November 2007

Reginald H. Howe, proprietor of Golden Sextant Advisors and consultant to GATA, has reviewed the Bank for International Settlements‘ semi-annual derivatives report and finds explosive growth in gold options. Howe also notes that foreign-owned gold has started to be withdrawn from the the New York branch bank of the Federal Reserve.So, in his new essay, “Gold Derivatives: Options Galore,” Howe writes: “Both the explosion in gold options and the resumed exports of foreign-earmarked gold suggest that managing the gold price is becoming an ever-more-difficult task. No surprise, then, that gold prices have turned sharply upward during the second half of the year. However, the price managers still have one thing operating in their favor: the apparent willingness of hedge funds and other supposedly sophisticated large players to make their bets on gold through paper derivatives, not the acquisition of physical metal.”

November 30, 2007 (RHH)

Gold Derivatives: Options Galore

On November 21, 2007, the Bank for International Settlements released its regular semi-annual report on the over-the-counter derivatives of major banks and dealers in the G-10 countries and Switzerland for the period ending June 30, 2007. The total notional value of all gold derivatives came in at $426 billion, $37 billion less than previously reported for year-end 2006 but a whopping $214 billion less than the revised year-end figure. Period-end gold prices increased from $636 to $651 (London PM). Gross market values fell to $47 billion from an unrevised $56 billion.

As detailed in table 22A, forwards and swaps rose marginally to $141 billion from $139 billion, also unrevised. Options, however, fell from a revised $501 billion to $285 billion. The previously reported year-end 2006 figure for options was $324 billion, $177 billion less than the revised number. In the past, although there have been occasional minor adjustments in the data for the prior six months, none have been close to this magnitude.

Converted to metric tonnes at period-end gold prices and based on the revised data for year-end 2006, total gold derivatives rose by nearly 8,200 tonnes in the last half of 2006, and then fell by 10,495 tonnes in the first half of 2007. Forwards and swaps, which declined just over 700 tonnes in the second half of 2006, fell another roughly 60 tonnes in the first half of 2007. Options, which rose almost 8,900 tonnes in the last half of 2006, fell nearly 10,900 tonnes in the first half of this year.

At the same time that it released its regular semi-annual report on the OTC derivatives of major banks and dealers in the G-10, the BIS also released the first part of its regular triennial survey on OTC derivatives of a wider universe of market participants from some 50 jurisdictions. This report, too, contained an eye-popping number. According to Table A, total gold derivatives over the three-year period rose from $359 billion at end-June 2004 to $1,051 billion at end-June 2007, or in tonnes at period-end gold prices, from 28,200 to 50,250.

The data is summarized graphically in the three charts below, updated from the prior commentary on this subject. For the G-10 and Switzerland, total forwards and swaps now stand at approximately 6,800 tonnes, options at 15,850 tonnes, and total gold derivatives at 22,650 tonnes. The triennial survey, or at least the first part of it, does not provide separate data for forwards and swaps and for options. Due to the wide intervals between these reports, the triennial totals are shown only in tonnes in the third chart.

The $177 billion upward revision in year-end 2006 OTC gold options equates to over 8,450 tonnes in notional value. According to an e-mail message from the BIS, “two reporting countries provided revisions” for year-end 2006, with “mainly one reporter” responsible for the adjustment to gold options. Since country data is confidential, the BIS declined to provide any further detail. However, to identify any single reporting country that might even under extraordinary circumstances be “mainly” responsible for an error of this magnitude is far from easy.Data published annually by the Swiss National Bank shows total precious metals derivatives of all Swiss banks as of year-end 2006 at CHF 151 billion, or approximately US$123 billion at the year-end exchange rate (CHF 1.225 = US$1.00). Of this amount, CHF 91 billion (US$74 billion) were in options. Data published by the Office of the Comptroller of the Currency on the gold derivatives of U.S. commercial banks (primarily J.P. Morgan Chase, HSBC Bank USA and Citibank) shows total gold derivatives at year-end of $94 billion. What is more, the OCC reports this data quarterly, and neither the report for the first nor for the second quarter of 2007 shows any revisions to the 2006 year-end data.

