WHEN IN DOUBT, STAY OUT -Russell

The AU Report
Apr 13, 2004

In this business, I don't call 'em the way I want 'em, I call them the way I see them. And here's what I see.

First, consumers are continuing to spend – big time. Retail sales in March rose 1.8%, the biggest increase in a year. U.S. consumer spending was led by purchases of autos, furniture and building materials.

Second – inflation is running wild. This from today's San Diego Union headline, "Median Housing Price Hits Record in Country – San Diego Country's housing market, far from settling down, heated up last month to reach a record median price of $424,000, up nearly 17 percent from a year ago. Meanwhile, prices for resale condos rose even more, up 24 percent.

This from the front page of today's LA Times – "Home Prices in LA Soar at Record Rate. The median leaps 29 percent to $375,000 in March as Buyers Scurry to Act Before Interest Rates Rise."

Third, as I reported yesterday, the dollar is rising against all the major currencies. The dollar's new-found strength began in February. The strong dollar has hit the precious metals hard. The dollar opened 105 points higher this morning with the euro down 140 points and closing in on 119.

The strong dollar hit the precious metals like a slap in the face. At the opening, gold was down over 12 to 407 and silver crashed 54 cents to 7.40.

The strengthening dollar hasn't helped the bonds. The 30 year T-bond broke wide on April 12 smashing below its 50-day moving average. Today the long bond was down again – and less than a point above its 200-day MA, which stands at 108.05.

I'm going to give you my broad opinion on the whole picture (this after going over all the charts prior to the opening). I believe the upward momentum of the metals, and the stock market is over. I believe the bonds have topped out. I believe interest rates are heading up, and refinancing in the housing market is over. I believe my original opinion on the stock market was the correct one – the stock market is in the process of building a major top.

I've said that my own basic position is in cash and gold (two-thirds coins, one third gold stocks). My reason for this position – the old adage, "When in doubt, stay out."

I didn't like this wildly-overvalued stock market, I didn't like the fact that everybody was "unfriendly" to the dollar and was on the other side of the equation (meaning they were in foreign currencies). As far as the universe of gold, I don't trade it, I sit with it. As for bonds, I haven't liked bonds for months or longer – not with the Fed hell-bent to inflate. And inflate they are doing – nonstop.

As for the big picture, I believe the government has about "shot its load." Look what's happened over the last 12 months, and still the major stock averages have been unable to rise to new highs.

- Eleven rate reductions taking short rates down to a Great Depression level of 1%.

- Massive refinancing of home mortgages to the tune of $2.5 trillion in 2003.

- Fed injecting over a trillion dollars in liquidity into the banking system over the last 12 months. Over the last four weeks we've seen M-3 rise $100 billion or at an annualized rate of over $1 trillion.

- Massive foreign buying of US Treasuries, which has (up to now) kept long rates down.

- Series of tax cuts by the Bush administration.

- Weekly "happy news" propaganda from various Fed governors.

- Huge government deficits which tend to stimulate the economy.

- All-out spending spree by US consumers.

So what the Fed and the US government have done is to build the greatest edifice of debt ever seen by one country in history. And this debt continues to build. For the US government, the debt build-up is continuing at the rate of over $13 billion a WEEK. The current rising trend in interest rates will bear down on this ocean of debt.

This pits the forces of deflation directly against the forces of inflation.

This impending battle of inflation vs. deflation is going to be one of the most critical economic confrontations seen in decades. Frankly, I don't know how it's going to turn out – and neither does anyone else. In fact, I'd say 99 percent of the US population is unaware that it's even happening.

The inflation-deflation battle will express itself in waves – of first inflation, then deflation.

These are two mighty forces militating towards deflation.

1 – Overproduction brought on by the entrance of China, India and much of Asia into the global economy,

2 – Massive US and world debt which must be carried with the help of low interest rates, if indeed this debt (particularly the US debt) can be successfully carried at all.

And of course, we have the forces of inflation working to reduce the power of overproduction and deflation via the printing presses of the Federal Reserve and the central banks of the world. Without the discipline of gold, the central banks can create any amount of money they want any time they want.

However, the central banks cannot control the "bond market vigilantes." When the vigilantes become frightened about inflation, they dump bonds and rates go up (which is what's happening now).

The price of real money, GOLD, will fluctuate wildly as the inflation-deflation battle goes on. In the end, the great casualty will be intrinsically worthless, paper money. In the end, irredeemable paper money will be distrusted, and it will go down. The only power evil has is the power to destroy itself. I call paper money evil. In the end, it will destroy itself as it has done all through history.

And in the end, what I've warned about all along will come to pass. "In a bear market everyone loses, and the winner is the one who loses the least."

theaureport

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THE NEW GLOBAL CURRENCY: GOLD -Russell -- 1-15-04