Editor’s Note: The following is an excerpt of Richard Russell’s Dow Theory Letters. For subscription information click here
Question -- Will the US government call in the gold, as Roosevelt did in 1933?
Answer -- My answer is a rather strange and original one. China, India and most of Asia not only allow its people to hold gold, but actually encourages them to buy and accumulate gold. The US authorities must be keenly aware of this. In other words, these other nations allow their people to protect themselves against currency devaluation and inflation with gold.
Holders of gold in the US possess some protection against inflation and dollar devaluation. If the US continues on its current policy of dollar devaluation, the Fed and the administration will receive far fewer objections if its people hold gold or silver. I believe that Bernanke intends to devalue the dollar so that the government can better address its outrageous mountain of debt. Thus, it would not surprise me if somewhere ahead the US government comes out and actually encourages its people to buy and own gold. This may sound far-fetched, but if it happens, that could be the start of a panic in the US to buy gold ("Hey, if the government says it's OK to buy gold, then brother, I'm buying!").
On to the stock market. My PTI has surged higher for two years, but more recently it has been falling. However, my PTI has still not delivered a sell signal. This corresponds to the Lowry's studies, which shows their Buying Power Index, has of late, been declining and their Selling Pressure Index, has of late, been rising. Nevertheless, Buying Power continues bullishly well above Selling Pressure. This suggests to me that the stock market believes that QE3 lies somewhere ahead.
Because of the uncertainty, the market has grown "quiet and dull," but an old Wall Street adage, warns us "never to sell a dull market."
This being a rather dull market, the history of dull markets is that they do not precede bear markets. Thus, until I receive an actual Dow Theory bear signal or until my PTI turns bearish, I'll conclude that the primary bull trend remains in force.
A clearer picture is seen in the precious metals market. The bull market in the precious metals is underscored by the ominous weakness in the Dollar Index. I say "ominous" because the dollar weakness is setting off international demands for a new reserve currency. If the US dollar loses its status as the world's reserve currency, it will be a disaster for the US, which can print "money" in the same currency that its debts are denominated in. If the US has to borrow foreign currency to cover its debts, interest rates will head higher. Once the US mountain of debt is subject to rising interest rates, the game is over, and the compounding cost of carrying the Federal debt will throw the nation into virtual bankruptcy, an emergency that the US can't print itself out of.
Below -- the chart that no one wants to look at. It's the Dollar Index, heading inexorable lower, perhaps to test it record low of 70.50. At stake -- the reserve currency status of the "almighty dollar." Already there are plans for a new reserve currency made up perhaps of the euro, the French franc, the renminbi and gold.
Russell prediction -- sooner or later (probably sooner) gold will re-enter the world monetary system.
The current monetary system based on competing fiat currencies is like a drunken sailor who is unsteady on his feet while trying to adjust the ship's broken compass.
