rr on gold..., page-8

the only rr worth listening to re: gold Richard Russell On the Markets

"America is addicted to low-cost consumer goods produced outside it borders. The demand for imports will push the trade imbalance out to more worrisome levels in the months to come." So said Chris Rupkey, senior financial economist for Bank of Tokyo--Mitsubishi in New York a day ago. And damned if he wasn't right --

The US trade gap in November widened to a record $40.5 billion. That reflected a record inflow of holiday and other consumer goods. Biggest gap was with China -- the gap rose from $9.5 billion in October to $10.5 billion in November.

On the news this morning the March Dollar Index sank to a new low at the opening, the March 30-year T-bond rose 15 ticks, and the S&P futures plunged 950 points. I'm writing this early part of the site half an hour after the opening, so I have no idea how the market will close.

One of the strangest current situations is the contraction in the M-3 money supply, this in the face Fed. Governor Barneke's statement that the Fed possesses "a printing press," and it's not afraid to use it. But in the face of the Fed's fear of deflation, why in the world would M-3 (the broad money supply) be shrinking? Maybe the wisest words on the subject has been heard from my friend, A. Gary Shilling --

They can flood the banks with money, but the banks are scared to lend, and creditworthy borrowers don't want to borrow. So we're pushing on a string.

Sometimes it pays to just step back and look at the BIG picture. And as I see it, this is the big picture. Japan, the world's second largest economy, continues to be mired in recession. It's like "Help, I've fallen down, and I can't get up."

Germany, the world's second largest economy and the so-called "economic engine of Europe," is sinking into a second-dip recession. The Federal Statistics Office of Germany reported yesterday that the German economy grew just 0.2 percent last year, its worst performance in a decade. As retail sales plunged and unemployment rose above four million, economic growth in Germany ground to a halt. And few economists now see anything that suggests that the German economy has come back to life.

That leaves the US as the sole savior of the global economy. Is the US up to the task? That's the trillion dollar question. My own instinct is to say "No," but I always defer to the market, and so far, the market has held above its October low.

If the October lows hold, then it's probable that the US will follow my friend, John Mauldin's scenario. John forecasts coming years when the US will just "muddle along," neither booming nor busting, just, well, just "muddling through."

If the October lows are violated, and I believe that in time they will be violated, then I think we will see all kinds and varieties of trouble, including the current recession (and I believe we are still in recession) turning into something much nastier.

So in the big, or I should say BIG picture, the October lows are KEY to our future.

And just in case you forgot, the October 9 low for the Dow was 7286.27. Write it down, dear subscribers, it is

Dow 7286.27.

Of course, Dow 7286.59 must be viewed as the final line of defense. But above the October low is the very important December closing low of 8303.78. Let me put it this way, Dow 8303.78 is the first line of defense and 7286.27 is the final line of defense.

Question -- Russell, what do you think the odds are of both of those Dow numbers breaking?

Answer -- I believe that in due time the Dow will violate both of those "lines of defense." The reason -- we're in a primary bear market, and in bear market values deteriorate through time. Time is against those who hold stocks in this bear market.

Question -- I note that the gold shares seem to be lagging gold, the metal. True, many of the gold stocks have made huge moves over the last year or so, but now the gold shares seem reluctant to go to new highs, even though gold is going to new highs.

Answer -- First, the gold shares are still common stock shares, and common stocks are in a bear market. Thus, I believe the fact that common stocks in general are doing poorly, is "rubbing off" to some extent on the gold shares.

The second reason, and this is important, is that I believe a lot of people are of the opinion that gold has risen because of the impending war in Iraq. "And, if there is a war, is will be a short war. Furthermore, when the war ends," they reason, "gold will collapse, and we'll be holding gold shares at a loss. Thus gold shares are risky holdings, which are dependent on a fleeting war situation.

As I see it, both theories are wrong. Gold started up in March of 2001 well before Bush decided to attack Iraq. The rise in gold is a response to the falling dollar and the chances of either inflation or deflation. In the big picture, I don't think Iraq has much to do with the rise in gold.

TODAY'S MARKET ACTION (01/17/03)-- In a word -- lousy.

The Dow was down 111.13 to 8586.84. Dow broke below its 50-day MA and has turned bearish. Two movers in the Dow today, MSFT down 3.89 and IBM down 4.75. MSFT to split two-for-one and pay a dividend. Big deal on the dividend, you buy 1000 shares of MSFT and you get a dividend of $16.00. You know who get the money -- Willie Gates. Next case --

Feb. crude up .25 to 33.91.

Transports was down 27.75 to 2344.53.

Utilities down 2.06 to 219.11.

Advances were 1105 and declines 2167. Up volume 317 million and down volume 1.021 billion. Down volume was 76% of up + down volume. Not a good day at all.

New highs were 112 and new lows were 17. My High/Low Index was up 95 to minus 7074.

Total NYSE volume was 1.35 billion shares.

S&P was down 12.81 to 901.78.

Nasdaq was down 47.56 to 1376.19 on an increasing 1.618 billion shares -- this was a "distribution day" for the Nasdaq.

This is important -- my Big Money Breadth Index was down 6 to 682 and now only 2 above its bear market low of 680 recorded on Nov. 1. If this Index breaks 680, it will be a bearish omen.

March Dollar Index was down .23 to a new low of 100.89. March euro was up .38 to a new high of 106.29. March yen was down .07 to 85.00.

March Nikkei was down 15 to 86.10.

Bonds were higher with the March T-bond up 21 ticks to 111.02 to yield 4.92%. March 10 year T-note up 16 ticks to 113.25 to yield 4.01%. Money moving to safety.

Feb. gold down 1.30 to 356.80. March silver down 2 to 4.81. April platinum up 4.70 to 619.00. March palladium up 7.50 to 258.00.

Gold/Dollar Index ratio down .50 to 353.70.

XAU down 1.88 to 75.30. HUI down 3.11 to 143.09.

Gold advance-decline line down 17 to 1119.

AEM down .37, AU down .40, CDE up .01, GFI down .38, GG down .37, GLG down .21, HMY down .63, NEM down .87, MDG down .46, SIL down .35. See above for comment on gold shares.

CONCLUSION -- Important -- The Dow and the S&P both closed below their 50-day MA thereby turning bearish. The Nasdaq gapped down below its 50-day MA thereby also turning bearish.

All major averages are now bearish on my method of reading the moving averages.

Why, what's happening? I think it's it can be described in one word -- deflation.

Also -- trade deficit is widening, dollar is sinking, profits are getting hit, lay-offs are continuing, and consumers may be cutting back. Consumer sentiment is plunging. All in all a rotten situation, but no big liquidation of stocks yet -- just erosion. Sellers are not ready to dump yet -- but buyers are leaving the scene and stocks just erode away.

Sorry I can't be more optimistic, but I say it as I see it.

A bit more tomorrow, and then Monday (thank you Mr. King) a holiday


Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com

January 20, 2003