Category Archives: gold

Correction of Errors on iShares Silver Trust (SLV) Interpretation

Posted on February 11, 2012 by | 1 comment
In our previous reviews of the iShares Silver Trust (SLV) (found here), we attempted to apply Dow Theory to the price movement of SLV. However, we have made an error in our analysis that has resulted in arriving at the wrong conclusion of the price potentially declining to the previous low that was established at the beginning of the bull market run on November 21, 2008 at $9.02.

 

Instead, we are revising our analysis to reflect that the price of silver may decline as low as $21.02 if it were to replicate the rise and decline from October 2001 to November 2008.This revision should provide a more qualitative view on the future prospects for both SLV and the price of silver.


As background to the error that was made, we first must explain that the iShares Silver Trust (SLV) is supposed to track the price of silver. However, SLV has only been in existence since April 2006.Our Dow Theory analysis of SLV was incorrect because we didn’t have an appropriate starting point, the previous low, to arrive at a correct downside target. The previous low occurred in 2001 which was long before SLV began trading.


This resulted in the mistaken belief that SLV should be expected to go back to the low of 2008 at $9.02. To remedy our error, we have obtained the price of silver from the last major low in the price, and re-ran our Dow Theory analysis. The chart below provides the three downside targets from the March 17, 2008 high of $20.99.


The downside targets from the peak were as follows:
In the final outcome, the price of silver fell below the third downside target of $9.68, ultimately resting at the $9.02 level before making the ascent to the recent high of $48.35.This sets the stage for our analysis of the current price action.
Our current Dow Theory analysis involves the period from the November 21, 2008 low at $9.02 to the peak of April 28, 2011 at the $48.38 level. The downside targets are as follows:
It should be noticed in the chart below that as time passes, the support levels increase which exerts greater pressure on the price to either rise substantially or breakdown.

 

Despite the revision to our numbers, our previous analysis about the expected outcome has remained accurate.Our May 5, 2011 article was on target with the claim that SLV would trade in a range before falling much further. SLV traded in a range until mid-July and ultimately fell as low as $26.16, a drop of -30.87% since that article was written.
The current indications suggest that SLV will fall as the $22.14 support level. Because silver easily fell to the third support level in the period from 2001 to 2008 (within the context of a precious metal bull market), we expect that the $21.02 is a realistic worst case scenario to watch for. We will consider buying silver and related derivatives at $22.25 and below.
We view the most recent rise from the December 2011 low as running out of steam.Therefore, the rising resistance level established at $28.70 appears to be firmly in place…for now.

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Posted in Dow Theory, Error, gold, iShares Silver Trust, SLV

Gold Stock Indicator Points Down

Posted on February 7, 2012 by | Leave a comment
On November2, 2011, we posted an article titled “A Strategy is Needed for Lagging Gold Stocks.”  In that article we made reference to a Gold Stock Indicator that we’ve been using to determine the best times to buy and sell gold stocks.   Below is the same Gold Stock Indicator covering the period from November18, 2010 to February 7, 2012. 
In this example of the Gold Stock Indicator, we’ve provided the percentage change when the Direxion Daily Gold Miners Bear (DUST) [in red]and Direxion Daily Gold Miners Bull (NUGT) [in green] are bought and then sold when the Gold Stock Indicator has reached the opposite trend line.  In this example, the opposite of the NUGT trendline is the red trendline and vice versa. We’ve excluded the respective peaks and troughs in consideration of percentage change.  We only used the periods when the indicator first crossed the opposite trend line.
DUST and NUGT are ETFs that carry the highest risk of loss because they are intended to move at 3 times (3x) the NYSE Arca Gold Miners Index.  Therefore, DUST and NUGT are speculations and not investments.  Additionally,as the trend for the Gold Stock Indicator has been in a long declining phase,we expect that this pattern should reverse substantially at some point.  However, based on the current trajectory, we have May/June 2012 as our tentative reversal period.

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Posted in gold, Gold Stock Indicator, XAU

