Thought I'd post this today for all the gold and silver fans. I've taken the liberty of bolding a line russell writes below about trading of gold shares as it reflects my own view....
July 23, 2003 -- There's a lot happening these days, but most of it is not being covered in your local newspaper. The reason it's not being emphasized is that a good deal of what's happening is occurring in that most mysterious and yet fundamental area of the economy. I'm talking about the area of money.
At this point, almost every nation on earth is trying to push or talk its currency down. Europe is not in good shape, and the talk there is of the European central bank on the verge of lowering its interest rate. Germany and France are in or near recession, and Italy is joining them. In Asia the situation is very difficult, since every Asian nation is now competing with China for exports.
The Chinese renminbi and the Malaysian ringitt are pegged to the dollar and protected by capital accounts. The Hong Kong dollar is also tied to the greenback via a currency board. All the other Asia currencies float, but their central banks have been intervening on a huge scale in an attempt to hold down their currencies, particularly since the dollar has weakened.
So the big battle on the part of almost every nation is -- "How do we keep our currencies weak against the dollar and against every other currency? The answer, and I've been predicting this for quite some time is -- COMPETITIVE CURRENCY DEVALUATIONS. "Begger thy neighbor" is the new trend in currencies.
This presents an ideal background for real money -- gold. And for gold's "little sister" -- silver. The precious metals are in a most interesting position. Think about it -- here's the Fed, printing $150 billion of BS paper in six weeks. That's enough junk paper to buy the entire gold industry and have roughly $50 billion left over. What that means to me is that gold shares are "dirt cheap," and so is their product -- the yellow metal, gold.
There's also an amazing irony in the money-gold situation. Because of a two-decade bear market which followed the bursting of the precious metal bubble in 1980, a new doubting generation of Americans grew up. It's a generation which has watched gold and silver going nowhere. On top of that, the new generation has swallowed the great lie promulgated by the central banks -- the lie that paper currency is wealth and real money, gold, is just a relic of the past.
Now we see an extraordinary process. We see the central banks of the world creating tens of billions of "somethings" in their own fiat paper as they seek to buy dollars while selling their own currencies. As a result of this blizzard of new currency, these nations have built up their productive capacities, and thus too many goods and too much merchandise is being thrust upon the world, and particularly upon the US. The result of this mass of new production is a rise in deflationary forces -- and an end of pricing power as we know it.
But the forces of deflation are a death-threat to the debt-logged US economy. The Fed knows this, and it has and answer. The Fed's answer -- inflate, inflate, drop interest rates and inflate some more. Again, the ideal background for real money -- gold.
In investing, occasionally, great value-opportunities present themselves. In 1942 the Dow sold as low as 92, at a time when it looked as though the Allies could lose the war to Nazi Germany. I saw another such great opportunity in 1949 when the Dow sold as low at 161, during a time when everyone thought we were on the edge of a second Great Depression. In 1974 the Dow sunk to 577, presenting a third historic buy opportunity for investors and readers of Dow Theory Letters.
And I wonder here in 2003, whether gold (and possibly silver and even platinum) aren't presenting us with another great buying opportunity in an item that is totally out of favor with investors?
But this time the item in question is even more fundamental than are stocks. This time the out-of-favor item is far more emotionally charged than stocks. Veteran readers of these report remember the late 1970's when I would write repeatedly that "There's no fever like gold fever." I believe we'll live to hear that same phrase again -- but probably not until gold has moved into its third psychological phase. The third phase of a bull market is the phase that sees the public rush into the market as they finally buy with abandon.
By my reckoning, we are still in the first psychological phase of the gold bull market. This is the phase where informed investors quietly accumulate the desired item. These investors are in no hurry, and they are not interested in "bulling" their acquisitions. These early investors want time to accumulate, and they want as little public recognition and competition as possible.
