Here's the question...

Here's the question...

By Richard Russell, Dow Theory Letters | 7 November 2007

Extracted from the Nov 6, 2007 edition of Richard's Remarks

There's a problem, and it's a doozie. Maybe it's just as much a question as a problem. Here's the question— "Can you run a great empire on borrowed money?" My answer— you can for a while, but only for a while. Eventually, something's got to give. The "give" will come in the nation's currency, in its standard of living— or in the demise of the empire itself. It happened in Rome, it happened in Britain, and I'm very much afraid it's going to happen to the United States. The big question, of course, is the timing.

I sit here in La Jolla and I do a lot of wondering. For instance, I wonder if we get a primary bear signal, whether that will be the signal for one of the above listed items— a fall in the currency, a fall in the standard of living or a demise in the American empire itself. Maybe all three, and then again, maybe none of the above, maybe something else that I'm not even thinking about.

If we do get a bear signal, and a bear signal is in no way guaranteed, but if we do get a bear signal, and stocks start to head south in earnest, all the talk will be of subprime mortgages and the trouble with the big banks on Wall Street. Yes, that will be very specific and easy for most people to understand. People like answers, very definite answers— answers with clear solutions.

But it may not happen that way even if we get a bear signal. And I keep coming back to that original question. It's a question that haunts me. "Can a great empire continue to function on borrowed money?" You see, that's what worries me. Because there's no question that the United States is an empire with its military bases and influence spread around the world. And there's no question but that the US is running current account deficits of upward of $800 billion a year. And it's the truth that the US needs roughly $2.3 billion dollars coming in every day just to sustain us and keep the nation running.

Ah well, I'm reminded of the introduction to a book by James Farrell. It runs like this— "Alone and afraid, in a world I never made." Of course, I'm not alone, and I don't think I'm afraid. But it's obvious that I never made this world, because if I had made it, I would have made it quite a bit differently.

The current issue of Time magazine surprised me. The issue had a two page report on libertarian, Dr. Ron Paul, the Texas Congressman, who is running for President. Ron believes in the US Constitution. Ron would like to shut down the Federal Reserve and go back to the gold standard. I gather Ron would end the war in Iraq— further, he would close down all our 120 military bases that are spread across the face of the globe. Ron would legalize narcotics and thereby end our expensive and idiotic "war on drugs."

I guess, to make it short, Ron would pretty much get the government out of our hair, and return it to its original Constitutional form. I'm all for that. Furthermore, I'd mandate that every US Congressman and Senator be fully conversant with the US Constitution. I'd mandate that each and every one of them take an intensive course in Constitutional law. What they'd learn would probably shock them, but they'd get over it.

I'll vote for Ron Paul in the coming election. He's not going to win, but I just can't see myself voting for one of the other candidates. "Why are they running?" I ask. "Do they stand for anything different? Do they [really] question where this nation is heading? Do they ask how this nation is going to continue living on borrowed money? Do they ask why the Federal Reserve was never subject to a Constitutional Amendment?"

Gold— has been making upward tracks, and I note that some of the gold-bugs are growing skeptical. A few are issuing warnings. Some of the warnings are based on individual Elliott Wave interpretations. A few of these Elliotteers are showing that gold is entering corrective wave 4 preparatory to the "real" upward explosion which would be wave number 5.

They may be correct, and then again, they may be out in left field. Personally, and I've said this before, there are now too many Elliott experts, and they don't all agree. Personally, I'm staying with market action, and so far, the market action for gold has been good.

The other argument is that "the public is now hot for gold," and that gold has become "too popular and therefore Gold is overbought." My own appraisal is that the public hasn't even begun to buy gold. The average American hasn't the faintest idea of where to buy gold. Furthermore, the average American has absolutely no idea of the meaning of gold— or why gold is considered real money.

As the rise in the price of gold continues, the chorus of "it's gone too far" gets louder. In fact, I wonder if the camp of the gold sceptics is actually becoming lop-sided (a contrary take on contrary opinion!). Today in the Financial Times I read this about gold (although the Financial Times and its sister publication, the Economist have never liked gold), "As the price approached $800, the momentum of buying interest slowed— one sign that a correction could be at hand."

So I have three conclusions about gold at this time— (1) What we're seeing now is not public buying. The public couldn't be less interested in gold. At over $800 a [1oz] coin, gold is pricing itself outside the grasp of the public. (2) A surprisingly large number of gold-bugs are calling for a correction in gold. That means these sceptics are on the sidelines and waiting impatiently for a correction. (3) It's a bull market in gold. In big bull markets, guessing at the start of corrections is seldom a successful or profitable business. Ride the bull.

Here's an interesting test. Go into any privately-owned local store and buy something that costs say $50. Then go to the owner of the store and say, "I'm really sorry, I forgot my wallet. But I happen to have a South African krugerrand with me, and I wonder if you'll accept this in payment?" See what the store owner says. My bet is that he'll turn you down. Why don't you try it?

Normxxx    
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