Thoughts on Gold

Posted on January 28, 2012 by | Leave a comment
A reader says:
“There's a reason Gold is the hottest in the world.Investors are simply losing faith in ALL fiat currencies. Hence, they areturning to one thing that has always been real money - GOLD!”
Our Take:
We don’t know about the far distant future of gold,governments and profligate spending. However, we've always enjoyed a historical perspective on the topic of “realmoney.”  We’ve pulled a few quotes fromRichard Russell’s Dow Theory Letterson the topic of “real money” in the same vein as described above.
“The US is on a treadmill to disaster via the creation ofdebt. In time (and the time is moving very rapidly now) the debt will destroyalmost ALL forms of investments. Gold will withstand the destruction, becausereal money is never destroyed.” 
Dow TheoryLetters.  Issue 736. August 7, 1978. Page5.
“Coming up in a month, a year, a few years (I can’t time it)is the BIG PROBLEM, the problem that I’ve warned about for a long time. How doyou get people to hold paper “money” when they have increasing doubts about itsworth? The answer: you must make it CONVERTIBLE into real money-gold.”
Dow TheoryLetters.  Issue 766. September 26, 1979. Page1.
“My job now seems to be to try to save my subscribers fromthe deceitfulness and greediness of our own Government. So I talk about thetechnical position of gold, of where WC are, of whether gold is still a buy andwhether it will take 900 or 1000 paper dollars to buy an ounce of real moneysay six months or maybe even three months from now." 
Dow Theory Letters.  Issue 774. January 16, 1980. Page 7.
“‘How can the Government ever be bankrupt if it is able to createmoney?’ The answer is that the Government could only be bankrupt if no onewould accept that money. And of course, that possibility is the reason why manysurvivalists will ‘never be without some kind of a position in real money -gold.’” 
Dow Theory Letters. Issue 805.March 25, 1981. Page 3.
“Why could gold be bullish? Two opposing reasons: first,with a potential crisis in the world monetary system, people turn to real moneyas an insurance policy. Gold is real money. Second. With unbearable deficits facingthe US over coming years, politicians will be tempted to ‘print’ (monetize)some of those deficits (and suppose Edward Kennedy gets in in ‘84).”
Dow TheoryLetters. Issue 841. August 11, 1982. Page 6.
Now, we’re not suggesting that the ultimate consequence ofprofligate spending isn’t coming.  Additionally,we’ve made a call for a secular bull market (as opposed to a cyclical bullmarket) in gold on September28, 2010 and silver on September5, 2009 .  However, much of thearguments during and after the peak in the price of gold are the same as today. 
Additionally, nothing has changed that was said about profligatespending at the peak in the price of gold in 1980 or the period from 1981 to1999, a time when the price of gold was in a declining trend.  Therefore, we have little to help us distinguish the difference between huge government spending when gold is rising and when gold is falling.  We're sticking to the view that Dewey and Dakins' assertion that gold vacillates in a 50 to 54-year cycle is right on target (our 2009 review of their work here). 


We’re opting for the view that goldexperiences good times and bad rather than the view that our nation is comingto an end.  After all, the redemption ofour gold, as with all forms of insurance, is not something that we look forwardto.

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Posted in Dow Theory Letters, gold, Richard Russell, Silver, Simmons First National

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Dow Theory Applied to Silver?

Posted on December 20, 2011 by | Comments Off on Dow Theory Applied to Silver?

A reader asks:

“How do you relate Dow Theory to the Silver market?”

Our response:

Charles H. Dow was first an economist, then a commodities expert and finally a stock market analyst. Before Charles H. Dow co-founded the Wall Street Journal, he was better known for writing the “Leadville Letters” for the Providence Journal. The “Leadville Letters” reported on Colorado’s silver mining boom in 1879. After co-founding the Wall Street Journal, the lessons learned in the silver mines ofColorado were found to have application on Wall Street.

Charles Dow was keenly aware of the importance and correlation between commodity prices and stock prices. Many of Dow’s articles in the Wall Street Journal were focused on the movement of commodity prices and all costs of production that went into commodity prices from shipping to the finished product.

As an example, Dow made the following observation:

“For the past 25 years the commodity market and the stock market have moved almost exactly together. The index number representing many commodities rose from 88 in 1878 to 120 in 1881. It dropped back to 90 in 1885, rose to 95 in 1891, dropped back to 73 in 1896, and recovered to 90 in 1900. Furthermore, index numbers kept in Europe and applied to quite different commodities had almost exactly the same movement in the same time. It is not necessary to say to anyone familiar with the course of the stock market that this has been exactly the course of stocks in the same period.”

Much of Dow Theory is based on Dow’s observation of the price action of commodities and then later applied to stock prices. The application of Dow Theory to the price of silver, gold or almost any other commodity is bringing Dow’s work back to its roots. In fact, Dow’s observations in commodities and then later applied to stocks is the basis for much of the modern fundamental and technical analysis that is done today, which includes the quest to determine the “value” of a company and the uses of Fibonacci numbers.

Dow Theory is applicable to all prices that are subject to the whims of market forces. Dow Theory also accounts for manipulation and hoarding. Dow Theory attempts to account for what can reasonably be expected of price action in the not too distant future.