Accordingly, the finger of suspicion with respect to the reporting snafu seems to point in the direction of one or more big U.S. investment banks, e.g., Goldman Sachs, which are not included in the OCC data. But whoever the culprit, the numbers themselves suggest that the gold options involved in the revisions have now been transferred to market participants outside the regular semi-annual reporting system but covered by the triennial survey.

Indeed, it would appear that these options were never intended to be picked up in the regular semi-annual report. One plausible hypothesis is that one or more big U.S. investment banks are effectively running large gold options books through non-reporting entities covered only in the triennial survey, and that due to errors of accounting, timing or otherwise, these banks were forced by their auditors to recognize on their own books at year-end gold options that they believed were on the books of others.

Another intriguing development of the past few months is the resumed outflow of foreign earmarked gold from the United States. From the end of 2003 through January of this year, there was virtually no change in the total amount of gold held under earmark at the New York Fed for foreign and international accounts, mostly foreign central banks. However, from February through September, the latest month for which figures are available, these accounts are down by a net 169 tonnes, from $8,967 to $8,737 million at $42.22/ounce, or from 6,606 to 6,437 tonnes.

Both the explosion in gold options and the resumed exports of foreign earmarked gold suggest that managing the gold price is becoming an ever more difficult task. No surprise, then, that gold prices have turned sharply upward during the second half of the year. However, the price managers still have one thing operating in their favor: the apparent willingness of hedge funds and other supposedly sophisticated large players to make their bets on gold through paper derivatives, not the acquisition of physical metal.

The reported figures indicate that the mountain of gold options now almost certainly exceeds 30,000 tonnes — an amount roughly equal to the world’s total claimed official gold reserves. How many of these options are cash settlement only? Have the bullion banks actually committed to delivering physical gold in anything like these notional amounts?

If so, they have put themselves and the fiat monetary system of which they are a part at a new level of risk, one scarcely hinted at in the ongoing unraveling of various forms of credit derivatives. Large players currently content to take paper cannot be expected to remain blind to its risks forever. When they finally awaken to the difference between claims on gold and physical possession of bullion itself, the world is likely to witness a bank run and gold rush of epic proportions.

By Ambrose Evans-Pritchard
The Telegraph, London
Friday, November 30, 2007

A clutch of Europe’s top economists have called on the European Central Bank to cut interest rates at its policy meeting next week, warning of severe downturn unless confidence is restored quickly to the banking system.

The concerns came as one-month Euribor spiked violently by 60 basis points to 4.87 percent today, the sharpest move ever recorded. Italy’s financial daily Il Sole splashed on its website that the Euribor had “gone mad.”

The three-month Euribor rate used to price floating-rate mortgages in the Spain, Italy, Ireland, and other parts of the euro-zone rose to 4.77 percent, near its August high and far above the ECB’s 4 percent lending rate.

Thomas Mayer, Europe economist for Deutsche Bank, said the authorities should take pre-emptive action to unfreeze the debt markets and reduce the danger that events could spiral out of control.

“If they don’t do anything, this could go beyond just a normal recession. With this credit crisis it could turn into a very uncomfortable situation, with a real economy-wide crunch that we cannot stop,” he said.

“We’re still seeing considerable stress in the European banking system, especially for smaller banks that can’t get credit. I am afraid we could have another Northern Rock case,” he said.

It emerged today that Germany’s IKB bank had racked up losses of E6.15 billion on subprime ventures, although it has been rescued by a pool of German banks.

Mr Meyer is one of six members of ECB’s Shadow Council to vote for a rate cut at a gathering in London today.

The group of bank economists and leading academics — organized by Germany’s Handelsblatt newspaper — meets before each ECB vote. It serves as barometer for eurozone opinion.

Veronique Riches-Flores, Europe economist at SociΓ©tΓ© GΓ©nΓ©rale, said investors were deluding themselves if they believed that Europe and the rest of the world could carry on growing briskly as the housing slump engulfed America.

“The idea people have in mind that emerging markets can decouple is completely wrong. Emerging markets are only OK as long as the US consumer is OK,” she said.

She warned that the surging euro had become a bigger long-term threat to the region than people realized.

