A hard look at gold

Richard Russell snippet
Dow Theory Letters
Oct 28, 2008

The newspaper and magazines are currently featuring articles and editorials about the wickedness of Wall Street. Everybody is searching for a scapegoat to pin the blame on for the sad state of the US and the world. But one thought stays in the back of my mind. Great bear markets tend to clear the air, great bear markets tend to reveal the lies and bring out the truths.

The one area that no one touches, that no politician will mention, that no investigative journalist will dare discuss is the value and viability of fiat money. Yet, we know that throughout history, no fiat currency has ever survived. My thinking is that fiat money was expressly forbidden in the US Constitution. The Founding Fathers in their wisdom expressly stated that the US was not to resort to fiat money. Today, the US government can "print" Federal Reserve Notes and decree by law or fiat that what they are printing or creating by computer is legal for the payment of all debt. In other words, fiat money is indeed money by government proclamation. It's as if the US government proclaimed by fiat that "all cats are now dogs." It makes that much sense. Since money is wealth or payment for work done, the question is -- is fiat money really wealth? To ask that question today is almost treasonous.

You and I work for a real return. Is it logical that what ten thousand men work for can be printed in an instant by the government? Fiat money exists for only one reason -- the last three generations are used to it, nobody questions it -- it is based on mindless confidence in the government.

Every central bank on the planet is now grinding out their brand of fiat currency -- and in large quantities. I believe that somewhere ahead doubt will rise as to the validity and logic of fiat money. Fiat money has existed and been accepted for recent decades. My belief is that ultimately this bear market is going to expose the great fraud of fiat money. Right now, for some reason, gold and gold bars are being swept off the market. Call up any coin dealer and ask about his inventory of gold coins. He'll tell you he has none. Why? What's happening? I think this is the first stirring of distrust in fiat money. The little cloud, now no bigger than a fist, is growing. The little dark cloud is distrust in fiat money. And it's growing.

Gold -- Let's take a hard look at gold. It's severely oversold. From Oct 9 to Oct. 23 gold declined on a closing basis 8 out of 10 sessions or 80% of the time. That alone spelled oversold. Note the long "stems" on the first red arrow. These stems denote rejection of the downside. The blue histograms are beginning to pull back towards zero. Finally, the full stochastics are in oversold territory and are now starting to turn up. Conclusion -- gold may now be attempting to establish a bottom.

Oct 27, 2008
Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters
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