Sources:

  • Dow, Charles. Review and Outlook. Wall Street Journal.February 21, 1901.
  • Bishop, George W. Jr. Who Was the First American Financial Analyst? Financial Analysts Journal, Vol. 20, No. 2 (Mar.-Apr., 1964), p.26-28.
  • Bishop, George W. Jr. New England Journalist: Highlights in the Newspaper Career of Charles H. Dow. The Business History Review.Vol. 34, No. 1 (Spring, 1960) p. 77-93.
  • More on Dow Theory from NLO

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Posted in commodities, Dow Theory, gold, Silver

iShares Silver Trust (SLV) Update

Posted on December 17, 2011 by | 1 comment

The iShares Silver Trust (SLV) ETF has fallen in line with our assessment from May 5, 2011.  However, it is times like these that we get nervous about our ability to believe that the price action of SLV will continue on a forecast that was presented over six months ago.  Back in May, we said the following:

“…we should see SLV tread water for a brief period of time before falling back to the prior low which began with the current run back in November 2008.   Dow Theory suggests that a reasonable buying opportunity would exist at [or] below line B (blue line B).”
Currently, the “blue line B” is around $24.31 and rising as time passes.  In our May Dow Theory interpretation of SLV, the price fell right through line B in 2008 without any hesitation.  We’re not so certain that such action will occur this time around.  As long as SLV can hold above the Dow Theory fair value of $28.15, there is a good chance silver will be able to rebound in a meaningful fashion.  However, closing below $28.15 (again) could be a confirmation of the downtrend.    
Many precious metal enthusiasts are arguing that what happened in 2008 was an outlier event for silver and therefore is unlikely to happen this time around.  It is hard to argue against such a view. However, it is difficult to get the period from 1974 to 1976 out our mind (visual here) when gold fell 50% and gold stocks fell 66% in the middle a gold bull market.  
Below is our updated chart of SLV reflecting the most recent price action:
The Punchline: If you like the idea of investing in silver, then a buying opportunity should be at/or below the blue line B ($24.31).  However, don’t go all in, just in case the dashed blue line does materialize at $17.

 

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Posted in Dow Theory, gold, iShares Silver Trust, Silver, SLV

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A Strategy is Needed for Lagging Gold Stocks

Posted on November 2, 2011 by | Comments Off on A Strategy is Needed for Lagging Gold Stocks

For gold stock investors, a timing strategy is the most effective way to match or beat the coming metal price increase. Among our caveats, we’re excluding junior and exploration mining companies which will either go out of business, experience share price booms or get acquired by peers or the majors. What follows is our examination of whether the lagging gold stocks, the inability of gold stocks to perform equal to or greater than the price of physical metal, is unique to our time or a fundamental hallmark of gold bull markets.

There is considerable discussion about the divergence between the price of gold and gold stocks. In the divergence, the price of gold has tended to rise to new highs while gold stocks (majors) either trade in a range, decline or increase at a tepid rate compared to the physical metal.

Some argue that due to the divergence, gold stocks represent the best investment opportunity because inevitably, the stocks will catch up with the metal. Others say that, the lack of confirmation of gold stocks to exceed prior highs is an indication that the metal is overvalued or needs to decline.

Unfortunately, although both points seem well reasoned (along with many other explanations), evidence from the previous gold bull market suggests that gold mining majors typically underperform the metal. The primary source that we’re drawing from is Richard Russell’s Dow Theory Letters from 1970 to 1979 with data points confirmed in Barron’s and Kitco.com for the respective dates.

On numerous occasions, Richard Russell would express his concern for the divergence between the price of gold and gold stocks. Below are Russell’s observations of the failure of gold stocks to follow the price of gold higher:

“Meanwhile, despite the recent highs in the price of gold bullion, the gold stocks are not keeping up with the price of the yellow metal. I have received many calls from subscribers asking why.” (Richard Russell, Dow Theory Letters, May 17, 1972, Letter 529, page 6.)

“The general feeling seems to be that the gold stocks have been discounting [falling in advance of] a decline in bullion.” (Richard Russell, Dow Theory Letters, September 27, 1974, Letter 610, page 6.)

“‘What’s happening to the shares’ I am asked. ‘Why don’t they move with gold?’” (Richard Russell, Dow Theory Letters, January 2, 1975, Letter 618, page 5.

“At the bottom of the chart is the Barron’s Gold Average (stocks). This may move, too, but this Average has a long way to go to hit its 1974 high while gold could better the old 200 high easily. That should tell us something. And it’s the reason I’ve been saying all along-gold, not gold stocks.” (Richard Russell, Dow Theory Letters, November 9, 1977, Letter 713, page 5.)

