Gold Likes/Dislikes & Bouncing Dead Cats

Richard Russell snippet
Dow Theory Letters
published Sep 17, 2008

Extracted from the Sep 16, 2008 edition of Richard's Remarks

September 16, 2008 -- IMPORTANT -- Lowry's reports that yesterday was a "very decisive 90% down-day," the third one in September and the sixth one since April.

Question -- Is there a difference between actual bullion (gold coins) and GLD?

Answer -- In my mind there is. Gold coins represent gold that you actually hold in your possession. GLD represents paper stating that you own a specific quantity of gold. There is a difference.

I've heard rumors that some of the "gold" that GLD owns is in the form of gold futures. I asked wife, Faye, a leading securities lawyer about this.

Her answer, forget the rumors, look at the prospectus. If GLD is buying futures instead of actual bullion, then the prospectus would have to state that they can do that.

Actually, there's now a run on gold coins. The Treasury is out of Gold Eagles, and I hear there is a premium charge for Krugerrands. Check with your coin dealer on this.

Gold -- the monthly chart, December gold, dropped from a 1017 high in March to a recent low of 742, a loss of 275 points. On a normal rebound of 50%, gold could recover to 880. That may be what's happening now.

What do I like about the monthly chart below? Gold has not violated its long-term blue trendline, although it has broken below its shorter-term, steeper trendline. What don't I like about the chart? Gold has violated the steeper trendline and RSI has turned down.

I also don't like the fact that monthly MACD has given a sell signal (red arrow) and the first monthly negative (below zero) histogram has appeared.

The correction does not appear to be over on the monthly chart.

***

Late note [The markets] -- Today, just a normal and expected bounce after a 90% down day. Following a 90% down-day, there is usually a 2 to 7 day "dead cat bounce." Today's market internal action was rotten. Despite a 141 surge in the Dow, breadth was down and there were a huge 1165 new lows on the NYSE. Down volume was a dismal 79.4% of up + down volume, in all a poor picture of market internals.

Gold gave up a little of the yardage gained over the last two days. The gold stocks continue to go with the stock market, they continue to act like just another group of stocks.

***

The great tragedy unfolds phase by phase. This is the way I see it. The first phase was the giant edifice of inflated home prices topping out and rolling over. The second phase was the collapse of the great Wall Street houses, the third phase was the stock market sinking day after day. The path of the stock market directly affects public sentiment. And I'm very much afraid that the next phase is going to be a pull back in spending, particularly discretionary spending, by the US public. Jobs will be difficult to find, the word will spread, if you've lost your job, you're not going to find another one at the same level of pay (if you find one at all). This will have an impact on retail sales, and US imports (which will have international implications for the exports of foreign companies, remember, the US is buyer to the world). In this atmosphere, the big money, as I see it, will be made by wealthy speculators who will buy up foreclosed housings at bargain prices, often below the cost of replacement. Everything now depends on people being able to finance what they own, and this takes income and cash. The two rarest items around will be just that -- cash and income. The great danger as I look ahead is that the bearish trends will feed on themselves. Frightened people dump their stocks for cash, the result is a sinking stock market. A sinking stock market further frightens people and pushes them to sell ("get me out at any cost"). When I tell people that the correct posture now should be cash and gold coins, they look at me as though I was crazy. That reaction makes me worry.

One advantage of gold coins is that you're not tempted to trade them (it's too difficult). As my buddy, old-timer Sir Harry Schultz puts it, "The last man standing is he who owns gold." Hold your gold coins.

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written Sep 16, 2008
Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters
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