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Warren should've listened to Daddy Buffett

Richard Russell (big snippet)
Dow Theory Letters
Dec 17, 2008

December 16, 2008 -- Now as the Bernanke-Paulson team open the monetary flood-gates in their desperate effort to halt deflation and bring back inflation. Our creditors (i.e. China) must be getting nervous, and they're beginning to let us know about it. The problem for our creditors -- the dollar is now fading rapidly. There's one obvious way to make the dollar more attractive -- higher interest rates. The choice now -- rising rates or a declining dollar. What I'm most worried about is the US dollar losing reserve status. This would mean that our creditors would refuse to take in more fiat Federal Reserve notes, "money" that we can print as we want.

Gold -- I believe that big money, institutional money, is finally beginning to "get it" about gold. Bonds are in trouble, muni bonds are getting hit, the dollar is in trouble, real estate is getting killed, the world is swimming in debt, and we're facing a monster "margin call" on all debt. Where can you find wealth that is not anchored in debt? Only one place -- gold.

Many people, and not just wealthy people, are thinking in terms of survival. How do you survive in a world that won't lend, in a world where nobody trusts anyone else, in a world, where every asset class is in danger? Only one place -- eternal wealth -- gold. This is the concept that has alluded the public and the wealthy as well. It took a situation (as now) where ALL asset classes are in danger before the smartest people on the planet finally "got it." The "last man standing is gold." When the world's asset classes are crumbling, only gold is left.

You can see it in gold's action. While almost all other assets are sinking, gold on a year-over year basis is up 5.6%. So far, this year, gold is up .01%. Nothing else can match gold's performance. Talk about superior relative strength, you're seeing it in gold.

Gold stocks are common stocks. Up to now, gold shares have acted like typical common stocks -- they've been declining with the Dow and the S&P. I've been saying that once bullion starts moving higher on a steady basis, the beaten down gold shares will start acting like entities that produce gold, rather than ordinary mining stocks that sink with the general stock market.

One of the best tests of an asset or a stock is its relative strength compared with the standard -- the S&P. Below I show a daily chart of GDX, the exchange traded fund (ETF) for gold shares, divided by the S&P. GDX is starting to show positive relative strength. From a March 17 high of 55.74, GDX (crumbling with the rest of the market) hit a low of 15.03 on October 24. Today GDX is selling at 30.67, almost a double from the low.

If gold continues to climb, I would think that oversold GDX will head higher.

Year after year -- This may shock you. What item has closed higher every year since 2000? I'm indebted to my old Manhattan friend, Ron Rosen for this one. Here are the gold closings for the following years:-

2000 -- $273.60

2001 -- $279.00

2002 -- $348.20

2003 -- $416.10

2004 -- $438.40

2005 -- $518.90

2006 -- $638.00

2007 -- $838.00

2008 -- ?

Asked price for spot gold as of yesterday $837.10. So question -- will gold close the year 2008 above its 2007 closing price of $838.00? Guess we're going to find out at the end of December. Isn't this a fascinating business? Ya gotta love it.

The "Oracle of Omaha," Warren Buffett, once said this about gold (thanks to Hubert Moolman for this Buffett quote):-

"It gets dug out in Africa or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

When it comes to gold, Warren didn't know what he is talking about. Warren should have listened to his daddy, who was a confirmed gold-man. The following is from Google regarding Howard Buffett, Warren's dad --

Human Freedom Rests on Gold Redeemable Money

by Hon. Howard Buffett
U.S. Congressman from Nebraska

Reprinted from The Commercial and Financial Chronicle 5/6/48

"Congressman Buffett stresses relation between money and freedom and contends without a redeemable currency, individual's freedom to sustain himself or move his property is dependent on goodwill of politicians. Says paper money systems generally collapse and result in economic chaos. Points out gold standard would restrict government spending and give people greater power over public purse. Holds present is propitious time to restore gold standard."

"Is there a connection between Human Freedom and A Gold Redeemable Money? At first glance it would seem that money belongs to the world of economics and human freedom to the political sphere.

"But when you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty. You see, gold is mobility, gold is a passport to move across borders.

"Also, when you find that Lenin declared and demonstrated that a sure way to overturn the existing social order and bring about communism was by printing press paper money, then again you are impressed with the possibility of a relationship between a gold-backed money and human freedom.

"In that case then certainly you and I as Americans should know the connection. We must find it even if money is a difficult and tricky subject. I suppose that if most people were asked for their views on money the almost universal answer would be that they didn't have enough of it.

"In a free country the monetary unit rests upon a fixed foundation of gold or gold and silver independent of the ruling politicians. Our dollar was that kind of money before 1933. Under that system paper currency is redeemable for a certain weight of gold, at the free option and choice of the holder of paper money."

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

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