“Since Barron’s Average is very heavily weighted in favor of ASA, we are looking to a large extent at the relative performance of the S. African gold shares against bullion. The picture is clear enough. The market, since mid-1974. has preferred bullion to the gold shares. And who am I to argue with the market? That’s the reason I’ve been recommending gold, not the shares.” (Richard Russell, Dow Theory Letters, February 17, 1978, Letter 722, page 6.)

“Since late-January the gold stocks have been reactionary whereas gold has been hitting new 1977-78 highs. In March both stocks and the metal declined, and as you can see the stocks broke below their February lows. Yet the metal has not confirmed on the downside, holding well above its February low. I take this non-confirmation as a bullish indication. I think it is telling us that the metal will not respond to gold share weakness, and it is telling us that the metal ‘wants’ to go to new highs. Whether the stocks will follow is another story.” (Richard Russell, Dow Theory Letters, April 5, 1978, Letter 726, page 6.)

“My chart of gold and the gold averages (see page 6) is now showing a dramatic divergence. The gold stock average has broke” below its November low, but the bullion price has held well above that point.” (Richard Russell, Dow Theory Letters, May 5, 1978, Letter 729, page 5.)

“This non-confirmation between gold and the gold stock average which I discussed in the last Letter is still in force. Many feared that the reactionary tendencies [decline] in the gold shares were calling for a correction in gold. For this reason many advisors have been telling their clients to sell their gold or even short gold. The consequences have been unhappy for the sellers, disastrous for the shorts.” (Richard Russell, Dow Theory Letters, November 1, 1978, Letter 742, page 5.)

“My chart of gold bullion (daily) and the Gold Stock Average (GSA) documents the extraordinary divergence which continues to build between gold and GSA. Why did gold and GSA rally in tandem up to the October highs and why are the gold shares so

reluctant now?” (Richard Russell, Dow Theory Letters, February 28, 1979, Letter 751, page 7.

“My chart of daily gold and the gold stock average (GSA) continues to picture divergence, with Campbell Red Lake and ASA stubbornly refusing to move back to their October highs.” (Richard Russell, Dow Theory Letters, July 5, 1979, Letter 760, page 6.)

“I obviously cannot tell at this time whether gold is going to surge above 307 to a new high- or whether gold is in the process of topping out. The gold stocks have been weak, and my gold stock average has broken below the three minor bottoms. But so far, even weakness in the gold shares has not rubbed off on the metal.” (Richard Russell, Dow Theory Letters, August 15, 1979, Letter 763, page 6.)

To add to the consternation of gold stock investors, the period after the peak in the price of gold in January 1980 showed gold stocks held up better than the metal. This threw off “seasoned” gold investors because it gave the false impression that gold’s collapse would recover somehow. The following is Russell’s comments on this matter after the peak:

“The gold stocks did not act during the 1980 decline the way they did during the 1974 debacle. This time they tended to hold very well. Now they are looking bullish (despite the many troubles, the increasing troubles in So. Africa). The shares, in other words, show good relative strength against the metal. This is a good sign for gold in general.” (Richard Russell, Dow Theory Letters, June 4, 1980, Letter 784, page 5.)

Although gold stocks are a leveraged play on the price of gold, there are critical points in time when gold stocks should be bought and then sold in order to take advantage of the leveraged characteristics. Those who buy and hold gold stocks for the “long term” will be disappointed with the performance as compared to the price of gold. Therefore, it is necessary to have a timing indicator that will highlight the best times to invest in gold stocks.

Below we have constructed a gold stock indicator based on the Philadelphia Gold and Silver Stock Index (XAU) which reveals the best times to accumulate and dispose of gold stocks. The points above the red line indicates the time to sell gold stocks and the points below the green line indicate when to buy gold stocks. We’ve taken the liberty of considering a sell indication whenever the indicator first reaches the red zone on a move to the upside and a buy/accumulate when the indicator first falls to the green line on a move to the downside.

On average, sell indications occurred after a +52% increase in the XAU index. This does not account for the individual performance of gold stocks that are constituents of the index. The consistency of our Gold Stock Indicator reflected the best times to acquire the major gold stocks as well as the most ideal times to sell the gold stocks.

On the chart of the Philadelphia Gold and Silver Stock Index (XAU) above, we have shown where the indicated “buy/accumulate” recommendations would have taken place in yellow. The green circles show what would have happened if the purchase occurred at the worst possible time in the given period and is measured to the respective peaks in the XAU index soon after. As mentioned in many prior articles, we always account for at least -50% downside risk with any investment position that we take. This appears to be a minimum requirement when applying our indicator to the purchase of constituents of the Philadelphia Gold and Silver Stock Index (XAU).

