"I want to present a few observations or I should call them theories about gold. I note that the gold shares have become somewhat immune to the gyrations in gold, the metal. This is a change that I believe has occurred just over recent weeks. It suggests to me that those buying gold and gold shares are not doing so for speculative purposes. It appears to me that those buying gold and gold shares today are buying them with the big picture in mind.
The big picture is a dollar that faces momentous problems, problems that I have outlined may times before. To be brief, the US is new dealing with a trade deficit of $40 billion a months. These deficits have been financed by foreigners all during the '90s and up to recently, mainly because the US was perceived to having the world's most vibrant economy. But this could be changing.
In the first quarter of this year foreigners were actually net sellers of US assets. The selling was minor, just $2 billion net, but nevertheless it was the first negative quarter since 1998, five years ago.
Since last year the dollar has fallen 25% against the euro. Nevertheless, it's amazing to me that the dollar has held together as well as it has. Perceptions don't change quickly, and the perception persists that the dollar is basically a "strong" currency and that the US economy is the most powerful in the world and that the safest place on earth for money is here in the US.
As the debt come in, as the deficits continue to build, these perceptions, I believe, will change. Which is why I recommend that all my subscribers own gold and gold shares.
As an aside, I just read an interview on SmartMoney.com with Jim Rogers. Jim's the world traveler who was co-founder with George Soros of the Quantum Fund. Rogers is skeptical of the lasting power of the Euro. He also believes that the dollar is doomed, and that the currency most likely to replace the dollar is the Chinese yuan. The yuan is now a blocked currency, but if China wants to become a world economic power is will have to make the yuan fully convertible.
I've said before that China has a large trade surplus, it has a huge competitive population, and it's an accumulator of gold. If China was to make the yuan fully convertible, and if China backed its yuan with gold, I have not doubt that the yuan could become the world's premier currency, and that the yuan could, in time, replace the dollar as the world's reserve currency. Sound impossible? Don't discount it.
As subscribers must know by now, I've advocated all my subscriber owning shares in the premier gold stock, Newmont Mining. Today the stock broke out above 34, before settling back -- in what I would term an important technical feat. You can see on this point & figure chart how important this breakout is. I think it's represent a plus for the entire gold universe.
Newmont is breaking out of a base which has been five years in formation, going back to May 1998.
Turning to HUI, the unhedged Amex Gold-Bug's Index, looking at a monthly chart the HUI is breaking out to the upside of a very large ascending triangle. This, too, is positive news for the whole gold universe. What more can I say. This is a slow, building bull market in gold, a bull market that I still believe is in its first or accumulation phase."
posted on behalf of
Dow Theory Letters Richard Russell, Editor-in-chief
