Tuesday, September 13, 2011

Richard Russell - Not So Fast Gold-Haters

With gold trading around the $1,800 level, here are some key points the Godfather of newsletter writers, Richard Russell, wrote about in his two most recent commentaries, “The gold-haters have climbed on the “it's over” bandwagon again. Their argument is that gold has been in a parabolic rise, and that means “the sure end” of the gold bull market.  My reaction: Not so fast.  The gold bull market isn't going to end with a three-month sharper up-pointing angle.”

“The simple chart below shows gold climbing above its 150-day moving average.  But starting in July gold assumed a sharper rising angle.  Many gold-haters took this new angle to be a parabolic rise and thus, the end of the gold bull market.

Now let's examine the recent action of gold more closely.  Here we see the new steeper angle more closely.  We also see that gold has formed a triangle.  The obvious bullish resolution would be for gold to break out top-side of the triangle and land into the 1900s.  With all the talk and forecasts of the wise men, only the coming price action will complete this story.

Even if this happens, we can be sure that the gold-haters will come up with new and original tales regarding why gold is “finished and now topping out for the duration.”  The current sharp correction has not reversed or violated the two year pattern.  That tells me that the bull market in gold is still intact.  Note that gold is still holding above its base at 1800.

On to the dollar's chief competitor, the mix-master puzzle that we call the euro.  NO talks or guesses, just a chart.  The daily chart below of the Currency Shares Euro Trust have been weakening through the year and then Friday plunging to new lows below its triangle effect and below both of its moving averages.

When the euro is weak, the dollar is strong.  Since gold is measured in dollars, if it takes fewer dollars to buy an ounce of gold, then the price of gold goes down in terms of dollars as it's now doing.

Private and public debt surged during the period from 1971 to today increasing by $50 trillion.  During the same period GDP in the US rose from $1.1 trillion to $16 trillion today.  Figure the ratio of debt to GDP at about 3 to 1.  In other words, it's taken about $3 trillion in additional debt to produce each additional $1 trillion in GDP.

When are the perma-bulls going to realize that the fun's over?  If or when the Dow closes below 10,000, I think such action will have a heavy bearing on psychology, particularly on the retail trade and I'm talking about their attitude towards stocks and consuming. 

The Dow does not want to slip below the psychological 10,000 level.  In fact Dow 10,000 acts like the “third rail” of New York's famous subway.  I place great importance in the Dow's willingness to break, or hold above 10,000.  A stubborn and continued refusal by the Dow to violate the 10000 level will have bullish implications.”

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