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Is it still a good time to diversify out of stocks into bullion?

*Dow Theory Letters, Richard Russell, May 12, 2006

“The toughest time to write about the markets is following a “sudden” wild day like yesterday. For the edification of new subscribers, I don’t like this stock market, and I haven’t liked the stock market over recent months. The reasons I don’t like the stock market are simple — it’s overvalued and it’s been exhibiting poor technical action. I’ve gone over the poor technical action so often and so thoroughly that I’m almost sick of talking about it.

Conversely, I’ve liked the gold market — a lot. You can say that I’ve been a long-term cheerleader for the gold market — all the while almost bullying my subscribers into buying gold. Now gold is overbought, but the situation in gold is so powerful that I honestly don’t know exactly what to say about it. OK, I’ll say something — gold is now in one of the most powerful bull markets that I’ve ever seen, and I’ve seen a lot of bull markets in my 81 years. This gold bull market far surpasses in strength the gold bull market of the 1970s. This bull market is far bigger, it’s far more international, and it has much stronger and broader fundamentals than did the bull market of the ’70s.

Suffice it to say that gold is in a powerful primary bull market, and my advice in a bull market has always been to put on your chaps and leather vest and boots and ride the bull. But wait, you prefer to trade? You think you can beat the bull via in-and-out trading? Then good luck. However, I’m betting you can’t out-trade the primary bull trend. I’m betting that if you insist on trading, you’re going to end up on the sidelines just when a major move is underway. Big bull markets gobble up and spit out in-and-out traders. I’ve seen it happen in every bull market since the 1940s.

The way to make money in a bull market is to load up early on the favored items, buy a bit more on the corrections, and hang on to the bull like grim death. The bull will do everything in his power to shake you off his back. To hell with what the bull wants — you stick with what you want, and what you want is to harness the full power and profitability of the primary bull trend.

For the last couple of hundred upside points we’ve heard nothing but caution and warnings from those who don’t understand gold and worse, from those who don’t have a clue as to what’s happening. Yesterday gold and silver both closed at new highs, but because the metals were so overbought, I wrote that I thought the time had come for some kind of a correction.

After all, gold had been up 16 out of the last 19 days, an incredible performance and possibly an all-time record for any item. Stocks and commodities and precious metals tend to act like living organisms, meaning that they exhale (go higher) and they inhale (go lower). Gold and silver have been exhaling for 84% of the last 19 trading days. Talk about amazing bullish power, we’ve been seeing it..

The capitalist world is very “unbalanced” these days. The US has been getting away with what some of us refer to as “financial murder.” How so? Well, the US has been devouring the world’s merchandise and services and savings at a furious rate. But the “murder” part of it is that the US has been paying for all this good stuff with paper that doesn’t cost the US a damn thing. The US just creates the paper out of thin air, and damned if the rest of the world doesn’t accept it — for now.

You can get away with this chump’s game for just so long, but at some point the US’s creditors are going to look at all this junk paper that they’ve collected, and they’re going to say — “Enough, we can’t keep taking in this garbage paper. Because what’s behind this paper? Nothing — except just more paper. We’re selling the US real items — food, furniture, machinery, clothes. It’s about time we got something real in return — some tangible US assets or some real, intrinsic money like gold.”

Of course, the US won’t give its creditors any gold — the US stopped doing that back in 1971 when Nixon closed the “gold window.” So what are we giving our creditors now? I’d say mostly arrogant advice, bullying demands, and well, a whole lot of unadulterated BS. But we may be close to the time when our creditors are tired of all of those “free” items. They may even be tired of paper dollars, which is one reason why the dollar is sinking. Worse, the US openly wants the dollar to fall — maybe by about 25%. But hold it, a lot of our creditors are loaded with billions in dollar-denominated securities, and obviously they don’t want to see the dollar fall. Maybe they should (pardon the expression) diversify. Diversify into what? Euros and yen — and even gold comes to mind.”

*This information is solely a highlight of the opinion of a third-party publication and is incomplete.  Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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