Apr 18, 2007

Richard Russell: (Real) Cash is Beautiful!

Richard Russell"... Cash is beautiful. With it you can buy a luxurious Bentley car, an apartment house in New York, a McDonalds franchise in San Diego or a million acres of land in Argentina. But wait -- don't hold onto your cash too long. Because today's cash isn't the cash of the early 1900's. In those days, you could turn in your cash and receive gold for it. Your dollars had something behind them that was tangible and eternal. The item that was behind your dollars or more properly Federal Reserve Notes was real, undisputed money. That situation ended in 1933. No more gold for your dollars. Today your cash has buying power, but that buying power is based solely on government fiat. And sad to say, the longer you hold your cash, the less buying power your cash will command.

Below I show a monthly chart of gold, the eternal money. As the chart indicates, since 2001 it has required more and more of today's fiat paper to buy an ounce of gold. The chart shows gold rising relentlessly from a low of 254 back in 1999 to almost 700 today. The blue line is a 13-month moving average, and the red line is a 34-month moving average.

What's happening?

I believe what's happening is that big money, sophisticated money, is slowly but relentlessly moving out of all paper or fiat money into real money or gold. Why would they do that? Here's the reasoning behind their move. The Fed and the central banks of the world are set against any contraction in the US or in the world economies. Remember, there's a natural tendency for markets and economies to regress to the mean. Currently, the US economy is operating well above trend -- therefore, the natural tendency for the US economy is to correct -- or to regress to the mean.

But the act of regressing to the mean for the US economy would mean recession. The Fed is dead set against recession. The Fed fears recession because of the enormous amount of debts and deficits built into the US economy. The Fed fears recession because of the fragile state of the US housing. Any recession in the US would almost surely produce deflation. And once deflation digs its claws into a debt-laden economy, the situation can get very nasty. In fact, the situation can get quickly out-of-hand.

Feb Chairman Bernanke, a leading student of the Great Depression, has already warned about the dangers of deflation. Bernanke wants no part of deflation. In fact, you might say he's preempting deflation. Mainly, because of the housing slump, Bernanke is already preempting deflation. And he will continue to preempt deflation. How does he do that? He does it by expanding the money supply and by fostering sub-standard interest rates. In other words, inflation is now being "force-fed" into the US economy. It's not a matter of whether inflation -- it's a matter of how little or how much inflation.

One very obvious measure of inflation is the amount of fiat currency it takes to purchase one ounce of gold. The monthly chart of gold going to 1997 tells the story. And its an accelerating story. Note how gold is pulling away from its (red) 34-month moving average.

What about holding a leading stock average rather than holding gold? The monthly chart below is a relative strength chart showing the performance of gold compared with the Dow. Here again we see that consciously or unconsciously the market in its wisdom is choosing gold over one of the strongest segments of the US stock market.

In July of 1999 one share of the Dow would buy 43.85 ounces of gold. Today one share of the Dow will buy only 18.44 ounces of gold. That's a decline of 58.2%. Thus, the Dow is steadily losing strength against gold. The reason, of course, is that the Dow is denominated in depreciating dollars.

What about the technical position of gold at this time? The P&F chart below tells the story. The latest move by gold has just filled the 695 box, it's highest level since the bottom of the correction. This opens the way for an attack on the 730 box recorded in May 2006.

The most recent move on the chart was an uncorrected advance from 640 to 695. This is a "high pole." Obviously, I don't know whether some correction or consolidation will be needed now or whether gold will move directly higher. It really doesn't matter. The trend is bullish for gold, and the base continues to build. The bigger the base, the more strength in the ultimate move to new highs. All that's needed now (and this has been the case all along) is patience, more patience -- and an understanding of the fundamentals."

To read more from R.R.'s quintessential market wisdom consider subscribing to his unique daily resume: The Dow Theory Letters

Labels: , , , ,


Anonymous Anonymous ΕΙΠΕ (SAID)...

Remember, there's a natural tendency for markets and economies to regress to the mean. Currently, the US economy is operating well above trend -- therefore, the natural tendency for the US economy is to correct -- or to regress to the mean.