“The problem of the exchange rate is urgent. The euro has appreciated 50 percent against the Asian currencies this decade and that really worries me.”

It is unclear whether the grim mood at the shadow council foreshadows a policy shift at the real ECB. A German-led bloc of monetary hawks in Frankfurt has been on the war path in recent weeks, fearing that inflation could soon become lodged in the system and set off a 1970s-style wage-price spiral. The ECB’s dovish faction tends to keep silent but may have more votes.

German CPI inflation reached 3.3 percent in November, the highest since the launch of the euro. It is approaching levels that could start to erode popular support for the single currency in Germany.

Austria’s ECB governor, Klaus Liebscher, said this week that inflation had become “alarming,” citing a jump in oil, commodity, and food costs, as well as capacity contraints in industry, and a spate of fat wage rises. “There’s a good number of reasons why we can’t be complacent,” he said.

Joachim Fels, head of economic research at Morgan Stanley, said it was an error to dwell on inflation at time when the economy is tipping over, dismissing the latest spike as a hangover effect that would subside next year. The greater risk is monetary overkill. The surge in Euribor spreads amounts to three rate rises, he said.

While 13 of the shadow board voted to keep rates unchanged (none voted for a rise), most agreed that the world is facing an ugly cocktail of buckling demand combined with an oil shock, a stagflation mix that is extremely hard for central banks to combat.

Jacques Cailloux, Europe economist for RBS, said there already clear signs that the US slowdown is spilling over into Europe and the rest of the world, although the markets had yet to wake up to the full implications.

“We’re seeing a contraction in German exports to Asia. I don’t see any evidence that decoupling is happening. The biggest five European banks have $2 trillion of claims on the US economy,” he said.

Jean-Michel Six, Europe economist for S&P, said the great unknown was whether deflating house prices in the Club Med region and Ireland would trigger a serious downturn, and whether banks still had enough oxygen as the credit crunch ground on and on.

“What will be the effect if they have to repatriate mortgage securities onto their books on a massive scale? It could be a major constraint on their ability to lend. This is the first test since the Basel II rules came into force, so we’ll see what happens,” he said.

There is a fear the restrictive Basel II code could force banks to tighten further to meet reserve asset requirements, compounding the credit crunch.

* * *

The recent gold price surge has been shortlived again as a dollar rise has led to a fall back to below the $800 level and may move lower. The gold price thus continues to be very volatile moving up and down on dollar strength perceptions.


Author: Lawrence Williams
Posted: Wednesday , 28 Nov 2007

If you want to take a view on gold and where the price is going you have to first take a view on the US dollar. Gold moved sharply upwards on a falling dollar last week, but this week, as some strength has been seen in the US currency, the gold price has rapidly tracked back downwards through the $800 mark – and if the dollar stays where it is, or shows even the smallest sign of strength – however temporary – we could see a return to the mid to high $700s over the next few days.

But, if the dollar starts to move lower again against the major currencies, gold will almost certainly bounce back upwards, and whether it achieves the $850 all time high in the near future will depend almost entirely on the weakness, or perceived weakness in the greenback in the next few months.

If US interest rates move down another quarter point, as many feel likely, then the dollar value against the basket of currencies will probably move down again too and gold will likely move up. If the Fed decides against cutting the rate, then this could be seen as a positive sign for the dollar and gold could slip back as a result to the mid $750s.

The dollar weakness is also being curtailed as non-US economies may also consider cutting their own interest rates to try to ward off any business downturn as a result of a static or contracting US economy, and their own industries becoming less competitive internationally against US output as the dollar declines.

But, gold production worldwide is, at best, flat and probably falling, and with the cancellation of major projects like Galore Creek, coupled with a credit crunch which could see more marginal or risky projects struggle to raise development funding, the decline may be greater over the next few years than analysts have been estimating.

There is also an impression that the rate of Central Bank gold sales may be declining in the face of higher prices and there are indications that some banks may even be buyers in the market to increase the size of their foreign reserves.

The pattern makes for increasing gold price volatility, such as we have been seeing over the past few weeks with recent short term peaks and troughs in the gold price being up and down as much as $70 an ounce – perfect for smart traders to move in and out of the metal and make good profits if they judge the market right – which in turn increases the volatility quotient.

