Morning readRICHARD RUSSELL ON GOLD, SILVER & US$
March 1, 2003 -- Ah, I love these ratios. This first ratio is very instructive. This is a ratio of the Dow in terms of gold. At its high back in the year 2000 one share of the Dow would buy 44 ounces of gold. As of today, the Dow will buy around 19.50 ounces of gold. In other words, the Dow in terms of real money (gold) has lost over half its value since its bull market high of 11722 back in January 2000.
What does that tell me? It tells me that the primary trend of the Dow and the stock market is down. That's a vital piece of information, as far as I'm concerned. It tells me to put a goodly portion of my Federal Reserve Note (dollars) in gold. The reason is that the primary trend of gold is bullish -- and that the odds favor the Dow/gold ratio heading towards 1. It may not get to 1, but my thinking is that the ratio is going to drop a lot lower, maybe to 20 or 10 or 5, but if I had to guess I'd guess somewhere near 1. I'm patient, I'll wait.
A number of "precious metal fans" play the gold-to-silver ratio. They do it now with the actual metals, since there's no ETF yet for silver, so you can't play GLD against a silver ETF. You may be able to do that soon, however, because a silver ETF is in the works (assuming the authorities ever approve it).
The history of the gold/silver ratio is rather fascinating. In 1914 the ratio was 41, meaning that one ounce of gold would buy 41 ounces of silver. By 1919 the ratio had fallen to 16. The ratio then surged to 100 in 1941, and from there it declined back to 16 in 1967. In 1973 the ratio was 47 but by 1980 the ratio had sunk to 16 again. By 1991 the ratio rose all the way to 100, but by 1998 it fell to 40. In June of 2003 the ratio hit 82, as you can see on the chart.
From there the ratio headed down again hitting a low of 56 last year in June. From there we experienced months of erratic action, and yesterday the ratio was 57.51. Where to next? The story changes in this area.
Today, more silver is used commercially than is being produced, and many traders believe that the ratio once again could be heading considerably lower -- possibly toward that old 16 level again. If this occurs, it would mean that holders of silver would stand to make a lot more than holders of gold, relatively speaking -- even though both metals would be rising.
Should subscribers play the ratio game, buying say twice as much silver metal as gold? Personally, I'm not going to do it -- I'm just going to stick with gold. Today gold is considered THE monetary metal -- furthermore, gold is the only precious metal that central banks hold.
But I know people who have purchased those heavy bars of silver, and they have hidden their silver in the attic or some other secret place. These people see silver going from today's 9.80 an ounce to maybe 50 dollar an ounce to even 75 dollars an ounce. Is that possible? Listen, this is a bull market in precious metals, and the central banks of the world are turning out one hell of a lot of fiat paper. In a bull market, anything can happen, and often does.
I want to add one thought to the above. Major bull markets tend to go further on the upside than anyone can foresee. I don't know whether this is what is fated to occur in the current precious metals bull market, but it would not surprise me. Who, in 1974 with the Dow at 577 would believe that in 1980 the Dow could climb above 11000? Which of us in 1972 with one-ounce gold coins selling at 60 dollars envisioned gold rising to 850 eight years later?
My experience with major bull markets is that they climb erratically until their third phase. The third phase is the speculative phase, and that's where the biggest money is made -- and made fastest. The third phase is the fantasy phase, the "I don't believe this" phase. We saw the last third phase of a bull market during 1998-2000 when the tech stocks shot heaven-ward as a climb that left reality far, far behind.
My thinking is that one day we'll see that kind of action in gold. "There's no fever like gold fever," runs the old adage. Believe it -- we will see gold fever again. The fever lies somewhere ahead, maybe years ahead, but it's out there as sure as night follows day.
Time to Watch the Dollar -- The chart below is a daily of the dollar. The first thing I note is the declining tops (red arrows). The second item is RSI about to drop below 50. The third item is MACD about to drop below its 9-day (thin black line) moving average, an act which will turn the blue histograms negative. So if the US dollar is inherently weak, this would be the time for the dollar to head lower.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsf
March 1, 2006
The inimitable and venerable Mr. Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December.
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