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Why shift more wealth out of equities and into gold?

*Dow Theory Letters, Richard Russell, January 23, 2006

“Question: Russell, what do you make of the big break in the stock market on Friday?

Answer — Well, if the newspapers have the story right, the break was due to the price of oil rising above 68, along with the “situation” in Iran. Of course, that’s the obvious answer, but dealing with the “obvious” always bothers me.

First of all, I wonder if the break in the stock market here had anything to do with the big break last week in the Japanese and Asian markets? Is something happening worldwide that we don’t know about? Or is it just oil and Iran? Guess we’ll find out.

Question — What about gold. In your site last Friday you showed gold rising against almost every other sector. What do you think is going on there?

Answer — I’m wondering if it isn’t all connected. I know the standard and obvious answer for why gold is rising is that the Fed is creating “too much” liquidity, and that in turn is watering-down the value of the dollar. But that argument is becoming suspect. It’s suspect because gold has been rising against almost ALL currencies.

Therefore, two concepts come to mind. The first is that the investment world is having increasing doubts about the value and sustainability of all fiat currencies. Thus, there is a worldwide movement towards the safety of gold.

The second concept is that gold is reflecting rising uneasiness about the global economy. There’s an international feeling of worry in the air. The sentiment around the world is that — “Something is wrong. I can’t put our finger on exactly what it is, but something is very wrong, and I want to move some of my money into the safety of gold.”

Question — Why has the gold advance so persistent? Gold has been creeping up day after day without a real correction. It’s almost eerie.

Answer — The rise in gold has been extraordinary in that it has been so persistent yet so low-key. My thinking is as follows — gold had been in a very long (20 years) extended bear market. During that bear market period, only the most die-hard gold-bugs continued to even follow the path of gold. By the year 2000, literally anybody who had ever owned gold or gold shares had unloaded his or her wares. Gold was totally sold-out.

But a new primary bull market in gold started in 2000. Now, as the current “new” bull market moves along, it’s beginning to attract a larger group of buyers. And of course, China and Asia have joined in the buying of the metal. Even so, the funds have hardly started to buy gold. And potential new buyers continue to wait for a correction before buying. Thus, on any dip, anxious buyers who have been impatiently waiting, move in to buy gold. Obviously, this can’t continue forever. Sooner or later we are going to get a correction in gold. But so far, too many are waiting for “the correction that never seems to come.” “


*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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