Overall, though, not withstanding worldwide currency manipulation and the impact of various Central Bank policies, the trend in the dollar value remains downwards for the moment, and the gold supply situation is not likely to improve. There is additional offtake from the market through ETFs, although of course this can be divested more easily too. So, gold price fundamentals remain good, dollar fundamentals remain weak and thus the medium term gold price outlook should be very much a positive one.

If there are any serious shocks ahead for the US economy – which is certainly a possibility – and the dollar moves back down again, the gold price will rise and re-test recent peaks. It will be the strength or otherwise of such a dollar decline which will determine whether gold will at last breach the $850 level, but the general consensus of market followers is that this will happen sooner or later, but exactly when few are prepared to define.

Analysts also cite the oil price as being a driver for gold, but it seems more likely that dollar strength or weakness is both the driver of the oil price and the gold price, as both are traded in US dollars. Oil, though, is more open to market manipulation by the producing nations which can increase or reduce supplies at very short notice – an option not really open to gold miners.

Economist Antal Fekete explains in his new essay, “Our Diseased Monetary Bloodstream,” why gold remains crucial to a decent and successful international financial system, a system that puts government and corruption in their places — which also explains why crooked government needs to subvert gold. Fekete appeals to sovereign minorities to help set things right by putting gold back into circulation in their jurisdictions.

Dear Fellow Deviants,
Dear Fellow Travelers standing by for the next flight to Genius,
Ladies and Gentlemen:

Synergy Be With You!

One of the truly spectacular sights is from the airplane as it makes its approaches to Los Angeles International Airport at dusk. Down below is the illuminated “live” map of Los Angeles with its winding and intersecting freeways, with an endless flow of white headlights and an opposite flow of red tail-lights. It reminds me of the human bloodstream with its flow of white and red blood corpuscles. As I was flying in the other day I could not help but contemplate that possibly just a handful in a million people down there may realize what a fatal year 2007 has been, as the rest are completely oblivious to the great dangers awaiting the world on this Thanksgiving Day.

Over the last thirty-five or so years people have been de-sensitized to the ‘chill-and-fever’ syndrome epitomized by the gyrating value of the dollar. It had its ups and downs but, here we are, still doing business using the services of ‘Old Trusty’. People appear to be forgetful that the dollar is steadily losing value, losing purchasing power, losing the all-important respect of foreigners. They have been brainwashed into thinking that inflation, like continental drift, is God-ordained. There is nothing human beings can do about it. It would never occur to people that they are victims of deliberate plundering by their own government, and deceitful pilfering by their banks, covered up by the mendacity of academia and the financial media.

By this fall we have reached the threshold, we have crossed the continental divide, we have passed the ‘point of no return’ as it is becoming obvious that bad debt in the system has reached and surpassed ‘critical mass.’ The chain reaction has started. In the fullness of time the nuclear explosion is bound to occur.

The history of the dollar boasts two Waterloo’s. The first one was in 1933. That year marks the default of the U.S. government on its domestic gold obligations, accompanied by the confiscation of the people’s gold by F.D. Roosevelt. He appealed to patriotism saying that in complying with his Executive Order people were saving the country from economic ruin. The bad faith behind this capricious and unconstitutional act was shown by the fact that no sooner were people forced to give up gold in their possession than the government would write up its value by 69 percent, pocketing the difference as ‘profit’. So much for the provision of the Constitution that “…nor shall private property be taken for public use without just compensation.”

The monetary bloodstream of this nation was given the cancerous qualities that characterized the currency of both Soviet Communism and Nazi Socialism, neither of which has survived the test of times. Nor will the irredeemable dollar.

There was a second Waterloo for the dollar, in 1971, marking the default of the U.S. government on its international gold obligations. In economic terms this event was even more devastating than the first. It triggered a snow-balling process as revealed by the price charts of commodities such as wheat, sugar, copper, not to mention crude oil, and the destabilization of foreign exchange and interest rates, making debt proliferate and rendering government bonds totally unsuitable for the purposes of saving.

