Richard Russell's Gold / Dow Prognostication

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    Here it is for those who are interested:

    Posted: 2002/11/07 Thu 21:12 ZE2 | © Mineweb 1997-2002

    NEW ORLEANS -- Investment newsletter guru Richard Russell has for some time been urging his subscribers to accumulate gold stocks and the metal itself as an antidote to a sorrowful recuperation from the speculative bubble of the late 1990s. The bull market that he says ran from 1974 to 2000 was unprecedented, and he believes the consequences will be just as unprecedented.
    The keynote speaker at this year’s New Orleans Investment Conference, it was not just another gold bug message. Russell’s reputation was minted through uncannily accurate trend spotting that made his followers truly wealthy, which is why the audience swelled to hear him.

    He is warning average investors to quit the market altogether unless they have really good advice; which will not come from Wall Street. “Wall Street is there to distribute stock to raise capital. They are worried about their commissions, not their clients.”

    So what does he recommend for average investors? Ultra-safe, high yield securities such as Treasuries and AAA municipal bonds. He says to buy and hold those; allowing compounding to work its magic. “You must have the discipline to reinvest as the money comes in; take the tax free income from munis and put it into gold and Treasuries.”

    He’s so bullish on gold for no other reason than it’s the best alternative to an overpriced stock market. Russell says by the the most conservative definition, the Standard & Poors 500 group of companies is priced at 48-50 times earnings. The decompression of the last two years has only made a small dent in returning that number to its historical trend. Eventually, Russell says, the market will plunge into extreme undervalue when stocks trade at averages of 6 times earnings. That’s when he’ll be buying again.

    As the correction proceeds, Russell believes a crossover between gold and the Dow Jones Industrial Average to be inevitable. He subsequently pegged his best bet - $3,000 per ounce of gold and 3,000 on the Dow.

    Unfortunately, that drew some applause which is, surely, the last reaction Russell would have expected or encouraged since he’s not in the business of telling people things to please them. Besides, there is no iron-clad guarantee.

    That said, the Russell reputation is gilded and he draws heavily on his experience of living through the Great Depression. He remains adamant that America’s primary threat is deflation as the bubble fallout progresses and it will all last a long time; perhaps as long as two decades “before we can buy with our eyes closed.”

    He turned particularly bullish on gold when the 20-month moving average for the gold price crossed above the 40-month moving average.

    Russell describes the problems facing the US as “more serious than in 1980”, the year in which the gold price reached $850 an ounce. Now the country must contend with the fact that it has exported its manufacturing base to China. That is partly reflected in the chronic current account and trade deficits - a tripwire for the dollar that is being earmarked for a 20% depreciation to compensate.

    The ultimate consequence is likely to be wrenching unemployment as China gears up for economic war with the West.

    The Chinese threat is taken so seriously that Russell worries that a move to a gold-backed yuan could be the death knell for the dollar, which is why he advises he clients to get into alternative securities.

    That is perhaps the core weakness in Russell’s argument – China is only powerful while it has US consumers to vacuum up its goods. It is always worth recalling that American Declinism was an influential cottage industry in the early 1990s, predicting that the US would run a bad second to both Japan and Europe at the start of the new century. However, that is also not to say that America is immune from a Japan-like surprise in its fiscal and monetary management. After all, both systems are founded on similar policy ideas, and Japan faithfully followed the prescriptions of President Clinton’s money team through the ‘90s, to no avail.

    “Gold has been the only real money for 5,000 years and there will be a frantic move to buy it. We are at the very early stages.” There are a lot of people who hope Russell is right, but more who want, and need, him to be wrong.

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