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Gold Is Trying To Bottom

Richard Russell
November 10, 2008, DowTheoryLetters.com

The hedge funds don’t buy or own actual gold coins or bullion. If a hedge fund wants to take a position in gold, it will buy GLD [gold exchange traded fund I've highlighted in past reports] or “paper gold” which can be quickly bought or sold. The hedge funds have for the most part done very poorly this year and they’re getting a lot of redemptions. To pay off redemptions, hedge funds must raise money. To do that, I believe many hedge funds have dumped their sluggish GLD. This has held back or pressured gold to the downside. I believe that gold is “trying” to bottom here, and I believe hedge fund selling is easing off. It’s significant that gold coins and bullion bars have been swept off the market even while the price of gold has been fairly static. Central banks have also been sellers of gold and I believe the IMF will be a seller. Once all these various entities get rid of their gold, the supply of gold for sale will be reduced drastically, and the stampede for gold will begin in earnest. I look at the present as the early accumulation period (first phase) in the coming great bull market for gold. The second phase of the gold bull market will begin once gold is firmly above 1000 again. Near-term, Dec. gold above 775 will be very bullish.

Gold needs no faith and credit of any nation behind it
October 21, 2008

… Confidence Index (CI) — the new low last week was at 57.3, an astounding drop from the previous week’s low of 64.2. In all my years, I’ve never seen a two-week drop this large before. The bond crowd is growing progressively more conservative as it moves from the medium-grade bonds to the highest-grade bonds — a sour forecast for the stock market which tends to follow the more sophisticated bonds.

For months I’ve insisted that no nation can run an empire and fight two wars on borrowed money. Sooner or later something has to give — the nation’s credit standing or its currency. Now the dreaded subject is beginning to emerge. The demise of the US’s world standing. Today, in The Wall Street Journal of all places, we see a featured piece on the op-ed page entitled, “The Dangers of a Diminished America.” A diminished America? How can that be? It be. The US has been getting away with it all by owning the unique advantage of printing the very money that its huge debt is denominated in. Yes, I’m talking about the reserve status of the US dollar. This is the Achilles Heel of the US. The US dollar will possess its reserve status as long as our creditors continue to accept Federal Reserve Notes, paper with nothing behind it accept the “full faith and credit” of the United States.

Which is why we hold gold. Gold needs no faith and credit of any nation behind it. Gold can not be ground out by any central bank. Gold represents pure wealth, and it has before Biblical times. Nobody has ever challenged the intrinsic value of gold. Sometime in the future the world will challenge the worth of all fiat money.
Fiat money is money because a government decrees by fiat that “this is money.” Is that logical? Every fiat issue of money has been destroyed going back in history. Only gold remains — unchallenged. Got gold? Gold below $1000 an ounce is, in my humble opinion, cheap. When all else is subject to doubt, gold will shine its brightest.

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  1. 9 Comment(s)

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  3. By Kirk | Reply

    In the short term, it may be foolish to “game” market fluctuations of gold’s dollar price: It’s like flipping a coin. However, I agree with the underlying sentiment, which is supported by data, that gold’s value is assured over the long term and particularly in a situation where “money” has no intrinsic value, what economists (and I’m not) call “fiat money.” History demonstrates this since as far back as we can follow the stories.

    There is a problem comparing the value of gold to the dollar: Increasing numbers or dollars for a certain quantity of gold could mean two things: gold is more valuable to buyers or the dollar is worth less. I believe much of what we’ve seen in the long term exchange rate between dollars and gold is the decline in the value of the dollar, rather than an increase in the value of gold. Therefore, I view gold as a place to maintain the value of my savings rather than a profit making enterprise.

  4. By admin | Reply

    Hey Kirk,

    Again, all great points and observations. You are absolutely correct.

    The US dollar is on a long term downward trend. But short term it is rallying because of the de-leveraging happening with individuals and institutions liquidating equities and purchasing dollars. Once this shorter them market perterbation subsides, the long term downward trend will resume and inflation will re-emerge.

    The U.S. dollar’s decline has helped push up the price of gold, but check out gold’s price in some other currency outside of the U.S. dollar. Gold has been rising against all currencies.

    Gold is not necessarily an “investment”. Instead, it is a store of “value” because gold, other precious metals, collectibles, commodities and even real estate all have intrinsic value that can never go to zero. Whereas, paper investments like stocks and bonds CAN go to ZERO should the company fail.

    Great comments, Kirk. You’re right on the mark.

    Jay

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