...keeping its citizens "stupid"
Dow Theory Letters
Oct 31, 2006
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
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
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
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
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
email: Dow Theory Letters
© Copyright 1958-2014 Dow Theory Letters, Inc.
began publishing Dow Theory Letters in 1958, and he has
been writing the Letters ever since (never once having skipped
a Letter). Dow Theory Letters is the oldest service continuously
written by one person in the business.
offers a TRIAL (two consecutive up-to-date issues) for $1.00 (same price that was
originally charged in 1958). Trials, please one time only. Mail
your $1.00 check to: Dow Theory Letters, PO Box 1759, La Jolla,
CA 92038 (annual cost of a subscription is $300, tax deductible
if ordered through your business).