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...and dreaming of Softgoo

Richard Russell snippet
Dow Theory Letters
Dec 28, 2005

Extracted from the December 27, 2005 edition of Richard's Remarks

...GOLD WILL RISE; THE GOLD BULL MARKET WILL CONTINUE. It's only a question of HOW the gold bull market develops -- where and when the periodic corrections appear, and how high the gold bull market will rise.

Once investors and the general public recognize and understand the predicament that the Federal Reserve and its ever-expanding oceans of fiat money it has placed this nation in -- the bull market in gold will accelerate. The timing of the gold bull market, like the timing of every other bull market in US history, will be impossible to predict. In this business the best we can do (if we're lucky) is IDENTIFY. Precise crystal-ball forecasting is beyond the scope of any analysts (regardless of what they may claim).

Federal Reserve Chairman Greenspan has been in office for 18 years. During those 18 years the nation never suffered a serious, extended recession. Greenspan has fought every attempt by the US economy to correct. When an economy corrects, debt is reduced, paid off or eliminated through bankruptcy. But instead of reducing or eliminating debt, the US has built up its edifice of debt.

Debt doesn't "go away." A business can "go away," customers can "go away," prosperity can "go away" -- but debt remains. Debt must be financed, reneged on -- or inflated away. The easiest way to handle debt is to reduce its size (power) through inflation. This is the course that the Fed, the Congress, the President and the nation have chosen. This has been accomplished by increasing the money supply. Only one thing stands in the way of increasing the money supply (assuming it is fiat money).

That one thing is -- GOLD. This is why central banks fear and hate gold. As they continue on the path of increasing the money supply, gold rises. And rising gold is a red flag, a time-honored alarm system that announces to the world that something is wrong.

When gold rises, the world's population asks questions. And when the populace asks questions, the central banks are forced to come up with new threats and lies. For instance, one threat has recently come from the central bank of Germany. The lying threat is that the German central bank is considering selling ALL of its gold. Of course, they would never dare, but that's the rumor the bank is spreading. My comment is that I wish all the central banks would once and for all sell all their gold. Then gold would be in the hands of honest people, and the central banks' lying threats would be gone, impotent, finished forever.

Ironically, however, there's another rumor going around. This rumor is that the central banks of Asia want to INCREASE their gold reserves. So maybe sometime in the future we will see a deal whereby China will offer to buy Germany's entire stock of gold. Yeah, and wouldn't that be telling us something about the new "Decline of the West." At this juncture, gold appears to be strong against almost everything. Charts may not predict, but they certainly tell us what's happening. Below we see a ratio of gold against the S&P 500 Composite. And it's obvious that gold is outperforming stocks.

The chart below shows gold vs. oil, and here too we see oil outperforming the world's leading source of energy.

I've been saying that gold is overbought, and the truth is that gold is staying overbought. The weekly chart below shows the high degree in which gold is overbought, and for this reason I have now stopped adding to my gold holdings. I'm not selling, but I've stopped adding.

RSI is in overbought territory, MACD looks very toppy, and the full stochastics, second from the bottom of the chart, are turning down. The 12-week rate-of-change at the very bottom of the chart has also turned down. All of these studies show gold to be overbought, but we should remember that the persistence of an overbought condition is a sign of strength in a bull market.

The advance in gold has come in the face of dollar strength, which has been one of the biggest foolers for those who were convinced that gold's rise was simply the reverse action of the dollar. The chart suggests a round of dollar weakness coming up or at best pressure on the dollar.

Of course the dollar strength is synthetic since so many central banks are creating paper money with which to buy dollars, thus keeping their own currencies "weak" and their own goods competitive for export.

After today's market action, we have three more days until we say good bye to the year 2005. The few days following Christmas to New Year are famous for rallies (selling usually ceases), but so far we haven't seen any strong rallies. I could be wrong, but this doesn't bode well for early action in 2006.

...CONCLUSION -- I've been saying, T-bills and gold, and I continue to say "T-bills and gold."

I had a nightmare last night, and in that nightmare everything that was out-of-kilter and screwed up -- came together in the fateful year 2006. The dollar plunged, interest rates surged, gold headed north, the stock market headed south, Iraq unraveled as civil war broke out, VP Cheney came out in favor of gay marriage, and Rumsfeld decided to retire and become a monk. Google dropped 200 points in a single week and was immediately taken over by Microsoft. A triumphant Bill Gates tells the world the name of the new corporation -- SoftGoo.

Worst of all, Hillary and Condi got into a bloody fist fight, which basically ended either of their chances of running for president. Bush threw in the sponge, followed Cheney, and came out in favor of gay marriage while at the same time denouncing the death penalty. Arnold announced that he had enough of California, and that he would run for the presidency in 2008. The WSJ denounced everything. The Financial Times decided to drop the pink from their paper and opted for a gold tint instead. The New York Times filed for bankruptcy. Economists at Goldman Sacks opined that, all in all, it seemed like an unfavorable start for the New Year.

lots more follows for subscribers...

[Editor's note: We have permission to extract, now and again, snippets from Richard's Remarks. The above is probably stepping over the 'snippet' boundary. But the Remarks were stuffed with gold comments, and it is Holiday Treat Time.
Thanks, Richard, for letting us post in 2005 - and this comes with Best Wishes to you and yours, for a Healthy, Fun and Prosperous 2006.]

December 27, 2005
Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters
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