Home   Links   Editorials

I sleep better with the metal

Richard Russell snippet
Dow Theory Letters
posted Nov 17, 2009

November 16, 2009 -- Question -- The Treasury sets the official price of America's gold at $42.22. Why doesn't the Treasury mark our gold to market?

Answer -- This is part of the Treasury's (in collusion with the Fed) idiotic and pathetic attempt to hold the price of gold down. In effect, the Treasury is saying, "gold is only worth $42.22 an ounce. Which is why we price our gold there. The market is crazy saying gold is worth over $1,100 an ounce. If gold was worth over $1,100 an ounce, we'd price it there."

The daily chart of gold below shows the metal climbing up a rather steep channel. Last Friday, gold reached the top of the channel. This may call for some sideways movement or even a rest. But any way you look at it, this is bull market action with numerous rallies and declines, all coming within a rising channel. Note today gold burst above and out of the channel.

Gold looks to be in its second phase with the third speculative phase somewhere ahead. It's not unusual for the second and third phase in a big bull market to be separated by a secondary reaction. This may occur in this gold bull market somewhere ahead. The reaction is what clears out the nonbelievers and readies the market for that third and final phase. As the boy scouts tell us, "Be prepared."

Question -- Why are the central banks such enemies of gold?

Answer -- The business of central banks is fiat money, money that they create and that they try to control. Gold represents discipline, and the central banks want to run the world's money on their own -- without any discipline and certainly without the discipline of gold. Also, the central banks employ tens of thousands of people. Running the world's money is a business. If gold wins and fiat paper loses, the central banks will be out of business, and all their employees will be looking for work. The central banks have thus taken on a life of their own. The Federal Reserve is doing work that was expressly forbidden under the US Constitution.

Question -- Russell, what could set off a big reaction in gold?

Answer -- I think a big, unexpected rally in the dollar would do it. Remember, the world is awash in debt, much of that debt is denominated in dollars. This has resulted in a massive synthetic short position against the dollar. On top of that, the dollar has taken over from the yen as the "cost-nothing-to-borrow" currency, meaning that the dollar has taken on the role of the new carry trade currency. And billions of dollars have been borrowed by traders who then sell their dollars, and use the money to buy higher interest-paying items. When so many dollars are borrowed, the situation becomes "top-heavy." Any initial strength in the dollar could trigger a tide of dollar-buying as carry traders rush to cover their dollar shorts.

Question -- What do you think of GDXJ, the new ETF?

Answer -- This is the new exchange traded fund that deals in small companies with a cap below $5 billion that receive at least 50% of their income from gold or silver mining. My answer is that I'd rather buy the product, the one-ounce bullion coins like Maple Leafs and American Eagles. The mines are stock companies, and what worries me is that if the stock market tanks, the stocks of the mines tend to go with the rest of the market. I'd prefer the pure gold play, which is the product itself -- the metal. The only thing that can happen to the coins is that the price can go up or down. As for the mines, they constitute leverage, but they also have to deal with energy prices, government controls, workers' strikes, depletion of resources and political developments. I sleep better with the metal.

Gold vs. silver --Silver has been known as the "poor man's gold." Silver used to be treated as a monetary metal. No more. Today no central banks hold silver as part of their reserves. However, silver has an historical relationship to gold. The historical average is that one ounce of gold would buy around 15 ounces of silver. The ratio is now out-of-whack at around 64, which means that compared with gold, silver is "dirt-cheap." The chart below shows the gold/silver relationship. When the ratio rises, it's favoring gold over silver. If the ratio breaks out above the declining trendline, silver will be outperforming gold.

As you can see gold reached its best strength vs. silver around October 2008. After that, silver gained strength vs. gold until October 2009, although silver lacked the strength to rise above the bearish blue trendline. As I write one ounce of gold buys around 64 ounces of silver. Silver is still cheap compared with gold. I like silver, but I prefer gold, since gold is the monetary metal. Today gold is treated as both money and a store of value. Silver is treated as more of an industrial metal.


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

© Copyright 1958-2014 Dow Theory Letters, Inc.

Richard Russell 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.

He 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).

321gold Ltd