In the second phase of a bull market, the item rises as smart fund managers and professionals begin to see the picture, and they too join in the buying. In the second phase the best-informed members of the public may also join in the bull market, and here the item begins to accelerate to the upside.
Well, enough about gold -- let's change the subject for now.
Looking at the bonds, I noted that the Commercial hedgers have taken a large position on the long side of the bond market, and this sophisticated crew is playing for the rebound that usually comes after an item has been "knocked on its ass," as the bonds have over the last six weeks. So what I see here is a corrective bounce set off by the professionals as they "catch the bounce" in bonds.
As for the dollar, I may be "jumping the gun" but I suspect that the rally in the dollar is over, and the buck could be on its way to testing first its July low and then its June low. Relative strength (RSI) for the dollar has turned down and so have the stochastics. MACD has not yet turned bearish, but it could shortly. OBV for the dollar has turned down.
As for the stock market, it has not yet given up the ghost. The S&P has slipped nearer to its rising 50-day MA than has the Dow. The 50-day MA for the S&P stands at 975.58, while the 50-day MA for the Dow stands at 8992.
From a Dow Theory standpoint, there could be trouble. the Dow made it high close on June 17 at 9323. But a month later, on July 16, the Transports recorded their closing high at 2597.59. This was a clear non-confirmation on the part of the Dow. With stock values at sky-high levels, I take this non-confirmation as a clear Dow Theory warning.
Comparisons are interesting. On June 17 at the Dow high, my PTI stood at 5321. New highs on the NYSE were 391. My Big Money Breadth Index stood at 718. And my Most Active Stock Index was at 257.
Yesterday, July 22, with the Dow rallying to 9158.45, my PTI stood at 5297. New highs on the NYSE had plunged to 73. My Big Money Breadth Index was at 690. And my Most Active Stock index stood at 218.
Probably the most dramatic change has been the collapse in daily new highs on the NYSE. I've been talking about the many 'buying climaxes" that we've been seeing each week. A buying climax occurs when a stock rallies to a new 52-week high, but then closes DOWN for the week.
The reason the stock closes down is that investors and traders have taken profits at the new highs, after which the stock reverses and actually closes down for the week.
This whole distributive process is reflected in a dearth of new highs even as the major averages continue to rally, as they did yesterday.
I'm watching lumber, and its been plunging. Two days ago Sept. lumber plunged below its 50-day MA. This is confirmed by the break-down in Fannie Mae, the giant mortgage buyer. It is also confirmed by the plunging action of the six home-building stocks that I follow -- PHM, FWC, KBH, LEN, CMH, CTX.
The chart above is probably telling the story. It's the story of interest rates heading up (sorry Geenie) and with interest rates rising we see mortgage rates following. Will the Fed buy the long end of the bond market, thereby knocking rates down? They may already be doing it -- I dunno.
But with the Fed also inflating madly, the bond market moves to protect itself. It protects itself by backing off, and when bonds back off, rates go up. Sorry again, Greenie, but you can't have it both ways. You can't inflate to your heart's content and also have lower long rates. But you can try. Note -- Do you wonder why the central banks are hell-bent on inflating? This from this morning's New York Times -- "Hong Kong: Deflation worsens. Prices in Hong Kong fell for the 56th consecutive months as the consumer price index was 3.1 percent lower in June than it was a year earlier. . . "
TODAY'S MARKET ACTION -- Not a bad day, but not a Jim-dandy either. My PTI was up 2 to 5299 while the moving average was at 5282. The PTI remains in its bullish mode.
The Dow was up 35.72 to 9194.17. There was one Dow mover, and it was dear old EK, up 2.27. Kodak also announced that will pass out pink slips to 4500 to 6000 employees. Why, why, why? Digital photography and Fuji Film is the Russell guess.
Sept. crude was up .18 to 29.67. Jan. natural gas down .27 to 54.16 and at a seven month low. Alan Greenspan was worried silly about gas reserves. C'mon Alan, watch the prices, Alan, you're not watching.
