 Gold: A Few
Russell Thoughts
Richard Russell
snippet
Dow Theory Letters
Jan 1, 2008
Extracted
from the Dec 31, 2007 edition of Richard's Remarks
December 31, 2007 -- A few
Russell thoughts with accompanying advice:
(1) The key words in building
a fortune is Compounding, the "royal road to riches."
(2) The most precious commodity
you'll ever have in investing is TIME. Compounding over time
equals increasing wealth.
(3) Debt is the destroyer
of wealth. Debt leaves you vulnerable in any downturn. Today
young people start out life buying a house with an accompanying
fat mortgage. In most cases, this puts them in perpetual debt
and prevents their ever saving.
(4) "Those who understand
interest, collect it. Those who don't understand interest, pay
it."
(5) Timing is the most difficult
thing to master in investing. My old friend John Magee's motto
was -- "Don't tell me what to buy, tell me WHEN to buy it."
Almost any item, bought at the right time, will produce profits.
Most people lose money because they fail in timing their purchases,
and they fail in timing their sales. Compounding eliminates the
problem of timing. In compounding you add to your portfolio regardless
of what the market is doing. In compounding you're not depending
on timing, you're depending on mathematics.
(6) One of an investor's worst
enemies in our central bank economy is inflation. Your single
best and most reliable defense against inflation is the only
stateless non-debt money -- gold.
(7) You don't time your gold
purchases, you simply accumulate gold. Gold is pure tangible
wealth and therefore it can never go bankrupt. In contrast, no
fiat currency has ever survived the passage of time. All fiat
currencies eventually become worthless in that over time they
lose almost all of their purchasing power.
This is the current case
for owning gold. Pressured
by politicians, the Fed and central banks the world over want
good times. And currently they're doing their share to create
and maintain good times. They're creating money (fiat paper)
by the tens of billions in an effort to ensure good times. Part
of the current move to create more paper has to do with the declining
dollar. Every nation's central banks want a competitive
currency for export purposes. The US dollar is the world's central
currency and the world's reserve currency. If the dollar is declining,
the various central banks will create more of their own money
in order to buy dollars. In so doing, they increase the price
of the dollar in terms of their own currency. Thus, the world's
total amount of paper currencies continues to expand. The steadily-increasing
amount of world currencies is inflationary. It amounts to "too
much money chasing an insufficient amount of goods."
Currently, the US is facing
a daunting housing problem. An army of home owners will be facing
increased mortgage costs in 2008. That's bad enough, but another
nightmare would be mass housing foreclosures leading to US consumers
cutting back on their spending. In the face of this possibility,
the Fed has embarked on a policy of expanding M-3 growth along
with incremental declines in short rates. Thus, the Fed is fighting
the potential forces of deflation. What deflation? Deflating
home prices, a potential decline in consumer spending, plus the
specter of rising unemployment.
Next, for the sake of this
argument, let's say that in 2008 the economy turns "bad."
In that case, the Fed will step on the accelerator and fight
the downturn with everything at its command, which again means
expanding liquidity and declining short rates.
Rising money supply, declining
interest rates -- the ideal atmosphere for a rising price of
gold.
OK, that's the case of deflationary
forces in the US possibly setting off a recession. Now, let's
examine the opposite side of the coin. Let's say that the US
economy stabilizes. The housing situation hits bottom and begins
to improve. In the face of this, all the Fed's previous monetary
machinations begin to "kick in." Business realizes
that the worst is over for banking and housing -- the economy
is starting to recover. The stock market is advancing steadily,
and suddenly Wall Street and Main Street turn optimistic. Housing
firms up, the stock market is heading up, commodities are surging
and inflation is in the saddle.
Under those conditions, gold
is again advancing. All the money that was created during 2007
to counteract recession now acts as an "overflowing punch
bowl." Business around the world accelerates. The global
economy is "on fire." Stocks are climbing.
Under these conditions, gold
heads sharply higher.
OK, Russell, but in what circumstance
would gold be hurt?
Here's my answer to that question.
In 2008 recession sets in. US consumers, loaded with debt and
with little or no savings, cut back sharply on their buying.
The economies of the world slow down. We might even be facing
a world depression. Suddenly, there's a panic for cash. An ocean
of debt screams to be fed with dollars. Worldwide the most-wanted
currency is the dollar. Cash, the dollar, is needed to stave
off bankruptcy. Deflation takes over. Suddenly, there's a panic
for dollars and the dollar heads higher.
Under these conditions, which
I think highly unlikely, gold does poorly. Everybody wants dollars
-- all variety of assets are sold to raise dollars, even gold
is sold for dollars.
Question -- Get real, Russell. If the central
banks can flood the world with liquidity, if the world's central
banks can create any amount of fiat currency at will, how can
you have deflation? Deflation is too little money chasing too
much in the way of goods.
Answer -- Deflation isn't going to happen, not while
the central banks can create fiat money out of thin air. Bernanke
explained that in his famous "helicopter" speech.
Question -- That's right, Russell, the central
banks can make the money available, but frightened, debt-laden
people don't have to borrow, and they don't have to spend. The
Fed could be pushing on a string.
Answer -- Well that's the theory, and that is the worry.
But it doesn't work that way, not in the real world. Make the
money available, make it plentiful -- and the American public
will spend it. Ever since World War II, whenever the money was
available, America's consumers spent it. They not only spent
it, they went into debt, thereby spending even more than they
had coming in.
No, Americans are professional
spenders. "Create it and they will spend it." Paint
that in large black letters and post it on your wall. It's a
time-honored truth. As night follows day, Americans will spend
any money that's coming their way -- and more!
Under these conditions -- again,
gold should head higher.
Question -- C'mon, Russell, are you telling
us that there's no way that gold is going to go down?
Answer -- I'm saying that gold is in a primary bull
market, and bull markets are always subject to corrections. I'm
not talking about timing gold today any more than I was talking
about timing gold in 2001 or 2002 or 2003 or 2004 and so forth.
I'm talking about the overall, long-term direction of gold.
This bull market in gold is far from completed. Who do you know
who has any kind of position in gold, not a large position --
any kind of position? How many Americans own gold?
Before the bull market
in gold is over, people will be lined up to buy gold. That's
the way bull markets end, not by Richard Russell having to explain
why you should own gold.
lots more follows
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Dec 31, 2007
Richard Russell
website: Dow
Theory Letters
email: Dow Theory Letters
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