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A Christmas card from James Grant

Richard Russell snippet
Dow Theory Letters
December 30, 2004

Extracted from the December 29th, 2004 edition of Richard's Remarks

This morning I received a Christmas card from my old friend, James Grant. Jim is one of the best and smartest writer-analysts in the business (Grant's Interest Rate Observer). In fact, at the end of this site, I include an excellent piece by James which appears in the current issue of Forbes magazine.

In this piece, James outlines the history and sad demise of the dollar, and at the very end of the article he writes, "Count me bullish on gold -- still."

Ah gold, how it's frustrated its followers, particularly its most recent followers. And I've (believe it or not) been giving some thought to gold. What I think has happened is that a lot of people have bought gold for profit. Buy it at 420 and hopefully sell it at 450 or 480 or golly, maybe even 1000.

It's not going to work that way, and besides, that's wrong thinking. You don't own real money (gold) with the idea of using it for trading profits. You own gold because you are familiar with the history of fiat money. The history of fiat money is "bankruptcy." The history of fiat money is that ultimately it becomes worthless.

But the trip from non-gold-backed to worthlessness takes time. The dollar is on a downward path now, but the dollar could be around (maybe not as a reserve currency) for a few years, five years, 10 years, or longer. The history of reserve currencies is that they don't die instantly; like MacArthur's "old soldiers" they just fade away.

However, the US is in a predicament. If the dollar's life is to be extended, the US must spend less and save more. But if we spend less and save more, you're talking recession or worse. However, spending less and saving more may be thrust upon us. Note the news today, that the Air Force is cutting way back on its order of the new, super-expensive (quarter billion dollars a copy) "Raptor" planes.

One of the main desires of the Fed is to ward off recessions. Thus, the Fed will do as much as possible to keep the US inflating, and that means a weaker dollar. And with our government assuming the task of being policeman to the world (I'm putting this politely), expenses will continue to rise.

Thus, it's difficult to envision a bright future for the dollar. This is the real reason for holding gold. To put it simply, the reason for holding gold can be stated in three words. We hold gold "just in case." One more thought -- this is early in the gold bull market. At some point ahead, the rise in gold will accelerate.

"What do we do then?" you ask. My answer -- "What we'll be doing then is that we'll probably be buying more gold at much higher prices. We'll be buying more gold because the dollar will be in its death throes, if not as a currency, at least as a reserve currency."

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Richard Russell
Dow Theory Letters

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