...keeping its citizens "stupid"

Richard Russell (big) snippet
Dow Theory Letters
Oct 31, 2006

Extracted from the Oct 30, 2006 edition of Richard's Remarks

"There can be no other criterion, no other standard than gold. Yes, gold which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence." -Charles De Gaulle

Russell Comment -- De Gaulle called upon the US to settle its debt with France by shipping US gold to France instead of US paper. At that point, President Nixon shut the gold window and in so doing took the US and the world off the gold standard and into the world of fiat paper.

Lower interest rates make the US dollar less attractive. And over the last few weeks the dollar has been heading down. How far down is the big question. A lower dollar means that imports to the US become more expensive. More expensive imports in turn mean rising inflation. It becomes a vicious circle, and if it continues Ben Bernanke is going to be facing a nasty and rather puzzling situation.

A weakening dollar represents a "wake-up call" for gold. Most people don't realize it, but rising gold is a form of dollar-devaluation. It's not an official devaluation, I call it a "free market devaluation".

Question -- Why does the US government continue to keep the official price of gold at $42.22 when the free market price for gold is over $600?

Answer -- This is the government's way of denying that the dollar has been greatly devalued. It's the government's method of keeping its citizens "stupid" and unaware of what's been happening to its money.

Remember, rising gold is the free market's way of devaluing paper currencies. Since the Federal Reserve creates our fiat dollars, you can imagine that the Fed does not want to see the dollar fall apart. A dollar that is very slowly declining against gold is acceptable, but a dollar that is rapidly declining against gold (i.e., a surging gold price) is something that the Fed most assuredly does not want. This has given rise to talk of the Fed manipulating the gold price, particularly at times when gold is surging. Does the Fed really manipulate the price of gold? I honestly don't know -- I'll leave that question to others, such as the Gold Council.

Aside from the stock market itself, I think the two places that we must watch most closely are the dollar and bonds. Well, there is a third place, and it's gold. Since many of my subscribers hold gold or gold shares, let's examine the weekly chart of gold (I'm using GLD). RSI appears to be pushing higher. Gold and its 10-week and 40-week moving average all appear to be tangled at around 600.

On the lower section of the chart we see that the histograms have turned positive (above zero) for the first time since June. And at the bottom of the chart we see the full stochastics turning up from the oversold level of 20. At 603 on Dec. gold, the preceding peak would be bettered. At 608 gold would have rallied above both moving averages, a bullish achievement. Let's see what happens (written before today's close).

click on chart to enlarge

Questions I ask myself:
Bonds are rallying and interest rates are declining. Bonds appear to be discounting deteriorating business in the months ahead. What will gold do in this situation? Lower interest rates tend to be bullish for gold. But lower rates also dovetail with declining business and deflationary pressures. In such an atmosphere, will gold advance or decline? If business turns sour in 2007, the Fed will move (as per Greenspan) to pull out all the stops, lower rates and open the money spigots wide. This would be inflationary and bullish for gold.

Does it make any sense to trade gold? My experience trading in-and-out of a bull market is that you end up being out when the big advance arrives. Nevertheless, some few people do trade gold successfully. Should I advice trading gold? My answer -- no, because subscribers almost always screw it up. Take your position, sit with your position, add to your position on corrections. At any rate, that's what I've done with my own account.

From a risk/reward standpoint, does it make sense to take a big position in stocks when P/E ratios are high and dividends are almost nonexistent, while at the same time Transports have not confirmed the Industrials and the yield curve is increasingly negative? My answer -- "I don't think so." The one exception here is the utility group, many of which still offer attractive, well-covered dividends.

For the long-term, I believe oil is headed higher? Should I advise major positions in oil stocks? Two items stop me. The first is that if the Democrats take over both houses, they will want to tax oil. The second is that I want to wait. If the economy slows down next year, oil stocks may back off. I hold small positions in a few oils (mainly XOM and SU). I'll just sit with those positions and wait.

Dec. gold was up 6.40 to 607.40. Dec. silver was up 17 to 12.25.

GDX was down .17 to 37.01. HUI was up 1.18 to 311.69.

ABX up .33, AEM up .94, ASA up .51, NEM up .18, SSRI up .20.

Gold creeping higher. Next hurdle is for Dec. gold to close at 608 or better.

My perspective -- It's hard to believe that the market doesn't know all about the housing picture. Anytime you think you know more than the market, you're on your way to being wrong. So did the market decline into the July lows discount the worst that lies ahead in housing? That could just be the answer.

lots more follows for subscribers...

Oct 30, 2006
Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters
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