Richard Russell has been writing the Dow Theory Letters for 48 years. He is gifted with a combination of knowlege and wisdom in things concerning the markets. Here's some of his latest thoughts...
Looks like the Fed has the nation on steroids. And it's not only the Fed, it's the central banks of the world. You see, nobody wants an "over-priced" currency, because everybody wants to sell to the US. And it's a very competitive world (think China and India and Asia), so if you want to sell to the US you have to compete, and that means you have to have a competitive currency. How do you keep your currency cheap against the dollar? Easy, you churn out a load of your own currency and with it you buy dollars. This keeps the dollar up and in comparison, your currency remains competitive.
Of course, when you're manipulating like this, there are always problems. One problem, if you want to call it that, is that there is one hell of a lot of paper money swishing around the world. In fact, you can say that the world economy is floating on an ever-rising ocean of paper money.
Well golly gee, isn't that inflationary? You bet it is, and the inflation is starting to hit full force. First it hit world real estate and housing, then it hit raw materials and oil, and now it's hitting everything consumers use -- such as food, transportation, college tuition, medicine -- well you name it.
You think gold is going up because of Iran or Iraq or because of less production from the gold mines? Forget it, gold is going up because it's reflecting and discounting coming inflation. You can call gold "real money" or you can call it the "golden barometer of inflation." Either description is accurate and either one will do. When the world goes mad, men seek the protection of gold. It's as basic as that.
What we're seeing now in gold and silver is the biggest story of the year and probably the biggest story since the great bull market since stocks topped out in 1980. Only the public, the crowd, the masses, don't see the story yet. But the markets see it. And I see it, which is why I keep writing about it. I've been on this story for about five years -- pushing, urging, cajoling my subscribers to "get with the story," and, of course, the story is the coming inflation and the revival of gold.
The alchemists of old spent their lives looking for a way to turn lead and other base metals into gold. They never succeeded. But there are alchemists today -- these latter-day alchemists have found a way to turn junk paper into gold. Here's how you do it -- you take your junk paper dollar to a coin dealer, and you tell the dealer you want to swap your dollars for gold. And presto, you can change your junk paper dollars into gold. Try it, I guarantee that it works. But don't let all your friends in on this secret, because in time they'll all try it -- and in doing so they'll drive the price of gold higher. I don't want them to do that -- at least, not until I'm finished buying all the gold I want.
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Subscribers probably remember my discussions of the 50% Principle as applied to gold. The 50% Principle should be used very carefully -- and only in situations where an average or an item such as gold has traveled a long way over and extended time period.
When gold declined from 850 (1980) to 250 (2000) I noted that it has lost a total of 600 points. Half of that loss would be 300. Adding 300 to 250 gave us 550, which was the halfway point of a protracted 20 year decline. When gold closed decisively above 550 and held there, I stated that under the 50% Principle, gold should approach and probably better the old high of 850. On that basis, I became even more bullish on gold, and I personally bought a lot more gold, while urging subscribers to do the same -- "buy gold and sit." So far, the upward ride on the back of the gold bull has been fairly easy. It may not always be this way.
When gold passed the 550 level and clearly held above the level (with a lot of backing and filling around 550), I turned even more bullish. And I continue to see gold heading for a test of the old 550 level. But this time, unlike 1980, gold will hopefully move to and above 550 with a lot less excitement. So far, incredibly, the bull market advance in gold from 250 to 684 has stirred up little excitement. This suits me fine. Let's hope it continues -- as the great "stealth bull market" in gold moves on.
What about the stock market? I not only follow the money, I try to go where the money is, and I try to direct my subscribers on the same path. Of course, there's money to be made in the stock market. The stock market advance has been very selective, and if you can locate the right sectors, you can make big money. But I continue to insist that the real story is in the undervalued area -- it always is.
The essence of Dow Theory is in its emphasis on values, in the purchase of undervalued items and the later sale of overvalued items. Right now, the great value is in gold, which is still well below its peak price recorded more than 20 years ago.
The best estimate I've seen for price inflation since 1980 is around a 400% increase. I bought my house in 1979, and that's about the increase I've seen in the value of my house. I've seen restaurant prices increase by 400% since 1980, I've seen ice cream cones increase 400% since 1980. So with gold at 800 in 1980 and gold at 684 today, I see gold as flagrantly undervalued. That will change. And it is changing. Markets aren't stupid. Sometimes they're ahead of reality, sometimes they're behind. But ultimately they always adjust to reality.
What's the stock market doing now? The stock market is obviously being "fired up" by surging liquidity and inflation (well, surging liquidity is inflation). But with the Dow selling at over 20 times trailing earnings and yielding less than 3%, I'd say the market is expensive. Most stocks are expensive, but that doesn't mean they can't go higher. I just don't feel that stocks are great values here, and I like to buy great values. Or let me put it this way -- I don't have the nerve to load up with stocks here. And to make real money, you've got to take a big position. Before I can take a big position, I've got to have faith that I'm buying bargains.
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As I said earlier, I believe the biggest story in the markets today is the bull market in gold. The irony is that everybody seems to be looking somewhere else. Which is fine with me. The higher gold rises while everybody is looking the other way, the better. Let the great "gold stealth bull market" express itself. My subscribers and I hear the song.