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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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