For an investor who wishes to accumulate gold shares from within the XAU index, they would benefit from well timed purchases rather than getting whip-sawed by a wildly gyrating index that will inevitably underperform the price of gold in the “long-term.” We have identified the top five stocks that are likely to outperform the XAU index when the next buy signal is given. The five companies are AngloGold (AU), Yamana Gold (AUY), Gold Fields (GFI), Randgold (GOLD) and Royal Gold (RGLD).

The obvious alternative to buying gold stocks is with the physical asset. The paper version of gold is the SPDR Gold Shares (GLD). Although not truly tested through a full gold bull and bear cycle, GLD remains the among the most popular ways to “invest” in the physical asset. Our preference is for the non-paperized version of gold in the form of one-ounce coins.

As has been demonstrated in the gold bull market from 1970 to 1980, gold stocks (the majors) will generally underperform the price of gold. Those who are bound and determined to buy gold stocks can pursue the juniors and explorers which provide a wide range of outcomes that are independent of the price of gold (but helped by the rising value of gold) based on new discoveries, getting acquired or going bust. The alternative, buying the majors, should be done with a well constructed strategy that does not rely on hold-and-hope.

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Posted in gold, Gold Stock Indicator, Richard Russell, Richard Russell Review, XAU

Richard Russell Review: Letter 713

Posted on October 26, 2011 by | 2 comments
This review of Richard Russell’s Dow Theory Letters is dated November 9, 1977 when the Dow Jones Industrial Average was at 818.43 and the Dow Jones Transportation average was at 206.56.
  