I have been often asked the question: “why gold?” I avoid giving an answer in terms of the physical or chemical qualities such as weight, inertness, and the like. My answer usually refers to the nation’s monetary bloodstream which becomes corrupted as the disease-fighting gold corpuscles are removed.

Debt is an indispensable economic instrument. It has a great beneficial impact on human welfare. But like fissionable nuclear material, it is shot through and through with extreme danger. If its quantity exceeds critical mass, then chain reaction is bound to set in causing a nuclear explosion. The role of gold is precisely to prevent that from happening. Gold is the agent that can detect bad debt and stop its proliferation in good time. Thanksgiving 2007 is special because we are just re-learning the ancient lesson that no banking system can safely operate without gold. You cannot measure the quality and quantity of debt in terms of another, just as you cannot measure the length of an elastic band in terms of another.

What has happened this fall is that the presence of bad debt in the economy has been established. However, bad debt is in hiding. Who is hiding it? “Nobody alive is above suspicion!” One bank can no longer trust another in accepting an overnight draft. Maybe the other feller is trying to pass on bad debt. True enough, banking is based on trust. But if you are not allowed to test debt, or to spot bad debt through demanding payment in gold, then trust is not justified. All debt becomes sub-prime. Why should a client trust his bank, if banks cannot trust one-another?

Thus, then, my answer to the question “why gold?” is that the gold corpuscles fight incipient leukemia in the nation’s monetary bloodstream. It’s not that withdrawing them causes sudden death. But it inevitably causes death in the long run. A rather painful and ugly death.

Since currency touches practically all our people, everybody is contaminated by a corrupted monetary bloodstream. The effects of monetary leukemia are many and in some respects subtle. The withdrawal from the monetary bloodstream of the gold corpuscles which, within broad limits, keep other money and credit corpuscles in good order, has produced the typical results: profligate government spending, extravagant growth in public and private debt, the monetization of government debt, extensive socialization, artificial exhilaration (not to say irrational exuberance), bloating, intoxication, fever, chills, nervousness, irritability, irresponsibility, dishonesty, immorality, decline in the purchasing power of the currency and, characteristically, the insane fear of gold ― as the drug addict fears the withdrawal syndrome. All these mixed with elements of a pronounced monetary revolution and the scattering of dollars and other resources among the nations of the world. The dishonesty involved in, and flowing from, the use of irredeemable currency permeates practically all aspects of our economic, social, and political system and provides yet another instance of how “corruption grows as naturally as fungus on a muck heap” (Andrew Dickson White in his classical book Fiat Money Inflation in France).

The pulsation of this corrupt monetary bloodstream through an economy finally weakens and undermines the nation involved; and unless removed before the logical and final consequences are reached, eventually brings destruction ― economic, political, and social.

When the people of a nation operate with a redeemable currency every individual is able to exercise direct control over the government’s use of the public purse to the extent of his purchasing power. If he is disturbed by government profligacy or unsound banking practices, he can conserve his purchasing power by converting it into the gold coin of the realm. He is not compelled to join forces with others to form a third political party in an effort, usually futile, to protest the profligacy of government and the duplicity of the banks. But if a considerable number of people demand redemption of non-gold currency in gold, the banks experience the impact in the form of diminishing bank reserves which is passed on to the U.S. Treasury and thence to Congress. These demands for redemption are the flashing red lights on a central signal-board ― signals the banks and the government respect. The wires were crossed at the signal-board when gold corpuscles were removed from the monetary bloodstream. Ever since signals deliver the wrong message.

It is true that a redeemable currency may, and frequently does, depreciate in a pronounced degree because of the misuse of credit and debt; but it cannot depreciate to the same extent irredeemable currency can. The limit in case of the latter, as it will be most dramatically demonstrated by the dollar, is zero.

When the government cut all the wires from individuals to the central signal-board in Washington, it opened the way to an orgy of profligate spending, to an unlimited depreciation of the dollar, to the ultimate destruction of this nation, and to the overthrowing of world order. The government and the banks, freed from their proper responsibility of meeting their promises to pay, now have an unrestrainable control over the lives of the people of this nation. Freedom is lost. We have all become slaves. It is this control that the government and the banks want to perpetuate through the regime of the irredeemable dollar.

