richard russell's latest on gold

  1. 9,081 Posts.
    "Russell On the Market & Gold

    I like to keep what I call THE BIG PICTURE in mind. I see the big picture as follows -

    The US has been living over its head for years with the help of two phenomena. The two phenomena are -

    The US possesses the world's reserve currency - the dollar. Prior to 1971 the dollar was "as good as gold," as far as our foreign creditors were concerned, because foreigners could call in their debts in the form of US gold. But in 1971 President Nixon "closed the gold window," stating that the US would no longer pay off US debts in gold. From that time on, the US was completely off the gold standard, and the dollar was reduced to a piece of paper with the words, "in God we trust" behind it. It's nice to trust in God, but it would be nice to be able to trust the Fed too.

    Surprisingly right up to the present - both foreigners and US citizens continued to treat the dollar "as though" it was as good as gold. Of course, that's just a fantasy, the dollar is no longer "as good as gold."

    Debt. The second reason why US consumers have been able to live over their heads is their build-up of debt. Total debt in the US is now three times Gross Domestic Product, a ratio that has never been seen before. Furthermore, the US continues to pile up individual, city, county, state and federal debt.

    The enemy of debt is deflation. This is the reason why the Fed is so frantic to avoid deflation or even a decline in inflation. What would happen if deflation did envelope the US? In that case, there would be a panic by individuals and corporations to carry their debt and to remain solvent. Today you carry your debt and you pay off your debt with dollars. This is one of the main reasons to hold dollars today.

    How about gold in a deflation? If deflation was actually to hit the US, I believe, in view of the sky-high debt levels, that there would be grave doubts about the solvency of the whole nation and the viability of the dollar. Thus, although there would be a panic by Americans to collect "legal tender" dollars, at the same time, foreigners would have doubts about the wisdom of holding dollars. Since the dollar is a reserve currency, and most nations hold dollars as reserves, if there were doubt about the worth of the dollar, there would also be doubts about the worth of all paper or fiat currencies. Obviously, this could set off a panic for real money - gold.

    Here is another consideration. If the US goes into deep recession, the US is such a huge factor in world commerce, I believe the rest of the world would follow. In other words, I believe that if the US should run into trouble, that trouble would run off on almost every nation.

    For the first time in history, over 2 billion people have, over a period of a few years, entered the global work force. Of course, I'm talking about the people of China and India. These are not third-world nations, but they do have enormous populations of willing workers, plus huge unemployment problems. India and China both have millions of educated citizens, and hundreds of millions of workers who are only too happy to accept low-wages (by our standards) for jobs - any jobs.

    This has created world over-production and price deflation in consumer goods. In fighting the forces of deflation and in fighting the problems of the burst stock market bubble, the Fed has elected to flood the economy with liquidity while driving short rates down to 45-year lows. This brand of manipulation will only work for a while, and while it's working, it is building new excesses into the economy.

    As I see it, because of the Fed's massive reinflation efforts - almost "everything" is overvalued. There is no guaranteed island of safety at this time - or I should say there is no island of safety that brings in any income. The ultimate island of safety is gold, since gold represents pure intrinsic value. Because gold is pure, intrinsic money with no debt against it, gold cannot go bankrupt. Gold is the only real money, and unlike paper money, gold is not derivative of debt.

    Conclusion - If you're one of those fortunate persons who don't need any income from your investments, the best place to be at this time is in cash and gold and gold shares. In the end, I'm not sure which currency will make a difference. In the end, all paper money (cash) is just a different variety of "legal tender." Historically, every issue of legal tender-fiat money has, in time, become worthless. It's just a matter of time. First fiat money loses its purchasing power. And in the end it disappears.

    GOLD AND REAL ESTATE - As for gold, the public isn't in gold, which is one reason why I like it. A second reason, and of course, the big one is that I believe gold is in a primary bull market. And like every bull market in its early or accumulation phase, gold is doing a great job of keeping people OUT. For instance, the recent correction scared the hell out of most neophytes. A LOT of people dumped their gold shares. The gold-haters gloated when gold temporarily broke below 400 this week.

    I've repeated over and over again that the hardest thing to do in this business is to get in early in a bull market and ride the bull all the way to its speculative third phase ending. I'll repeat that I believe that gold is in its early accumulation phase. Only the true believers are in gold today.