Dow Theory
The first topic addressed by Richard Russell is Dow Theory.  On this topic, Russell says the following:
“THE PICTURE: As far as I’m concerned, as far as my studies of the Dow Theory are concerned, a valid primary bear market signal was given when, on October 24 [1977], the Transportation Average confirmed the prior bearish indications of the Industrials. There are always those who cry, ‘The signal was late, it was too late!’ But no competent Dow Theorist in history ever waited for an actual bull or bear signal before taking action! For instance, we bought stocks in December, 1974 before the 1975 bull market signal, and we sold our stocks in March and April of this year well ahead of the October, 1977 bear market signal. We bought and sold on many clear indications, and the final Dow Theory signal merely confirmed what we had suspected and had acted upon.”
First, we’d like to address when a bear market signal is most likely to have occurred after the bull market signal that was confirmed in January 1975. From our perspective, the bear market was signaled on October 5, 1976 for the Transports and October 8, 1976 for the Industials when both indexes fell below the late August 1976 lows.
For whatever reason, Russell acknowledges that the call was late but doesn’t confirm how late he was.  Looking back at the October 16, 1976 issue of Dow Theory Letters  (Letter 678), in the first issue after we believe the bear market began, Russell makes no reference to the dual violation to the downside by both indexes.  Russell does allude to the Transportation Average level of 200.88 which he believed the market to be “weak” if the index fell below such a point.  On October 16, 1976, Russell said the following:
“On the other hand, if the 200.88 level is broken, I would take this as a sign of unusual weakness, and I would take an even more cautious stance towards the market (which means selling more stocks and upping the bond portion of your portfolio even further.”
Naturally, there is a high level of inconsistency in suggesting that he would lighten up on his stock holdings if the Transportation Average fell below 200.88.  In the November 9, 1977 issue, Russell claimed that at the time the Transports fell below the indicated level he “sold our stocks in March and April of this year well ahead of the October, 1977 bear market signal.”
Although done in hindsight, our interpretation, almost a full year ahead of Russell’s call of a bear market, would have sheltered the investor from 3 times the loss.  This is consistent with our Dow Theory bull market indication in July 2009 and our more recent bear market call on August 2, 2011 (all NLO Dow Theory Bull Market articles) contrasted with Russell’s many bull and bear misinterpretations from March 9, 2011 (as partially outlined here).
The difference in Dow Theory Bear Market interpretations to the March 6, 1978 low:
Date
Transports decline
Industrials decline
Russell:
10/24/1977
-1.20%
-7.43%
NLO:
10/8/1976
-4.89%
-22%
Ironically, Russell says the following of those skeptical of the Dow Theory bear signal on October 24, 1977:
“…others said that if it was indeed a bear signal, then probably the greatest portion of the market slide was over anyway. Two days after the bear signal, the market rallied sharply, as if in disbelief.”
Since Russell’s call of a bear market was in fact long after the majority of losses were incurred, he only furthered the skepticism and misinformation of a useful tool for investors and businesses alike.  From the March 6, 1978 low to the April 27, 1981 high, the Dow Industrials increased by 37.87% while the Transportation Average increased 119.71%.  Alternatively, the Dow Industrials increased 23.17% and the Transports increased 117.55% after Russell’s indication that a bear market began on October 24, 1977.
Steps to a Dow Theory Bear Market signal:
  • July 14, 1976 Transports hit new high 231.27 but unconfirmed by Industrials
  • Sept. 21, 1976 Industrials hit new high at 1014.79 but unconfirmed by Transports
  • Oct. 8, 1976 both indexes fall below the late August lows-Bear Market begins
On page 3 of the DTL, Russell starts a Q&A with a question that has a very interesting answer:
“Question: Suppose we get a rally that turns out to be a huge advance? Then what, Russell?
“Answer: We have a number of ‘fail-safes’ that work on either the bull side or the bear side of the market. The one I’m thinking about in particular is my study of the three moving averages of the Dow. At this juncture, the 13-week MA is a whopping 71 points below the 50-week MA, and we would need a crossing to get a major bull signal. Furthermore, the 4-week MA (short-term MA) is at 814, 29 points below the 13-week MA (intermediate-term) which is at 843. We need a crossing of the 4-week MA above the 13-week MA merely to get a ‘buy-alert.’ That would take time. So in the absence of a full over-sold bottom, I would say, ‘Skip any rally that may be forthcoming, or wait for the Dow’s moving averages to cross.’”
There is a concern that we have regarding this section of Russell’s letter.  First, a “fail-safe” provision should address what actions to take if investments don’t work out.  Being out of stocks altogether isn’t investing nor is it working towards compounding, an overarching, albeit conflicting, theme in Russell’s work.  Therefore, Russell’s “fail-safe” observations based on a moving average requires reacting to a lagging indicator which compounds the delay in taking advantage of investment opportunities.  In fact, using such an approach causes investment activity, or lack thereof, to be made at the worst possible time.
In general, the use of moving averages for buy indications seems to be in contradiction to Dow Theory.  As pointed out earlier, moving averages are lagging indicators whereas the use of Dow Theory is supposed to act as a leading indicator.  Although Dow Theory provides bull or bear market indications not buy and sell recommendations, it can be effectively used to navigate market gyrations.  Based on the performance of the markets after Russell’s call of a bear market, it is clear that the mixing of moving averages and Dow Theory led to conflicting ideas of market direction that allowed Russell’s “Great” Depression bias to become the default reaction.
Treasuries
On page 4, Russell gives a quick blurb that had been overlooked for a long time in the mainstream media until recently.  Russell says the following:
“I might also mention that if the public became wary of the banking system, there could be a major move out of bank deposits and into Treasury bills.”
This has been the story of our experience in the market since 2008.  Furthermore, as the European Union struggles with their less than integrated banking system, demand for Treasuries grows.  This is in stark contrast to the belief that gold is king when there is a banking crisis.  We believe such a view is a holdover from when countries propped the price of gold with a gold standard.  The decline of gold and gold stocks in 2008 shows that there is another horse in the race for financial “safety.”
Gold & Swiss Franc
Russell points out something which seems extremely relevant to any investor in gold and that is the relationship between gold, gold stocks and the Swiss franc.  Russell says the following:
“Now here’s what nobody (or let’s say very few people) know.  If I asked you “How’d you like to own Swiss francs at the early-1974 price?”  you’d probably jump at the chance.  Why would you jump?  Because the Swiss franc has been a hot item, a glamour currency.  Look at my next chart (bottom of p.5).  Note that the Swiss franc was about 31 cents in early-1974.  Gold at that time was $166 per ounce.  All right, the franc is now 45 cents or about 45% above its early-1974 price, in terms of dollars.  But gold is roughly the same price as it was in early-1974!  Now what the hell makes the Swiss franc better than gold?  The irony is that the Swiss franc is highly valued because it has such a high level of gold backing.”
Nothing could be more instructive than the review of the price of gold, gold stocks and Swiss francs during what was perceived to be a gold bull market. Few gold bugs will acknowledge the amazing decline in the price of gold from early 1975 to the low of 1976.  The decline was nearly 50% of the peak price and lasted nearly two full years.  Likewise, the Barron’s Gold Average lost nearly 66% from the high achieved in 1974 to the low near mid-1976.  The Swiss franc, on the other hand, remained in the a narrow trading range or moved higher.
Russell was correct to question “…what the hell makes the Swiss franc better than gold?”  Although Russell never mentions it, by pointing out the “uncharacteristic” rise of the Swiss franc at the time, we gathered that the activity of the Swiss franc implies that it is an indicator for the longer-term price of gold.  Because we’ve pointed out in many previous articles the fact that gold isn’t always the safe haven that it is fabled to be, when the next big decline in the price of gold occurs we will be watching closely the action of the Swiss franc for any indications of investment opportunities in gold stocks.  We have constructed what we believe to be a reliable indicator for the best time to buy gold stocks that are constituents of the Philadelphia Gold and Silver Stocks Index.  The action of the Swiss franc will act as a confirming indicator when the index is near a new low.
More Russell Reviews:

