Skip to content
HTML5 Incompatible Browser
Gold Banner

What might occur to suggest gold will NOT continue higher?

*Dow Theory Letters, by Richard Russell, October 16, 2007

“What might occur to indicate that we’re wrong on gold? The first item that comes to mind is deflation. Wouldn’t gold hit the skids if deflation enters the picture? And with the subprime housing mess still very much in play, this could have a negative effect on the entire US economy — and bring on deflationary pressures.

OK, let’s say deflationary forces enter the picture and simultaneously US business begins to slow down. What happens next? The Bernanke Fed would immediately begin aggressively lowering rates while flooding the system with even more liquidity. Under these conditions, the dollar would probably continue on its downward path — and this would be bullish for gold.

Then what? Either business would respond to Fed manipulations or it wouldn’t. If business responded, that would be bullish for gold, since expanding business and low rates are both positive for gold.

But what if business didn’t respond to the Fed’s efforts? At that point, I believe the Fed would become frantic and pull out ALL the stops. Fed Funds would probably be lowered to 1% and the Fed would start monetizing the debt, big time. This would be very bullish for gold, since the dollar would almost surely unravel under the Fed’s all-out efforts to re-inflate

Wait, there’s another possibility. The economy slows down — not quite a recession, but a drag. And inflation continues. We call that stagflation. Under stagflation I believe the Fed would continue to jazz up the economy, and under those conditions gold would continue on its long-term bullish path.

Question — So Russell, what you’re saying is that regardless of conditions, the future for gold appears bullish?

Answer — That’s right. The only situation that would be bearish for gold would be Washington and the Fed willingly accepting a deflationary recession. I just don’t see that happening, either from a political standpoint or an economic standpoint. There’s just too much debt built into the system for the Fed to willingly accept a recession, since a recession would be highly deflationary. And as we know, Fed chief Bernanke doesn’t even want to hear the word “deflation.” The Fed can always halt inflation, but once deflation takes hold, it can get out of control — a nightmare situation for Bennie and the Feds.

In the big picture, I think it’s clear that knowledgeable investors view gold as real money as opposed to any and all versions of fiat currency. My own belief is that as time passes, investors will become increasingly worried about the worth of all paper (fiat) money. Competitive devaluations will further erode faith in fiat paper, and a rising number of investors (and increasingly the public) will opt for the safety of the only true tangible money, which, of course, is gold (I could include silver, but I feel safer with gold).

It goes without saying (but I’ll say it anyway) that gold is always open to normal corrections. Every item is subject to corrections, and gold is no exception. We also know that governments and central banks will resist any major rise in gold — they will do whatever they can to hold back the advance of gold against their fiat currencies. Nevertheless, I believe the primary trend of gold is firmly bullish. Therefore, government’s or central bank’s efforts to put a top on gold is doomed to failure. The bull market in gold will fully express itself. The more forceful the authorities are in holding gold back, the higher gold’s ultimate peak will be.”


*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.

cpm-market-outlook