The fact that the people have lost control over the public purse constitutes a mortal danger threatening the well-being of the United States ― and that of the world as shown, for example, by the usurpation of war-making powers by the president.

The proof, if one is still needed, that the removal of gold corpuscles from the monetary bloodstream ultimately leads to cancer, is the exploding derivatives market. Its size has exceeded the $ ½ quadrillion (500 trillion) mark. Compare this with the annual GDP of the U.S. at about $ 14 trillion. Worse still, the derivatives market is growing at a pace of 40 percent per annum, roughly doubling in size every other year. This is cancer, which mainstream economists and politicians want you to ignore.

What is the solution? The answer is obvious. Put the gold coins back into circulation. Restore a healthy monetary bloodstream. Unfortunately, this is easier said than done. The failure of the initiative of Malaysia to revive the Islamic Gold Dinar is a case in point. Mainstream economists call me an old foggy-bottom and an unreconstructed belly-acher. They point to the Gold Eagles, Gold Maple Leafs, Gold Pandas, and Gold Koalas, in addition to the Islamic Dinar. “See, they are all sitting out there and refuse to circulate. They go into piggy-banks and cookie-jars. Gold just does not behave as it used to, they say. Gold is passé. You can’t put spent tooth-paste back into the tube”.

I want to explode this kind of disingenuous reasoning for once and all. The gold coins which governments have sold for profit were not meant for circulation. Governments don’t want them to circulate. They are souvenir coins, conversation pieces that people will not spend, and for a very good reason, too. People are not sure they can get them back on the same terms.

By contrast, gold coins issued constitutionally will circulate. The Constitution mandates the striking of the coin of the realm free of seigniorage. People surrender the exact weight and fineness of gold at the Mint in exchange for the coin of the realm free of charge. The right to convert is unlimited. If the government opened the U.S. Mint to gold, then people would start spending their Gold Eagle coins because they would know they had a constitutional guarantee to get replacement for their coin on the same terms. This is the wisdom of Isaac Newton, Master of the Royal Mint in London, who put England on the gold standard.

We may take it for granted that usurpers at the Federal Reserve and the U.S. Treasury have no use for Newton. They will not relinquish without a fight their monopoly of charging 100% seigniorage, as against the constitutionally mandated 0%, on issuing new money.

So how are we to restore gold corpuscles to the monetary bloodstream? It may well be that the solution is in the hands of minorities such as native Hawaiians, American Sovereign Indian Nations, or the First Nations of Canada, to establish a Mint on their reservations or territory. They don’t need more gambling casinos or more liqueur outlets. They need a Mint in order to open it to gold. The police scientists at the Federal Reserve and the U.S. Treasury may stop short of putting the Mint owned and operated by minorities out of business using Waco-type violence.

If the minorities did open a Mint to gold, it would be “their finest hour.” A grateful posterity would remember them for their heroism in defying slavery insidiously imposed by a reactionary monetary regime on them as well as on the rest of the world.

If they did that, we could truthfully say that “never have so many owed so much to so few”.


Session Three of Gold Standard University Live (GSUL) will take place in Dallas, Texas, U.S.A., from February 11 through 17, 2008. We are happy to announce that this program is sponsored by Mr. Eric S. Sprott, LL.D., C.A., CEO of Sprott Asset Management Inc. of Canada. The program is in three parts:

(1) A course on Adam Smith’s Real Bill Doctrine and its Relevance Today, consisting of 13 lectures. Professor Lawrence H. White of the University of Missouri, St.Louis, has been invited to represent the opposing view. Date: from February 11 through 14.

(2) A debate on the Economics of Gold Mining. The failure of Barrick Gold’s hedging program. True or Bilateral hedging. With industry participation. Date: February 15-16.

(3) A panel discussion entitled Gold Profits in Troubled Times where paraphernalia such as the gold and silver basis, gold and silver lease rates, NAV of gold and silver ETF’s, the bimetallic ratio, and the variation of these will be discussed with invited experts. Please note that this is a new departure in gold and silver investing through bimetallic arbitrage. Date: February 16-17.