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Posted in Barron's Gold Stock Average, Dow Theory, gold, Letter, Richard Russell Review, Silver, Swiss Franc

Slittare: Italy’s credit rating

Posted on October 6, 2011 by | Leave a comment
On February 18, 2009, we wrote an article titled “When Paper Has No Value.” In that article, we highlighted West Germany’s $2 billion bailout of Italy in 1974 that was backed by the value of Italy’s gold holdings. Regarding the use of gold as collateral we said the following:
“No nation wants to actually resort to this feature first, because as one nation dips its toes in the water all subsequent nations will follow in its path at ever higher gold prices. It is only the last nation in the pool, with sizable gold reserves, that benefits the most from using gold as collateral. The first nation in the pool becomes the sacrificial lamb. Unfortunately, desperate times call for desperate measures.”
We couldn’t help but notice that Moody’s credit rating for Italy was downgraded three notches on October 4, 2011 (found here). There are three primary reasons given for the downgrade of Italy’s debt:
(1) The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Italy, as a result of the sustained and non-cyclical erosion of confidence in the wholesale finance environment for euro sovereigns, due to the current sovereign debt crisis.
(2) The increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook.
(3) The implementation risks and time needed to achieve the government's fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties.
In Italian, the word slittare means to slide or to be postponed. This was the term that was used to describe Italy’s economic woes that led to the loan using gold as collateral in 1974. Depending on its usage, slittare encapsulates the problems faced by Italy today. The increase in long-term debt is the postponement of the inevitable and the increased downside risk to economic growth points to a further slide. The third issue mentioned by Moody’s, implementation risk, only adds to why the first and second reasons will only grow.
Like it was in 1974, Germany is currently in the position of having to buttress European nations as the “lender of last resort.” We’re wondering which nation will be the first to pledge their gold reserves as collateral in exchange for a loan to avoid collapse. It will be desperate times when a nation pledges their gold reserves for the purpose of a loan. However, when this does occur, it will set the ball in motion that will inexorably create a floor in the price of gold.

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The Coming Precious Metals Dividend War

Posted on October 3, 2011 by | Leave a comment
On September 9, 2009 we wrote an article titled “Silver Should be the Focus.” In that article, we cautioned readers to “be mindful of the coming competitive dividend war between precious metal companies. I remember one, now defunct, gold company that paid out their dividend in actual gold. These are all gimmicks to lure investors in at a time when the rule of the day should be ‘head to the exits.’”
The first salvos of the coming war to attract investors to precious metal stocks have be initiated.In April 2011, Newmont Mining (NEM) started what they deemed “… the industry's first and only dividend policy linked directly to the realized gold price…"Naturally, this isn’t the first time that gold linked dividends has taken place, but it sells really well to those unfamiliar with gold stocks and their dividend policies.On September 19, 2011, Newmont Mining (NEM) announced a further enhancement of their “first ever” gold linked dividend policy with the following changes:

 

“The enhanced policy will continue to link the quarterly dividend rate to changes in the gold price but will also provide an additional step up of 7.5 cents per share when the Company's realized gold price for a quarter exceeds $1,700 per ounce and a further step up of 2.5 cents per share (10 cents in total compared to the existing policy) when the Company's realized gold price for a quarter exceeds $2,000. At average realized gold prices below $1,700 per ounce, the current dividend policy remains unchanged. Newmont's quarterly gold price-linked dividend payments are based on the Company's average realized gold price for the preceding quarter.”
Not to be outdone, Hecla Mining (HL) announced on September 20, 2011 that they would have a dividend that is linked to the price of silver.Hecla’s silver-linked dividend policy is as follows:

 