Ο άνθρωπος μιλάει για mean reversion σε markets και θέλει να μιλάει για οικονομία; Για non-stationarity, infinite variances και unit roots έχει ακούσει ποτέ του;

April 25, 2007 12:38 AM  
Blogger Chrysotheras ΕΙΠΕ (SAID)...

Φίλε ανώνυμε,
δεν ξέρω τι έχει ή τι δεν έχει ακούσει -ή διαβάσει- ο R.R. αλλά τα λεφτά που βγάζει "ο άνθρωπος" και τα λεφτά που "άλλοι άνθρωποι" βγάζουν -και θα συνεχίσουν να βγάζουν- ακολουθώντας τις συμβουλές του, εσύ δεν τα βλέπεις ούτε στα πιό "άγρια όνειρά σου" (in your wildest dreams)

so keep on dreamin' while ...I'll keep investin'

April 25, 2007 5:26 PM  
Anonymous Anonymous ΕΙΠΕ (SAID)...

Ουσιαστικά σχολίασα μια βλακεία που είπε ο ζάπλουτος κύριος με επιχείρημα τη διεθνή βιβλιογραφία. Ζητώ ταπεινά συγγνώμη που δεν γνώριζα ποιός είναι ο κύριος και που δεν έσπευσα αμέσως να προσκυνήσω!

April 25, 2007 8:03 PM  
Anonymous concerned ΕΙΠΕ (SAID)...


Take no notice of Xrysothira......Richard Russel is a hero to all goldbugs. Just like Donald Trump and Robert Kiyosaki is a hero with all real estate 'investors'.....koita thn moira tous twra.

I will ask Xrysothira again. One simple question. If the price of gold was to go to 2-3000$ per ounce as some people like Richard Russel are predicting, what will the price of a 'commodity' like olive oil be at that point ?

Second question. How much have real wages risen in the past 5 years ?

April 25, 2007 9:56 PM  
Blogger Chrysotheras ΕΙΠΕ (SAID)...

@ Concerned,
R.R. is not quite our hero. He's rather a Dow Theory expert and "the wealth-creating power of compounding dividends" proponent.
A very down-to-earth view of the markets.

If I had to pick a "gold gug hero" I would go for Jim Sinclair or even Doug Casey.

Regarding the relative price of gold vs. olive oil it's a matter for the markets to decide (which is rarer)
(personally I' d go for silver....)

@ anonymous
no need for reverences...

April 26, 2007 11:09 AM  
Anonymous concerned ΕΙΠΕ (SAID)...

And you want me to buy gold based on your advice......??? With that answer ?

Olive oil prices have SUNK these past 2 years....what does this tell you my man ? In terms of gold ? Don't forget that in ancient times, olive oil was also seen as a monetary tool.

Asset inflation.......that is what has happened. Olive oil prices have sunk, yet land with olive trees has doubled in price. What does this tell you about gold ?

I asked another question that you didn't answer. Have real wages increased in Greece/World, in the passed 5 years ? Yes/No/a Little/Nothing compared to the price of hard assets........whats your answer ?

In that case.......do we have monetary inflation or credit expansion ?

As I said earlier.....whoever has cash in less than a couple of years will be king.

And you want some other advice ? Post a couple of articles as to why someone should be buying USD right now....there are tonnes out there on the net........

Call me a copntrarian investor.....but hey if it's good enough for Warren Buffett, it's good enough for me.

April 26, 2007 4:38 PM  
Blogger Chrysotheras ΕΙΠΕ (SAID)...

"does a butterfly batting its wings in New Zealand cause a hurricane in Florida?"

"can a cow jump over the moon?"

"are we ever going to reach the land of Oz?"

"does the price of olive oil has impact on the demand for gold?"

"olive tree land has doubled in price while the price of oil has sunk. -why?"

...dear concerned, questions like these not even the Great Wizard of Oz can answer.

One thing is true though.
Real cash is king! ..so:
(I will) Follow the Yellow Brick Road...!

April 26, 2007 11:49 PM  
Anonymous concerned ΕΙΠΕ (SAID)...

Go ahead,

I will be there buying 1 gold sovereign for ~80euros in 3 years.

April 27, 2007 10:01 AM  
Anonymous Concerned ΕΙΠΕ (SAID)...


You're answer was pretty lame.

April 27, 2007 4:30 PM  

Post a Comment


Create a Link

<< Home