By Richard Russell
Dow Theory Letters
Extracted from the October 7, 2005 edition of Richard’s Remarks
Is all paper money basically junk? Of course it is, and in due time, as the old saying goes, it will be reduced to its intrinsic value. This is the dreaded secret that the central banks of the world don’t want you to think or recognize. But slowly, ever so slowly, the “dreaded secret” will emerge, and it will be recognized and acted on by the masses.
We are now in the early part of the second phase of the great gold bull market. This is the phase where gold starts to make the news. And when an item makes the news, the great unwashed public notices and begins asking questions. They don’t do anything about it in this early stage — they simply ask questions. And the question that a few curious people ask is, “Hey, why is gold going up? I read somewhere that it’s at a 17 year high.” And so it starts. The next question they ask is — “What’s wrong with the dollar. It’s taking more and more of them to buy gasoline and heating oil and college tuition and rent. Is there something wrong with the dollar?”
These questions may sound innocent, but they scare the hell out of the Fed. So every week or so some fool Fed governor comes out and announces that “Inflation looks to be a little high at two percent, so we better raise Fed Funds another quarter of a percent. You see, we’re just as scared of inflation as you good people are.”
Of course, the one thing the Fed will never do is compare the purchasing power of the dollar with it’s purchasing power 25 years ago or 10 years ago or even five years ago. That’s a no-no, because the comparisons are sickening. You see, they have to keep that lie going to the effect that the Fed, like your dog, Rover, is man’s best friend.
Here’s my idea for a Fed motto — “Keep it slow, and they’ll never know.” The “it”, of course, is the decaying purchasing power of the fiat dollar.
On every dollar bill we read the words, “In God We Trust.” Of course, they’d never put the words, “In the Fed We Trust” on the dollar — because there’s a limit to how big a lie the Fed thinks it can get away with.
The US government is now on a spending binge that boggles the mind, but I’m not going to recite the statistics on all the debt and deficits and liabilities again. Let me just put it this way — the facts are horrendous. The question is, “How are we going to pay for them?” There are only two possibilities — The government will default on them or the government will simply inflate them away. And the winner (but you already knew this) is — inflation.
The ironic fact is that today we have “faith-based” money. Yeah, faith in the Fed. Economically speaking, could anything be more frightening — or bearish?
The US public may not believe it or even understand it — yet, but real money understands it. And now I’m going to shows you a few charts that I call my “secret weapons.” “Secret” in that most people have never seen them.
These are monthly charts along with 20-month and 40-month moving averages. The first chart, I think, is spectacular. Here we see gold declining through the 1990s, then recording “double bottoms” in 1999 and 2001 in the 255 area. In May 2002 something dramatic occurred. The 20-month (blue) moving average crossed above the 40-month (red) MA. With that dramatic confirmation, I was convinced that a new primary bull market was well underway.
Since that bullish crossing, gold has climbed irregularly higher, but always holding above its 20-month MA. Note, also, that the 20-month MA has held persistently above the 40-month MA. That’s the sign of a powerful primary up-trend. Today, up 2.70 at the close, gold has climbed to highest level since 1988.
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