Cheap, cheap, cheap

Richard Russell snippet
Dow Theory Letters
Aug 13, 2008

Extracted from the Aug 12, 2008 edition of Richard's Remarks

XAU is the index for the gold and silver shares. Through yesterday, [Monday] XAU has been down eight out of the last ten sessions and 12 out of the last 15 sessions. The 12 out of 15 sessions particularly interested me because it sets off my 80% thesis. Whenever any market is down 80% of the time over a string of closings, this represents a severe oversold condition. The longer the string, the more important the 80% thesis applies.

The action of XAU since July 15 can be likened to a crash. Study the daily chart of XAU -- the chart goes back to the year 2000. Look at the red arrows. It appears to me that XAU is now the most oversold it's been since at least the year 2000. XAU is now so oversold, so compressed, that I would think some sort of a bottom should be near.

Referring to the two panels at the bottom of the chart, the upper panel is MACD and the lower panel is the 144-day rate-of-change [ROC]. Everything on this chart suggests an oversold extreme.

With gold down sharply and with mining expenses and wages up, the pressure has been on the precious metal mining stocks. The vice of higher wages and lower gold has put a clamp on the gold mining stocks and only higher-priced gold will get these stocks out of their funk.

But the point is that they are now severely oversold and cheap, cheap, cheap.

My own policy -- Ever since the year 2000 I've kept a portion of our assets in gold with a smaller section in gold stocks. I've been adding bullion to our position periodically ever since. I don't consider this a trading position any more than I consider our home "a trade." I have always considered gold to be "a store of wealth," an asset that I don't worry about. That's still my position.

I've said this many times. I view our gold position in terms of "ounces owned." I don't control how many dollars it takes to buy an ounce of gold, but I do control how many ounces of gold we own. Unlike stocks or even bonds, I never worry about the solvency of gold.

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written Aug 12, 2008
Richard Russell
website: Dow Theory Letters
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