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Richard Russell Comments

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    Richard's Remarks:





    May 25, 2002 -- First, I call subscribers' attentions to our new feature, the bulletin board which you can click onto from our main site. Among my subscribers are some of the best investment minds in the world, and a number of these people post their thoughts on the bulletin board.

    Obviously, the main topic of interest right now is gold, and on the bulletin board you will see a lot of comment about gold. Nobody has the answer to how high this gold bull market will rise or how long it may last. Bob Powers' letter on the board will give you some historical insights on gold. But I repeat, nobody has the ultimate answer to the gold bull market -- or to the bear market in stocks, for that matter.

    Next, I want to thank Bill Fleckenstein for his kind comments about my work. Bill's terrific column is posted regularly on TheStreet.com. Last week Bill ran one of my site-columns in its entirety. Anyway, thanks for the mention, Bill.

    One question about gold comes up repeatedly -- In a crash phase of the bear market, how would gold stocks fare? Since gold stocks are well, stocks, couldn't they collapse with the rest of the market in an all-out crash?

    My answer is that in a crash, panic takes over and anything can happen. In a crash, I believe gold stocks could go down, but I believe they would decline a lot less than other stocks. Gold stocks might also rise in an all-out crash, since gold stocks produce gold. In an all-out crash the idea behind the crash is always the possibility of chaos, bankruptcy, illiquidity.

    Since gold, the metal, can't go bankrupt, gold stocks could conceivably represent an island of safety in a fear-ridden environment. Conclusion -- every situation is different, and there is absolutely no way of knowing how gold stocks would do in an all-out crash. I suspect, however, that gold shares would do a lot better than the average stock.

    Incidentally, I note that as of the latest reports, the commercial short interest in gold (commitment of traders) has contracted substantially, while the position of large speculators has increased substantially. I've been saying all along that gold is in a primary bull market and the "commercials" (who tend to be correct) are wrong this time -- since they are aligned AGAINST the primary trend of gold.

    Gold Friday closed just over the important 320 level, and the commercial short position has contracted substantially. My take on this is that the primary rise in gold has been forcing the shorts to cover.

    Question -- has the rise in gold been based mainly on short covering and a closing out of the forward selling position of the mines? This plus a cessation of selling by the stupid central banks, who have sold tons of gold at much lower prices?

    I don't think so. I believe this is a true bull market in gold, the bull market being based on a universal move to the safety of real money. I believe that competitive currency devaluations lie ahead as the great battle for exports heats up. Note that instead of "allowing" the over-priced dollar to fall, the Bush administration stupidly tries to protect steel and other industries with tariffs. Thus, we are in the early stages of the battle for exports. And the US is cheating already with protective tariffs -- much to the anger of the rest of the world. None of this is lost on the only real money -- gold.

    No, this bull market in gold is not just a case of a mass closing out of short positions in gold. This gold bull market is based on fundamentals. One of the fundamentals is a test of fiat or paper currencies. It's a test of gold vs. the fiat currencies that are created "out of thin air" at the will of the world's central banks.

    In this battle of truth vs. lies, who do you think will win? And by the way, in my opinion, a fiat or paper currency that is created and controlled by a central bank is an "economic lie."

    Example -- In the last three weeks the M-3 money supply in the US has expanded by around $80 billion. How long do you and I have to work to earn $80 billion? All the listed shares of the world's gold mines could be purchased for less than $80 billion. So I ask the question, "Is paper money moral money?" I say it isn't. And I believe that the bull market in gold is the market's way of saying that paper money isn't moral money.

    Paper money, central bank money, is an "economic lie." Which is why no paper currency in history has survived. Only gold and silver have survived. The gold-coin money of the ancient Romans could be sold today in five minutes based simply on the weight of its gold content.

    Gold is money, and I don't care if it's in the form of a Roman coin or a paper weight or a wedding ring or a Rolex watch. That's the truth that flies in the teeth of every central banker. That's why central bankers hate and fear gold.

    Oh yeah, try to pass off some Civil War paper greenback or some German pre-1930s paper marks as money today. Better still, don't waste your time.

    Dollar -- I Just received Jim Grant's terrific Interest Rate Observer. I note that the European Central Bank Balance Sheet shows that the European Bank is contracting its balance sheet, this while the US Fed is expanding its balance sheet. For instance, in May 2001 the European Bank's balance sheet showed 814,942 million euros. This May the total was actually down to 785,510 -- with an increase in gold holdings! This is a minus for the dollar and a plus for the euro.

    Another critical but little-watched statistic, the direction of foreign holdings of US assets. For the latest week foreign holdings of US debt DROPPED $646 million. A year ago for the same week foreign holding of US debt INCREASED by $33.8 billion!!

    Stock Market -- Friday's down-market was blamed on an explosion in a housing complex in Encino, California, the down-grading of a large drug company, and fears of another terrorist attack.

    I realize that the newspapers have to come up with stories to "explain" every market advance or decline. But these daily explanations of why the market does this or that are absolutely ridiculous, and no market veteran pays any attention to them.

    You're much better off visualizing the stock market in simple terms of supply and demand. Are stocks wanted or aren't they? In general, the market doesn't care about news. The market is only interested in news as it may affect the course of future corporate earnings, and most news has little to do with future earnings.

    Supply and demand is not a one-day affair. It's a trend affair, usually a long-term trend affair. News causes little bumps, pebbles, along the path of longer-term trends. But to think that the daily news is important to the longer-term trend of the market is absurd, a waste of time and a deception.

    Statistics -- For the week ended May 24, the Dow was down 2.40%, Transports were down 1.95%, Utilities were up 5.91%, the S&P was down 2.06%, Nasdaq was down 4.59%, the Russell 2000 was down 3.01% and the Wilshire 5000 was down 2.13%.

    For the same week on the NYSE there were 1,410 advances and 1,964 declines. There were 254 new highs and 94 new lows.

    The true advance-decline ratios for the week were May 20 plus 3.25; May 21 plus 3.00; May 22 plus 3.05; May 23 plus 3.25 and May 24 plus 3.09.

    The week ended with the S&P selling at 43.90 times earnings while yielding 1.48%.

    The earnings yield for the S&P was 2.28 (earnings divided by price). This was less than half the actual yield for the 10-year T-note where the yield (free of state taxes) was 5.13%.

    Stocks continue to be extremely expensive as measured against the T-note or as measured against historical criteria.

    The primary bear market in stocks continues in force.

    The bull market in gold continues in force.

    The dollar has topped out.

    The flow of funds appears to be away from the US.

    I'll see you guys and gals on Tuesday.

    Don't forget to floss morning and night and stay out of the sun or if you must, bake in the late-afternoon sun. Have a great three-day holiday and remember, your health is more important than your money (but as Groucho put it, "Rich or poor it's nice to have money").

    Your friend from the great Golden State,

    Russell.

    Oops, I was wrong. The commercials (commitment of traders) actually increased their short positions. They are fighting the rise by adding shorts. Interesting.

















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