    Now I want to say something about real estate. My father was in real estate all his life. Dad was a civil engineer, and prior to the Depression he was a builder. He knew building from the foundations to the elevators to the roofs to the electrical systems. Then the Depression hit, and construction stopped dead. Nobody built a darn thing - wait, the government built post offices and roads, mainly to give people jobs.

    During the Depression and afterwards, my father went into management. He managed buildings for Tishman Co. and these were all New York City Apartment houses - many on Park Avenue. In those days, times were so tough that you had to negotiate a lease on an apartment. In other words, you had to sit down with a prospective tenant, and try to get him to sign on the dotted line. Believe me, it wasn't easy, and my dad would often come home exhausted after getting someone to sign a one-year lease.

    My father had a "formula" that he used when buying a house, any house. He insisted, "No matter what you buy, figure it's going to cost you 10 percent to carry. That includes loss of interest on the money you put down, property taxes, wear-and-tear, repairs, extras - your cost will ALWAYS come to 10 percent." I've checked these figures over and over again, and my father was correct. When you buy real estate, think 10 percent!

    Recently in the WSJ there's a group (with pictures) of five houses that are listed as rental and income properties. The first house is typical. It's in Sanibel, Florida, a two bedroom condo - price $1,150,000. The house rents for $39,000 for the year. OK, so the house cost you $115,000 to carry (10%), and you pull in $39,000. Loss $76,000.

    Russell conclusion - This is an income property? It's selling at near three times what it's worth as an investment, in my opinion. And this is typical of almost all real estate today.

    You want your own home and a roof over your head that you can call your own? Fine, buy a house, own a house. But if you think you're getting a bargain today, forget it. Houses, like stocks, are overpriced. Period. The only economic reason to buy a house today is the thesis that inflation will bail you out. The only thing I don't like about that reasoning is that the public has swallowed it hook, line and sinker. Too many people own homes today and far too many own them along with fat mortgages.

    PHILOSPHY OF INVESTING - What are we really trying to do in this investment business? We're trying to improve our lives with the help of increased income and therefore purchasing power. Or are we trying to make our lives safer by increasing our assets? Or are we simply seeking more freedom, which is what money can give us?

    Seasoned investors think of investments three ways.

    First and most important - is the investment safe, meaning, if we buy it will we eventually get our capital back? One measure of safety is the risk premium compared with government 10 year T-notes.

    Second - Does it throw off income? Income increases our purchasing power. Income also allows us to compound.

    Third - Will it increase in price? If we buy it, is there a chance that we'll be able to sell it at a higher price to a future buyer?

    On another level, everything in the markets boils down to a flow of funds. In other words, which way is the big money, the important money, going? Then another question arises - why beat our brains out trying to decide what's a value and what isn't? Why knock ourselves out reading reports when the important factor is simply the flow of funds? Where's the money going?

    Ah, that's a key question. After half a century of struggling and asking questions in this business, I've concluded that you should have a good idea of what constitutes a VALUE. But once concluding that an item is a value, you must check and confirm your opinion via a flow of funds.

    For instance, if you think that General Electric stock is a value, you might be correct. But before you buy GE stock, you better check its price action. In this business you must accept the thesis that nine times out of ten, the market is smarter than you are. If you can accept that thesis, you'll be way ahead of the game.

    So if you believe that GE is a value, then check the chart and see whether GE is in a rising trend or not. If GE is in a declining trend, then I don't care what you think of GE as a value, you're going to lose your money. You'll lose your money simply because you're at odds with the market.

    OK, let's take it to the present, and talk about the stock market. By any historical measurement, this is a very expensive market. But what about the money flows? So far, the money flows have been favorable. Money has been pouring into the stock market. In fact, January's inflow into the markets has set a record.

    But the overvaluation is a huge consideration for seasoned investors like you and me. We have to decide about safety, particularly if we're not traders. The S&P is now selling for almost 30 times trailing earnings. That's about as overvalued as the market ever gets. So even though the flow of funds into the market has been favorable, should we participate? Critical question, and a personal question.

    The great money in investing has been made buying undervalued items - stocks, Picassos, gold, silver, housing, bonds, you name it. So what about the stock market now in its overvalued state? I've always believed that an overvalued market is an unsafe market. But since the trend has been UP, I have advised limited participation in the market via the Diamond ETFs, which are a proxy for the Dow.

