Feb 10, 2007

The venerable Richard Russell on Gold

More investment wisdom from Richard Russell's newsletter...

"... I noted on yesterday's site that gold is now advancing against all fiat currencies. And against some, like the Japanese yen, gold has become an almost irresistible buy. The chart below follows gold in terms of yen over the last two years. First, we see the big rise to the May 2006 high. Next, a correction as gold formed a huge symmetrical triangle. And most recently, gold has broken out of the triangle to match its May high.

click for larger version
Looking at this chart, you wonder how the Japanese can not be buyers of gold. As a matter of fact, I believe they are buying gold, but still in conservative quantities. In due time, I think all currencies including the dollar are going to resemble this chart. Ten or twenty years from now, who knows what will be left of the dollar or the euro or the yen? But one thing I can guarantee -- come what may, an ounce of gold will still be an ounce of gold. In time, most of the world will understand this. And the latest great adventure in man-made fiat money will be over.

I lived through and was active during the great gold bull market of the 1970s. That bull market was based on fear of the loss of purchasing power of the dollar, in other words, fear of inflation and dollar weakness.. The current bull market in gold is still in its early stages. But I think in its later stages, this bull market in gold will be based on fears about the very survival of fiat money.

If the US government told you that they had suspended the laws of gravity would you believe them? Of course you wouldn't. Then how about this -- if the US government told you that they could print wealth would you believe them? Of course you would -- and we're all working for Federal Reserve Notes aren't we? Sure we are, and we can buy a car or a dinner or even a subscription to Dow Theory Letters with those Notes. My advice, just put those dollars away for your kids.

I want to add one concept here that I don't think most people understand. It's the idea of devaluation, or lowering the value of an item. But when we say the dollar is being devalued, we have to ask, "Devalued or lowered in value against what?" And the answer is always, lowered in value against time honored intrinsic money -- gold. Of course, "the dollar being devalued" is a concept that the Fed doesn't want to hear about and doesn't want you to hear about. A "dollar devaluation," that sounds terrible.

But that is exactly what is happening when the price of gold rises in terms of dollars. Here's an example. In the year 2001 George Bush was elected President. Gold at that time was selling for 285 US dollars an ounce. Here in 2006 gold is selling; for roughly 660 US dollars an ounce. In other words, the US dollar has been devalued against gold, by almost 60%. Why don't you ask Dr. Benjamin Bernanke, our Fed Chairman, about the ongoing dollar devaluation. Chances are, if he is willing to respond at all, he'll tell you that the Fed is watching carefully and has inflation under control Sure they have. "But Ben, you're changing the subject, what about dollar devaluation?"

So just in case the dollar continues to be devalued, my advice is to own some gold. You see, just as the dollar is being devalued, gold is being revalued."


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