Richard Russell: "We are witnessing a great primary bull market in gold"

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The following is a guest contribution from Richard Russell, Dow Theory Letters, May 5, 2010.

I’ve spent roughly 64 years studying the stock market on a daily, weekly and monthly basis. I’d say that 80 percent of that time I was perplexed or unsure of my stand. I know in the advisory business you are always expected to know exactly what’s going on and where to place your money. In my experience, the more cock-sure the advisor, the bigger the quack.

One problem is that the stock market isn’t always talking, and when it isn’t, many advisors create scenarios so they can carry on the illusion for their readers that they, at all times, understand what is happening.

How about what’s happening now? Here’s what I think or suspect. I think we’re in a long-term bear market and currently operating in a rally in the bear market, a rally that most people take as a new bull market.

I firmly believe we’re witnessing a great primary bull market in gold. This bull market is opposing a long-term bear market in fiat or non-intrinsic currencies. Since there is no discipline putting a limit on fiat-currency production, I believe in our lifetimes we will see the end of fiat currencies as acceptable substitutes for real money. When that happens, there will be no ceiling for gold. In their guts and in their hearts, every seasoned investor knows this, which is why the bull market in gold will continue.

How high will gold go? Wrong question, how low will fiat currencies go? The answer, as Bob Dylan might say, is “blowin’ in the wind.”

June gold, above 1166, will signal an extremely bullish breakout. The chart above shows the large symmetrical triangle in gold. Recently, gold broke out above the triangle to a peak at 1166 (top arrow), then declined to test the upper trendline of the triangle. Now gold is pushing north again. If gold rises above 1166 to a new high for the structure, I think gold will make its way up to 1200. But first, June gold must close above 1166. Update - gold did close at 1171.80 for the day.

I think gold is now under heavy accumulation. I note that gold is often knocked down in the thin after market. I’m beginning to think that this is done on purpose. Large interests who want to accumulate gold have a reason to want to knock gold down, and thereby be able to accumulate it at “reasonable” prices. The last thing they want is for gold to run away on the upside before they have accumulated as much as they are able. I think this is particularly true of China and Russia and other Asian nations.

Suddenly it becomes known that Greece is in much worse shape than thought (Greek budget was a horrible 13.6% of GDP). This makes the euro a less wanted currency. If it turns out that Greece is in worse shape than thought, how about Spain and Portugal and Italy? The problems for the euro increase. Then there’s the even grimmer thought. When we come right down do it, are the US’s finances any better than Greece’s? And how about the UK? Greece has troubles, the euro has troubles, the dollar (now everybody wants the “safety” of dollars) is wanted, and the only completely safe currency (yes, gold is a currency!) is gold.

I want to clear one thing up. Most people and analysts think you buy gold as protection against potential future inflation. But big money does not think that way.

I watch the jewelry auctions, and I subscribe to the Sotheby’s and Christie’s catalogues. Prices for top-grade gems are going through the roof. I was talking to a jeweler friend yesterday who just returned from a Sotheby’s auction. He said he couldn’t believe the prices that some of the jewelry was going for. One diamond that he expected to be able to buy for $200,000 went for $950,000. He said he was staggered by the prices.

It’s’ apparent that BIG money is buying items of intrinsic value for the future. These buyers don’t really care whether their ruby rises in price over the next ten or twenty years. They know that twenty years from now that ruby will represent WEALTH.

And it’s the same thing with gold. BIG money gold-buyers know that gold represents eternal wealth. They don’t care whether, twenty years from now, gold is selling for 900 or 3000, what they do care about is that gold will always represent wealth, regardless of the markets and regardless of which political party is slapping on new taxes.

With the world choking on debt, the only guarantee of wealth now and in the future is something intrinsic, something representing wealth regardless of the world monetary system. If I told you I was going to give you a large steel box for your kids, and that box was not to be opened for fifty years, would you rather I put three million in cash in that box or three million in diamonds or gold? Me, I’d pick the diamonds or the gold. Which would you choose?

I put this question to an anti-gold friend of mine, and I asked him for his answer. He hacked and hawed, and told me that it was a trick question. But he never dared to give me a straight answer.

Silver has been called “the poor man’s gold.” Never mind, what I’m interested in is whether silver will remain in this ascending channel. A year ago silver was selling like something out of a compost heap. In early 2005 you could have bought all the silver you wanted in the six dollar range. Now silver will cost you around 18 dollars an ounce.

Today an ounce of gold will buy 64 ounces of silver. The historical ratio has been around 16 to 1, so silver compared with gold is cheap. Nobody knows whether silver will climb back to that old ratio, but we do know that silver is cheap. I like silver here, and the easiest way to buy silver is through the ETF (SLV). The negative — central banks don’t collect silver.