Richard Russell's thoughts on gold

In his Daily Remarks for November 23, 2009, Richard Russell posted his thoughts on the gold market. Read Russell's remarks, and you will learn that he is very bullish on gold.

Russell deals primarily with the stock market, but he became a gold bull in 2000, which, of course, was excellent timing. He was also a gold bull in 1970s, which illustrates Russell's insight into the precious metals markets. For more about Russell's Dow Theory Letters, visit www.dowtheoryletters.com.

November 23, 2009 -- "If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them [the banks], will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.” – Thomas Jefferson

Russell Comment -- And that's exactly what has happened. And it's the reason why the Federal Reserve must be abolished. The Fed is an affront to the Constitution of the United States. The Fed is a private banking cartel, created by bankers, run by bankers, for the benefit of bankers. On top of that, the Fed's actions are secret, and the Fed has never been audited.

Many years ago, when I was still living in NYC, I had a subscriber, a Swiss man named Jay Pfister. Jay owned a chemical company. During the early 1930s Jay sold his company to American Cyanamid. That sale made Jay quite wealthy, and he had a home in NYC and one in La Jolla. It was Jay who first told me about La Jolla. Jay suggested that I leave Manhattan and enjoy "a better life" in La Jolla. I thought a lot about Jay's advice. In 1961 I followed his advice, and it proved to be one of the best pieces of advice I've ever received.

One day I met Jay at the Plaza Hotel on 59th Street. We were sipping coffee, when Jay said, "I want to tell you an interesting story. My apartment overlooks the Hudson River. Last Sunday I was looking out over the Hudson, and I saw two large boats heading towards each other. They continued to close in on each other, and I said to myself, 'This is ridiculous'. The captains must be drunk. If they continue on this path, they're surely going to crash."

I looked wide-eyed and asked Jay, "So what happened?"

Answered Jay, "The 'impossible' happened. The two boats continued toward each other, and they crashed."

I never forgot that story. And I apply it to the current economic situation in the US. America has created, according to the experts, 50 to 100 trillion of dollars in unfunded liabilities including Social Security, Medicaid, money spent for stimulus, money promised for future Federal construction plans. The arguments and warnings are that if the US continues to spend in this manner, the dollar will collapse and the nation will be broke. Impossible, you say, but then I think of Jay Pfister's story about the two boats.

And the question I ask myself is this -- will our vote-sensitive politicians have the guts to do what's necessary to save the nation? This will mean that for the first time since World War II the US will have to cut back and live within its means. I try to envision how this will happen and what it will be like, and I really have trouble envisioning it.

Here's what I think will happen. Before the potential catastrophe actually occurs, the markets will sound the alarm. The dollar will lose its reserve status, and the US will sink into a serious slump. If the dollar becomes an unwanted currency, fiat or central bank-created currencies (all are currently backed with dollars) all over the world will cave in. The knowledgeable money will rush to the only money that cannot go bankrupt -- gold. The panic for gold will be unprecedented, and new currencies will have to be created. To have any authority, the new currencies will have to be backed by gold. In the panic to buy gold, the metal will rise to undreamed-of heights.

Question -- Russell, assuming you're correct and gold will rocket higher. At what point, if ever, would you sell gold?

Answer -- I'd only sell gold if another high-yielding "safe" currency would be obtainable. It's possible that in order to save the dollar, the dollar will have to provide an attractive yield, or the dollar will once again be made convertible into gold. That seems impossible now, but in this business anything is possible.

Question -- Russell, if there is a stampede to buy gold, how do you think it will start?

Answer -- If there's a panic to buy gold, I think it will start in China, aided by other Asian nations and probably by Russia. I think China seriously doubts that the US will cut back and do what has to be done to save the dollar. Therefore, I believe China is on a path of accumulating as much of the world's gold as possible (they're doing the same thing with rare earths). At some point, the Chinese renminbi will be seen as the world's strongest currency. The Chinese will then partially-back the renminbi with gold, at which point the renminbi will be the world's new reserve currency. The dollar will be an unwanted "has-been." I've said many times that the Achilles Heel of the US economy is the dollar and its reserve status. The Chinese know that very well.

At some point the US and China will be enemies in the new economic battle. To prepare for such a time, the Chinese are building their army, navy and air force. They want to impregnable in case of war. They also want to join hands with the Russians. It will be the US and Japan against the new and powerful rivals. Europe, bewildered and feeble, will be a bystander.

Question -- Russell, I just read an article in Saturday's LA Times in which the writer questions the rising price of gold in the face of less actual bullion buying around the world. Please explain.

Answer -- The columnist's confusion is a result of his treating gold as a supply-demand item -- or just like any other commodity. Gold is not just another commodity, gold is eternal money, and it can rise or fall depending on world investors' sentiment. Gold is little affected by supply and demand, it is affected by how world investors value gold. For instance, if I'm worried about the world situation and I want gold, I don't give a damn who's buying or selling gold, I'll pay the going price, and more if I have to, to add to my total gold ownership.

Question -- Should I buy more gold here?

Answer -- To those of us who bought gold a year or five years ago, gold looks expensive now. But questions -- is gold really expensive? Does the US have too much debt? Can the dollar avoid a collapse? Those are questions I cannot answer. As I write tonight, gold futures are up over $17. By any standard, gold appears to be overbought. But wait -- I'm wondering whether gold is on the edge of its third, speculative phase and whether gold is starting to go parabolic. If gold is going parabolic, then there's no such thing as "overbought." Gold will continue to rise until it's exhausted. And ultimately it will rise higher than almost anyone is expecting.

I've written before that my experience in big primary bull markets tells me that the item in question will advance further than anyone thinks reasonable or even possible. If gold is entering its third phase, I have no idea where it's heading and neither does anyone else.

Furthermore, if gold is close to going parabolic, all you can do is close your eyes and place your buy order. Waiting for a big gold correction is going to be a frustrating wait. You just have to pull the trigger and buy it. When the primary trend is up, the bull market will usually bail you out of most of your mistakes (and, of course, you will make mistakes).

There are almost a record number of gold shorts on the COMEX. How'd you like to be short of gold here? Talk about sleepless nights!