richard russell

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    BEST OF RICHARD RUSSELL

    May 13, 2003

    First the opening of the Shanghai Gold Exchange. Next month gold will be available to 1.4 billion Chinese. Does that sound like a random or casual policy change on the part of the Chinese government? Or is the Chinese government following a policy of encouraging its people to buy gold?

    The Chinese were gold-savvy long before the creation of the USA. There's no question in my mind that China intends to be the major power in Asia. How will they go about it?

    First, create the world's most wanted currency. The next step for China will be to make the Renminbi convertible. The step after that would be to back the renminbi with gold. A gold-backed fully-convertible currency (coming from a nation with a fiercely competitive economy, a very positive trade balance and a strong military) could rapidly become the world's most wanted currency.

    Throughout history, gold has flowed to the strongest nation. It's worth thinking about.

    There are two primary trends or forces at work today. There's a primary bear market in force, and this bear market includes US stocks, the dollar and the US economy. There a primary bull market in force, and this bull market includes real money or gold.

    The dollar has been heading down ever since January of 2002. The normal expectation is that with a falling dollar, bonds should head down as well. But this has not happened. As of today, the long Treasury bond is at a new high. What's going on? Two phenomena. I believe that Fed is buying bonds in an attempt to pressure long rates down. And in their urgent search for yield (income), investors have ignored the declining dollar and simply bought the bonds.

    In the face of the weak dollar, the stock market has been putting on a remarkable performance. Basically, investors have opted NOT TO SELL their stocks. This has meant that anyone wanting to buy has had to pay the price. In a way, the stock market in recent months has taken it's lead from the housing market. We might call it "a seller's strike." Nobody, it seems, want to sell anything be it stocks or homes or diamonds. And if you read the New York Times, daily you will read ads offering to BUY your jewelry rather than ads to sell jewelry.

    And I ask myself, "Why the reluctance to sell?" The answer is as follows -- the professionals, the fund managers, the bankers -- what they see is growing liquidity. The last figure on M-3 money supply for the week end April 28 was UP $53 billion. The Fed is flooding the market with liquidity. M-3 is rising at an annualized rate of 7.3%.

    The monetary definition of deflation is a shrinking of the money supply. It's not happening. The pros see that, and they ask, "Why should I sell stocks or anything else in the face of surging liquidity?" And the answer is that they are NOT selling their stocks. They are not even selling OPS or "other people's stocks."

 
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