    Recently, because of the non-confirmation by the Transports I've said that I, personally, have "had enough." I sold the Diamonds, and now I'm prettty much on the sidelines.

    The current policy of the Federal Reserve is to inflate. Alan Greenspan stated recently, literally, that he would keep interest rates low and inflate. And there's little question in my mind, that's exactly what he's doing. On his "word," stocks and bonds both surged.

    Let's return to the idea of values. With gold today at less than half its peak 1980 price, it seems to me that the best and the most unappreciated value around is gold. But gold has something going against it. The establishment is against it. Rising gold indicates a preference for intrinsic money over the fiat money that the establishnment (i.e., the Fed) is creating. Therefore, we can expect the establishment to do everything in its power to discourage the public from buying gold.

    For instance, we've been hearing about a "Gold ETF" which will be traded on the NYSE. Britain has a gold ETF and so does Australia. But weeks go by, months go by, and I understand that the hoped-for US gold ETF is being "held up" by the SEC. Why? Why should it take so long for a Gold ETF to become available? The answer is blowing in the wind.

    On February 11, the Dow broke out to a new recovery high, but the new high was not confirmed by the Transportation Average. Maybe the Transports will confirm today or tomorrow or next week. But a persistent failure by the Transports to confirm is a "red flag" as far as Dow Theorists are concerned. When the Averages disagree, something is wrong.

    So that's one of the main items that I'll be watching for in the period ahead. To confirm the Dow, the Transports will have to close above its January 22 closing high of 3080.32.

    TOPPING OUT - As subscribers know, I'm of the belief that the bear market (upward) correction that began from the October 2002 lows is now in the process of topping out. Along these lines, let's study this daily chart (courtesy of StockCharts). By the way, for definitions of some of these terms, please see my Glossary on the home page of the website.

    Look at the shaded area at the top of the chart. This tells us, according to RSI, that the Dow was seriously overbought. Note that the Dow then moved higher, but RSI did not confirm. Nor did MACD (the heavy black line at the bottom of the chart) confirm.

    The Dow then backed off to the 10470 level, where it sat for a few days. Next the Dow rallied to new high of 10737.70 on February 11. Again RSI and MACD refused to confirm. And that brings us to the present.

    Now note that MACD appears to be rolling over just above the thin black line at the bottom of the chart. The little vertical columns are called histograms, and they simply measure the distance between the MACD and the thin black line. The thin black line is a 9-day exponential moving average of MACD. Buy and sell signals are given when MACD (the heavy black line) crosses above or below the thin black line.

    If the Dow is in trouble, we'll see MACD drop below the thin black line, and we'll see the histograms move down below the zero line again. The thin rising line on the chart is the 50-day moving average of the Dow. If the Dow is in the process of topping out, first it will drop below the 10470 level and then below its 50-day MA, which stands at 10408.34.

    The Dow is very "stretched" on the upside, since it is so far above its 200-day moving average. The 200-day MA stands at 9588.19. The Dow is 10.9% above its 200-day MA. Anytime an item is more than 10% above its 200-day MA, it is overdue to correct.

    GOLD - Now let's turn to gold on page 6. Note again the shaded section of RSI at the top of the chart. This shows us where gold became overbought and ready to correct. Gold plunged down below the 400 level, but note at the low that RSI did not confirm. RSI did not break to a new low.

    However, we see MACD giving a bearish signal as it broke below its 9-day MA (heavy black line breaks below the thin black line). At the same time gold broke well below its 50-day moving average, the rising line. Now observe the histograms beginning to rise, and over the last four days the little histograms actually rose above zero. That meant that MACD had crossed above the thin black line - this was an early buy signal. We also see that gold has risen above its 50-day moving average again.

    What we are watching now is to see whether MACD, the heavy black line, can climb above the zero line. If it can, we'll have a second and very important bullish signal for gold. Finally, we see that gold is forming a potential "head-and-shoulders" bottom pattern. If April gold can rally above 416, I would consider this a bullish break-out from its basing pattern. However, it's possible that it will want to back off for a few days before trying for 416.

    INVESTMENT POSITION - I continue to keep the bear in the box, because I continue to believe that we are in an overall primary bear market. Wall Street and the public are super bullish now, but the non-confirmation of the transports are telling me that something is wrong."
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