Go where the strength is
Richard Russell
Dow Theory Letters
Dec 1, 2003
Extracted
from the Nov 29, 2003 issue of Richard's Remarks
. . . What to do, dear subscribers,
what do we do?
My answer is that we go where
the strength is, and right now the strength is in the precious
metals. I'm not just saying this, my relative strength charts
are telling me that gold and silver are outperforming the Dow
and the S&P.
Furthermore, common stocks have been rising in a liquidity-driven
upward correction in a bear market. At the same time, the precious
metal stocks have been rising in the early part of a new bull
market. I'll always choose to put my money early in a bull market
rather than in an upward correction in a bear market. It's just
correct investment procedure.
The P&F chart below shows gold in a clear bullish trend holding
above the blue rising trendline. We see a consolidation taking
place during late-2002 to the present, and then the most recent
breakout of gold as it filled the 396 box. Having touched the
400 box, gold has now clearly broken out of its massive consolidation
pattern. How high gold may go from this latest breakout remains
to be seen.
But any way you look at it,
gold is clearly long-term bullish.
A primary bull market is in
progress.
But something else is taking
place. The chart below shows gold vs. silver. We see that in
June 2003 gold rose to the point where one ounce of gold would
buy 82 ounces of silver. That was the peak of gold strength vs.
silver. But from there the trend has been irregularly down toward
stronger silver. The latest vertical column shows a line of "O"s
breaking below the preceding vertical column. This indicates
that silver's relative strength against gold is increasing. The
latest box is at 73.5, meaning that one ounce of gold will now
buy 73.5 ounces of silver.
Over the last 200 years the
average ratio has been that one ounce of gold will buy 31.34
ounces of silver. Silver has done best (compared with gold) during
periods of monetary stress. At such times, silver becomes a monetary
metal rather than an industrial metal.
To boil it down to simplicity,
what all this means is that gold is in a primary bull trend as
is silver, but silver is "too cheap" compared with
gold. For this reason, I'm suggesting that subscribers who own
no silver stocks take a position in a few of the following --
PAAS, SSRI, CDE, SIL, HL. Many subscribers may want to take an
equal dollar position in each.
The constant question that I receive is -- "The shares of
gold and silver stocks have been on a tear. Should I wait for
a correction before buying any gold and silver stocks or before
adding more to what I've already bought?
And my lousy answer is that I honestly don't know -- and neither
does anyone else. This is a "stealth" bull market in
the precious metals. The average investor doesn't have a clue
as to what's going on, and most institutions have no positions
in the precious metals. This makes timing extremely difficult.
Here we have a gathering fundamental situation, and nobody knows
that's happening and -- nobody's in gold and silver.
Let's go over a few statistics. The world's bond markets are
valued at well over $33 trillion. The US stock market is valued
at around $12 trillion. The M-3 money supply in the US is about
$8.8 trillion. That's a total of around $55 trillion. I've heard
that there's around $8 to $9 trillion floating around outside
the US. That takes the total to around $64 trillion of a fiat
US currency.
Against that all the gold ever produced since the beginning of
time is estimated at $1.8 trillion at current prices. The estimate
for all the world's gold stocks taken together is around $140
billion. So we have around $1.9 trillion as a value of the entire
gold universe (metal and stocks) as against around $64 trillion
in paper money sloshing around the world. And I'm not even talking
about world debt, which would be out in space.
Another interesting comparison is that the market cap of Microsoft
is around $274 billion. This is about double the value of all
the entire gold mining industry. Conclusion -- gold stocks are
cheap, and gold is cheap -- and there are one hell of a lot of
fiat dollars floating around.
Furthermore, the world monetary system based on non-intrinsic
currency is beginning, just beginning -- to sputter.
Under the above circumstance, how am I or anyone else to know
at what point to buy more gold or gold and silver stocks? Technical
analysis, cycles, RSI, momentum, stochastics, algorithms, over-bought
and over-sold methods? FORGET THEM. I doubt they're going to
work at this point.
--New highs struck for gold
and silver stocks last Wednesday -- PAAS, ABX, CDE, GSS, GLG,
KGC, CVJ, SSRI, NEM, GG, AU, PDG, FCX.
More follows for subscribers
. . .
Richard Russell
Dow Theory
Letters
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