Observations

Richard Russell snippet
Dow Theory Letters
Dec 28, 2010

December 27, 2010 -- I have posted below the year-end price of gold starting with the year 2000, the first up-year of one of the greatest and least appreciated bull markets in history. Take in this series, you may never see its like again.

2000 -- $273.60
2001 -- $279.00
2002 -- $348.20
2003 -- $416.10
2004 -- $438.40
2005 -- $518.90
2006 -- $638.00
2007 -- $838.00
2008 -- $889.00
2009 -- $1118.40
2010 -- ?

I've been around a long time, and I've studied many primary bull markets. And now I want to venture a few of my observations.

In markets, I have never seen a series like the above end with a whimper or a fizzle. The end or the wind-up of such a series usually arrives with an upside "explosion," as those who have failed to participate in the series finally rush in to join in the apparent endless advance. This is the wild and wooly speculative phase of a great bull market. Big bull markets don't end with a sigh, they end in exhaustion.

(1) Most great primary bull markets last longer and carry farther than the majority of investors (even the bulls) expect.

(2) A great primary bull market is an expression of something changing in a very fundamental and meaningful way. Following a great bull market, the world is never quite the same.

..........

His father, Congressman Howard Buffett, understood gold, but his son, Warren Buffett, does not understand gold.

Maybe this will help Warren. Why is gold the ultimate and timeless money?

Good money must have a number of unique characteristics.

(1) It must be durable, which is why we don't use wheat or corn.

(2) It must be divisible, which is why we don't use a Picasso painting or jade statues.

(3) It must be convenient, which is why we don't use lead or copper or real estate.

(4) It must have value in itself, which is why we don't use paper.

(5) It must be transportable, which means that large values must be contained in a small area (a gold coin weighing only one ounce can be worth far more than fifteen hundred dollars).

(6) It must have a long history of being accepted as a store of value. Gold was considered valuable as long as 5,000 years ago in the age of the Egyptians.

(7) It cannot "disappear" or be used up in manufacturing as is copper and even silver. Thus, the gold coin that you have in your hand may have been part of Cleopatra's earrings centuries ago. Almost all the gold that has ever been discovered is still available in one form or another.

(8) It must not be the liability of any sovereign nation, nor should it require governmental law to make it money. For instance Gold requires capital, talent, risk, sweat and courage to recover or to accumulate.

Russell note -- It's possible that gem-quality diamonds can fit all the above characteristics but two. Diamonds are not divisible, nor do they have a long history of being stores of value.

Second note -- The Washington-based IMF recently completed its promised sale of gold. It was rumored that the IMF would have to sell its gold on the open market. Not so. The fact is that central banks eagerly gobbled up the IMF's gold. According to The Financial Times, the IMF sold its gold directly to the central banks of India -- 300 tonnes, Sri Lanka -- 10 tonnes, Bangladesh -- another 10 tonnes, and Mauritius -- two tonnes.

And why are these central banks trading paper for gold? After all, it's the central banks that are creating the fiat paper. Why are they swapping their own beloved products for gold?

The latest anti-gold propaganda centers around the gold exchange traded funds. A full page article in Sunday's New York Times implied that only with the advent of all the gold ETFs has gold boomed. The article implies that the ETFs (mainly GLD) allowed an ignorant public to buy gold, and that this is the reason for gold's recent advances. The article did not explain why gold has risen yearly for almost a decade, even before gold ETFs were created. The Times article hinted that gold was in a bubble, and that it was a dangerous bubble. The article emphasized the 20-year gold bear market of 1980 to 1999.

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Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters
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