaganda regarding their Federal Reserve Notes (we still call them dollars) being superior to Constitutional money -- gold. It's a testament to the power of mass brain-washing. Why do the Fed and the banks denigrate gold? Simple, they survive and make their living through dealing with and creating fiat currency.

Today the dollar closed at a 14-month low (see daily chart below).

As the dollar sinks, in value and purchasing power, it requires more dollars to buy everything. This is a form of inflation, and I'm wondering whether between the sinking dollar and the torrent of liquidity, these are twin reasons for the stock market's rise. Can stocks be a "safe haven" from a falling dollar? I honestly don't know, but the idea has occurred to me. If a falling dollar and explosive liquidity levitates stocks, why doesn't it do the same for housing? Probably because the inventory of homes and condos is too large.

Before housing can rise, the monster inventory of homes for sale will have to be whittled down. Furthermore, the inventory of homes destined to be foreclosed will have to be reduced. This year, one in every 136 US housing units went into foreclosure. Houses to be foreclosed act like a weight over the entire housing universe. For instance, during the third quarter of 2009, housing foreclosures were up 23% from 2008. And it looks certain that 2010 will be worse! Why? The reason is rising unemployment and the resetting of adjustable-rate mortgages to higher rates.

How about this idea for another government bailout -- "Cottages for Cash. Bulldoze your old house, and buy a new one with an initial gift from your government of $50,000?" (Obama, if you use this idea I want a commission).

In the meantime, what are you and I doing? Right now my choice would be to buy GDX, the exchange traded fund that mirrors the NYSE Arca Gold Miners Index. It's a modified market-capitalization-weighted index made up of publicly traded companies that are in the business of mining gold and silver. Barrick Gold, Newmont Gold and GoldCorp make up roughly 30% of GLD [GDX] and 27 other companies account for the rest.

I'm showing a P&F chart of GDX, and it's a powerful chart showing GDX in a well-established bullish trend. The P&F upside target or "count" is 62, which if accomplished, would take GDX considerably higher. My thinking is that with gold now established in a clear bullish trend, this may be the time to buy the mining stocks. The simple theory is that the expenses of the mines in producing gold will remain reasonably constant, this while the price of their product (gold) heads higher. Thus there is a lot of bullish leverage in the gold mining industry assuming gold heads higher.

As a follow-up, I'm showing HUI, the "Gold-bugs Index," below. This widely-followed Index tracks some of the best and most important gold shares in the business. What I find so interesting is that the P&F price objective is 588, up almost 30% from where HUI is now.


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

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