My real emphasis has been, and still is - the precious metals. Gold has been in a 19-year bear market, and by 1999 gold was selling 70% below its 1980 high. Gold was ridiculously cheap in 1999-2000-2001, and I said so - literally, I said that gold was selling like "dirt." As I see it, gold is still cheap. Gold would have to rise to 550 to recover just half of its bear market losses. Will gold do it? Can gold do it? I believe it can - and will.
As with the early part of all bull markets, the public and most professionals relate with both ignorance and fear. But despite this gold continues higher. This morning gold was up over 7.00 with most of the gold stocks following the lead of the metal.
As for the gold action, I like it. A powerful upward surge, a spike in gold, would bother me. The best action for those of us who hold gold and gold shares is a measured, cautious, step-by-step rise. Nothing to excite the retail public. Nothing to make the pros feel that they are missing anything. So far, that's what we've got. So far, that's the way both gold and silver are "playing the game."
Meanwhile, the dollar continues to sink to new lows against its main competition - the euro. So far, the market is taking the declining dollar in stride. What me worry? The dollar is going down in "baby steps" the same way gold is going up - in "baby steps." Gold isn't exciting anyone, and neither is the sinking dollar.
Of course, if you're a foreign creditor of the US you might be getting a bit tight around the collar. You've seen the value of your US holdings drop probably near 30 percent in your own currency, this since January, 2002. Will the decline in the dollar continue? When will the dollar correct (you hope) to the upside? Or worse, could the dollar accelerate to the downside? If that happens, panic could easily take over.
We're watching the bonds. As I write this morning (12/30/03), the 30 year T-bond is down 23 ticks to 109.04. The 200-day MA for this bond stands at 109.00. The 50-day MA for the bond stands at 108.03, which is well below the 200-day MA. If this bond breaks below 108.03, it will be giving a "sell" signal. A sell signal on the long bond would be a very negative event. The stochastics and momentum on the long bond are now turning down. Today (Jan. 5) the bond has broken all support.
POWER - Can the government create wealth? No - governments create expenses. The Founding Fathers were well aware of this, which is why, almost to a man, they wanted limited government with as few foreign "entanglements" as possible.
What do the top men in government today want? One word describes it - POWER. Yeah, they can call it patriotism, leadership, service - but I call it POWER. In order to retain power, our leaders in government must create the illusion that they are "giving us something." The government taxes us and returns part of the tax-take in the form of government, more government and still more government.
But the tax-take doesn't provide all the gifts that the government bestows on us. As the spending increases, the government creates another illusion. The government tells us that it alone can create wealth (money). Actually, back in 1907 a group of greedy "stealth bankers" formed a money-manufacturing machine which they call the Federal Reserve. The Federal Reserve is the entity that creates "wealth" without working and without sweat. This wealth is accepted by the American people and the rest of the world - although the rest of the world now accepts the Fed-created "wealth" with increasing skepticism.
Our government states that the Fed-created "money" is legal tender for the payment of all debts. Thus, the money that the Fed creates is wealth by fiat. The government simply states - this is money. But as usual, the government creates too much of its legal tender. And when that happens, wise men become suspicious, and their thoughts turn to real money - gold.
Gold is "all right" as far as the government and the Fed are concerned as long as it "behaves," meaning as long as it remains in a trading range. And all the while the government and the Fed tell the people that gold is just a "relic of the past," and that holding gold is a lost cause, since gold is "going nowhere, and it pays no interest." In fact, we are told that "gold is just another commodity, and an outmoded and useless commodity at that." But wise men know better. Wise men know that for 5,000 years gold has been considered MONEY.
So is gold just a commodity? If it is, then gold will trade like a commodity. Ah, but the problem is that gold is not now trading like a commodity, and we can easily prove it.
It's been said that all economics can be reduced to a FLOW OF FUNDS. So saying, let's examine some flow of funds with the help of a chart. This P&F chart shows gold in relation to the CRB Commodity Index. And what's this? Gold is rising in relative strength against a basket of commodities! Gold has ceased to act like a commodity.