The registration fee for GSUL Session 3 covers participation in all three programs, the course during the week February 11-14 and the debates during the week-end of February 15-17. It is also possible to register for the week-end programs separately at a reduced fee. Participation is limited; first come first served. Participants pay their own hotel and meal bills. The cost of the closing banquet is included in the registration fee.

For the benefit of European friends of Gold Standard University, Session Three will be repeated, March 10-16, 2008, at Martineum Academy in Szombathely, Hungary, where the first two sessions of GSUL were held, provided that a sufficient number of people register.

For further information please check or inquire at

We are pleased to announce that a new website is now available. It contains e-books, archives, news about GSUL, and material of current interest.

November 24, 2007.

A Primary Bear Market

Richard Russell Dow Theory Letters
Extracted from the Nov 21, 2007 edition of Richard’s Remarks

It was a noble battle, it was a battle that seemed almost endless. But today the great battle ended. Today the D-J Industrial Average closed below its August 16 low of 12845.78, thereby confirming the prior violation of the Transportation Average. In so doing, the stock market and the Dow Theory have spoken — they have confirmed the existence of a primary bear market.


One of the precepts of the Dow Theory is that neither the duration nor the extent of the primary trend can be predicted in advance. I have absolutely no idea whether this is fated to be a mild bear market or a severe one.


Well, there is one hope and one hint. The most authoritative bull or bear signal comes when both Averages, Industrials and Transports, break through critical levels simultaneously. That is not what happened in the current instance.


The Transports broke under their August 16 low of 4672.35 back on November 7. Today the Industrials finally confirmed, so the bear signal was not given simultaneously. If there is even a hint that this bear market will be “kind,” this is the hint, but I’ll admit that this line of reasoning may be far-fetched. The fact that we must operate on is that the primary trend of the stock market is now definitely bearish. The great primary trend of the market is pointing down.


I’ve done my best to prepare my subscribers for this possibility. True, I did continue to “hope” that the Dow could stave off a break below 12845.78. The Dow did resist that situation for week after week. Alas, today the support gave way, and the Dow succumbed.


What to do now? I don’t have any magic formula. Prudence dictates that we be light, very light, in our holdings of common stocks. Those subscribers who are holding top-grade dividend-paying equities may decide to sit tight. Those subscribers in the “compounding business” with large reserve funds may decide to weather the storm, collect the dividends, and continue to compound, buying additional shares at whatever price the market may offer at the time.


Those with large stock holdings may simply decide to cut back. After all, a lot can be said for the luxury of a good night’s sleep. Personally, I’ve chosen what I call the “way of the sleeper.” I’m very low on common stocks, in fact the only common stocks I now hold is a limited position in GDX, the exchange traded fund for precious metal shares.


Thought — the market was oversold or actually severely oversold as of yesterday’s close. A big break today renders the stock market oversold to the extreme. This could lead to a rally very shortly, and such rallies often take the Averages back to test their initial breakdown levels. If we do get such a rally, it would provide subscribers with a second chance to lighten up.


Note that the S&P and the Wilshire have NOT confirmed the Dow. In one of the strangest situations I’ve ever dealt with, neither the S&P 500 or the Wilshire 5000 have confirmed the Dow in that neither the S&P nor the Wilshire have violated their August 16 lows. What is the meaning of this absolutely weird situation? I don’t know — honestly I really don’t know. But it is certainly something to think about.


Does the superior action of the S&P and the Wilshire cast doubt on the Dow Theory bear signal? I don’t know. I’ve never in fifty years of watching market action seen this type of situation.


There isn’t a lot more that I can say that is worth saying. The market has told its story. The scene has changed. I’ve lived through these changes before, and so have my subscribers. A few of my subscribers have been with me for almost 50 years. We’ve survived and done pretty well over those 50 years. We will continue to survive, regardless of the mildness or ferocity of this bear market.

charts courtesy of

This is an adage that I dreamed up many years ago, but I’m afraid that it’s just as true today —


“In a bear market, everyone loses, and the winner is the one who loses the least.”


lots more follows for subscribers…


Nov 21, 2007
Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters
© Copyright 1958-2007 Dow Theory Letters, Inc.