Transports were down 4.21 to 2572.46.
Utilities were down 2.08 to 235.85.
There were 1705 advances and 1513 declines. Up volume was 657 thousand and down volume was slightly higher at 666 thousand. Call it an "stand-off" day.
There were 79 new highs and 11 new lows. My High-Low Index was up 68 to 6852.
Total NYSE volume was 1.38 billion shares.
S&P was up .49 to 988.60.
Nasdaq was up 13.06 to 1719,16 on 1.81 billion shares.
My Big Money Breadth Index was up 4 to 694.
Fed Governor Bennie ("we'll drop dollars from planes") Bernanke announced today that the Fed, if need be, will drop rates to zero. On that news, the Sept. Dollar Index sagged 1.07 to 95.60, and the Sept. euro rose 1.44 to 114.56. Sept. yen was up .15 to 8423.
German DAX was down 13 to 3304. Sept. Nikkei was up 50 to 9610.
Bonds were a bit higher. Sept. 30 year T-bond was up 10 ticks to 110.23 to yield 5.03%. Sept. 10 year T-note was up 9 ticks to 113.21 to yield 4.10%.
The precious metals had a good day, to say the least. August gold was up 8.00 to 358.70. That put gold above both its moving averages and in a clear "buy" mode. A bigger surprise was Sept. silver up a whopping 28 cents to 5.07. Silver now above both its moving averages and in a clear bullish mode.
One ounce of gold now buys 70.7 ounces of silver. Silver is ridiculously cheap against gold, against the Dow or anything else and is priced about like good potting soil. Today's action felt like frantic short covering, and there are still a lot of silver shorts out there.
Oct. platinum was up 5.60 to 693.50. Sept. palladium was up 1.56 to 167.50.
Gold/Dollar Index was up 12.40 to 375.20 and is now above both its moving averages.
One share of the Dow will buy 25.62 ounces of gold.
Gold advance-decline line was up 20 to 1202 to a new high and above the 1195 high of June 19 of this year.
XAU was up 4.15 to 81.47. HUI was up 9.67 to 159.31, a breakout and a new high for HUI.
ABX up 80, ASA up 1.95, GFI up .64, GG up .80, GSS up .21, HMY up .69, MDG up .75, NEM up 1.88, RGLD up 1.60.
I hate to repeat it, but if you're trading, if you keep moving in and out of the gold shares, you're very likely to miss the big moves. In the early stages of a bull market, you buy the stocks, and add to your positions on the reactions. This is what I've advised my subscribers to do with the gold shares. Otherwise, you try to grab the little profits, but you end up being out of the real primary moves.
In a bull market you buy 'em, you own 'em, and you sit with 'em. Then you make money by doing nothing.
STOCKS -- My Most Active Stock Index was up 3 to 221.
The 15 most active stocks on the NYSE were -- AOL down 1.13, MU up 1.00, GLW up .50, EK up 2.35, NOK up .29, GE down .03, NT down .02, PFE up .45, TXN up .02, SGP up .80, AGRb down .19, AWE down .08, MOT up .23, WE down .32, C up .20.
VIX was down .54 to 20.44. No worries on the part of the option-writers.
McClellan Oscillator was up 25 to minus 160. Market remains in oversold territory with surprisingly little lift out of this area, at least so far.
CONCLUSION -- Market appears to be in a trading range, but for how long? Lowry's Buying Power continues to drop to new lows, but at the same time Selling Pressure doesn't really expand, so the market drifts -- as though looking for a new stimulus.
If you study the broad indices such as the NYSE Composite or the Wilshire 5000, it looks as though a top is forming. And maybe that's the best description of what is happening. Note how the new highs are falling off and also how we're no longer getting big upside numbers in breadth.
Today the breadth was up, but downside volume was actually greater than upside volume.
That'll do it for Wednesday.
I'm out, but still smiling.
Russell ....................................................................................................................