We see two rising bullish trendlines. Let's refer to the second or the more recent rising trendline. The ratio hit a low in October, 2002 (marked "A" on the chart), and since then gold has again been rising in relative strength against the CRB Commodity Index.
Gold is now at a very interesting juncture. We see a peak at 1620 back in June 2002, and two more peaks this year just a bit lower at 1610. This week the Gold vs the CRB Commodity Index ratio broke out to new highs. Thus, gold is saying "bye-bye" to a basket of commodities. If your broker tells you that gold is "just another commodity," show him this chart. If that doesn't shut him up - well get another broker.
Next, how about gold against stocks? To the left we see a chart of exactly that - gold divided by the S&P 500. Note that the ratio is holding above the rising (bottom) trendline in favor of gold. But starting in July of 2002 a "battle" began. Here we see the ratio reaching a high in February 2003, then backing off in June, and most recently forming a rising vertical line of X's starting in September. But remember, all this is taking place above the rising trendline, which indicates that on a longer trend basis gold is outperforming the S&P.
The question - will this ratio break out above its peak to 388, or will it break down to the 356 box? If gold breaks out to the 388 box, it will mean that gold has reached a new peak of strength against the broad stock market. Exciting times are coming up in 2004. And hopefully, my subscribers and I will be on top of it.
The FLOW OF FUNDS - that's what it's all about. Our job - to go with the flow. I believe the flow, an incredibly important flow, is towards real, honest money. I'm not talking about money created "out of thin air" by the Fed. I'm talking about money created through the expenditure of capital plus the sweat of tens of thousands of men - I'm talking about gold, dear subscribers. I'm talking about gold and by the way, I'm also talking about silver.
The US is the world's super-power. Our super-power status is based on two phenomena. The first is that we are the world's most powerful military power. That doesn't come cheap. This year in 2004 the US will spend more on our military than the rest of the world combined!
Secondly, we possess the worlds' reserve currency. We're the only nation in the world that can run up debts to foreign creditors and pay off those debts with paper currency that we manufacture "out of thin air." We don't have to pay off our debts with assets or sweat. We pay off our debt with a "high-speed printing press."
The US is currently the world's leading engine of growth. That's because we're the world's greatest consumer. The US is one giant consuming machine. The whole world wants to sell their goods and merchandise to the US. And so far, the sellers are accepting our paper dollars as payment.
But believe it or not, there are potential problems. One problem is that the dollar now has a legitimate competitor - the euro. Foreign central banks can now hedge against a weakening dollar by buying euros. No central bank and no foreign holder of US securities wants to see the dollar "go down the drain." But central banks and investors will be tempted to hedge their bets, and the euro gives them that ability.
Then there's China. China constitutes a strength and a weakness for the US. China has been a huge accumulator of dollars. If China halted taking in dollars, that would be a giant shock to the global economy, because if China halted its accumulating of dollars, the dollar would plunge. So the US depends on China to continue taking in dollars. Why does China do it? Because China wants to sell the US, and as long as China takes in dollars, the dollar will tend to hold together, and the US economy will theoretically hold together, and US consumers will continue to buy massive amounts of Chinese goods.
Ah, but there's another problem. China is playing for TIME. China is increasingly selling nations other than the US, and that includes other Asian nations. If China arrives at the point where it depends a lot less on the US, China could decide to cut way back on taking in our "printing press dollars." Thus the US has an unwritten pack with China. We'll take in your Chinese goods, and we'll pay you with our paper dollars. You continue to accept our paper dollars, and things will go merrily along. - until they don't.
Thus the "silent deal" continues. But somewhere along the line the deal will slow down or halt. It will halt if the dollar collapses or it will halt when China has had enough of the "deal." In the meantime, the US has to address its twin half-trillion dollar deficits; its budget deficit and its trade deficit. And the question is - can the world's biggest debtor nation continue to be the world's military super-power and the owner of the world's reserve currency?
Richard Russell Editor-in-chief - DOW THEORY LETTERS