Richard Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.

He offers a TRIAL (two consecutive up-to-date issues) for $1.00 (same price that was originally charged in 1958). Trials, please one time only. Mail your $1.00 check to: Dow Theory Letters, PO Box 1759, La Jolla, CA 92038 (annual cost of a subscription is $250, tax deductible if ordered through your business).

Newmont vice-chair Pierre Lassonde looks back at where the price of gold was, and how high it might rise, in this interview with business reporter Lisa Wright.

Q. What do you make of this correction of gold prices?

A. Hey, a year ago it was at $600-and-something (U.S.), so it’s still pretty good. We’re just getting a bit of a pullback, which is healthy. But I do believe that over the next year or two we’ll break right through the $850 (barrier). At some point in the next five years you’ll see gold with three zeroes after the first number, we just don’t know what number that’s going to be.

Q. So where is gold headed?

A. I’ll bring out my crystal ball (laughs). But everything is pretty well unfolding the way that we had anticipated and gold is responding primarily to the devaluation of the U.S. dollar. That correlation is the most important in terms of the gold price. We had foreseen that we were going to chase the old highs, the $850 (range), and just almost touched it last week.

Q. What’s your theory on the price?

A. Something I’ve been pointing out since 1999 in our Franco-Nevada annual report is the Dow Jones industrial average divided by gold price. It will blow you away. The Dow represents financial assets while gold represents hard assets. And, over a 100-year period from 1920 to today, there are cycles. There are times to own financial assets, when the ratio goes up, and then there are times to own hard assets, when the ratio goes down because it’s one against the other.

So from 1920 to 1929, you wanted to be in financial assets. From 1929 to 1935 you really wanted to be in gold. This is a very interesting thing because the financial asset peak was in 1966. And then the hard asset peak was 1980, so this was a 14-year bull market in hard assets. When you think about it gold went from $35 to $850. If I told you in 1966 that gold is going to $800, you’d say `Lassonde you’re completely out of your mind. You’re wacko.’ But oil went from $2.50 to $50 in that same time. And you know what happened to real estate prices in Toronto in the ’70s.

Now here’s the real kicker. At the top of the hard-asset bull market, (1933), the Dow, which had been 370 at the top, bottomed at 37, and gold peaked at (about) $35. The ratio was essentially one-to-one. In 1980, the Dow was (about) 800 and gold was $800. One-to-one. You know where the Dow is today – (just over) 13,000. Gold is $800. In every bull market in the last 100 years the ratio came down to essentially one-to-one.

Q. Is this Dow versus gold theory picking up steam?

A. When you tell portfolio managers this, it scares the heck out of them. If the Dow was to lose 90 per cent of its value and go down to 1,200 and gold is at $1,200, you have one-to-one. But then they’re wiped out. They’re kaput. Or is the Dow going to come down to 6,000 or 8,000 and gold is going to go to $6,000 or $8,000? That’s what happened in 1980. The Dow only lost 20 per cent of its value but gold just went straight up.

Q. What do you realistically see happening?

A. When people say to me, what’s going to propel gold to $2,000 or $3,000? I don’t know. How could I have foretold the events of the 1970s, for instance? Here I think we have a multiplicity of events. We have an industry that’s shrinking. We have central banks that are going to turn into buyers, not sellers. And the European central banks are going to run out of gold …. So I do think we’re going to continue to see good times in this industry for a generation.

Q. People don’t think gold has been in as big a bull market as base metals.

A. That’s right. Copper went from 65 cents to $4. That’s seven times. Gold is up three times. Oil went from $12 to $96. That’s eight times. So, in effect, gold has been the lagging commodity in this hard-asset bull market.

Q. Are these exciting times?

A. Well, the 1970s were a lot of fun but they’re generational bull markets. You have to wait 20 years in between. You’ve got to keep yourself busy. I must admit, being a bit older (and) having more money, this is even more fun.

If you’re wondering the reason why the FEDs are trying to knock the Liberty Dollar concept down (before it spreads like wildfire!), then take a look at this short video (made before the FED raid) for your answer…

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