“The initial quarterly dividend under the policy is expected to be $0.03 per share of common stock ($0.12 per year), if Hecla's average realized silver price for the third quarter is $40.00 per ounce. All dividends, including those in the third quarter, would increase or decrease by $0.01 per share ($0.04 annually) for each $5.00 per ounce incremental increase or decrease in the average realized silver price in the preceding quarter.”
Newmont Mining (NEM) and Hecla Mining (HL) are soon to be joined by a crowded field of precious metal companies that are going to progressively up the ante.It will soon be indistinguishable as to who has the most sensible dividend policy and who has a compounding “money” losing machine.The race to offer attractive dividend payments has help from an unexpected source.
Unlike past precious metal bull markets, gold and silver stocks have stiff competition for investment capital in the form of gold and silver ETFs.In fact, more money is being plowed into the combined gold and silver ETFs than the stocks that have actual claims on getting the metal out of the ground.This presents a challenge for precious metal stocks that would normally issue shares in acquisition of other gold companies or expand their operations.In order to get the share price up, a competitive environment of dividend increases will lead many companies to ruin in an effort to attract new investors.
As described in our 2009 recommendation silver, one gold or silver company is going to “jump the shark” and make their dividend payments in the actual metal.When that time comes, it will be fair warning to protect your positions, though this may be indistinguishable to ebullient gold bugs at the time.
The single best dividend policy that we’ve seen among gold stocks, was held by Homestake Mining [HM] as describe in our October 31, 2010 profile of Homestake (found here).By 1933, Homestake had a 53-year history of continuous dividend payments.Not surprisingly, Homestake was among the 2% of gold stocks that rose in value from 1924 to 1932 due, in part, to their amazing dividend policy.
Because we’re in the early stages of a gold bull market, there is little attention being paid to the quality of the dividend policy.Gold and silver linked dividend policies appear advantageous when the price of the commodity is going up.However, such a policy can imperil a poorly managed company as the average price declines.
The most effective antidote to becoming collateral damage in the coming dividend war will be to buy the gold and silver stocks that are members of the Philadelphia Gold and Silver Stock Index or the Amex Gold Bug Index.Ironically, institutional support, by being the member of an index, will allow gold and silver stocks to survive hard times where others will unnecessarily falter.
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Posted in dividends, gold, HL, Homestak Mining, NEM, Silver

A Contrarian Indicator That Says the Gold Run Isn’t Over…Yet

Posted on September 14, 2011 by | Leave a comment
As the saying goes, “once something becomes mainstream the investment opportunity probably has passed.”  In some instances, the magazine cover is the most recognized way to tell if a concept, idea or person has gone mainstream.  But how do we know this is really the case?  Except for the anecdotal evidence that fits someone fancy or the less than anecdotal evidence that was published here, there has been little proof to demonstrate that such a contrarian indicator is reliable or accurate.
 
The recent rise in the price of gold has many wondering if we have reached the stage where, as an investment theme, it has gone mainstream.  Since July 1999, the average price of gold has risen from $255.81 to the most recent high of $1,900.  For any commodity price to rise so much, let alone the dramatic increase in the stocks represented in that industry, should warrant some cause for concern.
As a contrarian indicator, we could look at the many magazine covers out there to make our determination of whether gold has gone mainstream.  However, using such an indicator can take a lot of cover stories and a substantial amount of time before we eventually could consider ourselves correct.  The number of missed opportunities and inaccurate calls for a market top would be many.
However, with the advent of keyword searches and proprietary databases, we can look at the historical significance of all mentions of gold. We have chosen to use the Proquest Complete database covering Barron’s from May 1921 until the present.  Although this will likely include advertisements, we’re willing to believe that the increase in ads about gold would correspondingly increase when there is more interest in the precious metal.  Not surprisingly, advertisers spend more when they shouldn’t and spend less when they should spend more.
In the chart below we see, on a 10-year basis, the number of times that gold is mentioned in Barron’s from May 1921 until August 2011.  For reasons that shall be explained, the decade of the 1930’s and 1980’s were periods when the number of gold mentions peaked. 

Our observation is that the peak in the number of mentions on the topic of gold occurred after major turning points in the price of gold.  The bar chart below shows the decade of the 1930’s in greater detail.  The year of 1932 shows the most articles written on gold.  The decline in interest after 1932 reflects the herd mentality of diminished expectations for gold after England’s September 21,1931 departure from the gold standard.
The impact of England’s suspension of the gold standard led to a domino effect of countries abandoning the gold standard. Denmark, Norway and Sweden abandoned the standard by the end of the same month.  In October 1931, Finland was next to go off the gold standard.  Those that remained on the gold standard in Europe suffered huge losses due to the devaluation of their large holdings of British pounds in their treasury.  The belief at the time was that the currency would always be backed by the set price of gold.

However, after many countries departed from the gold standard, the price of gold stocks began to bottom.  With fewer articles on the topic of gold after 1932, the bull market in precious metal stocks was just beginning as demonstrated in the chart below of gold and silver stocks from 1924 to 1933. 
During the financial crisis from 1929 to 1932, it seems as if gold was popular in Barron’s until it was no longer being propped by governments through the use of a gold standard.  Once freely able to find a price, the process of gold stocks bottoming was inevitable.
After the peak in the price of gold in 1979/1980, Barron’s was again late in the most mentions of gold.  However, the period that followed the 1980’s peak in mentions of gold held at very high levels as the die-hard gold bugs were unwilling to accept the reality of the disinflationary environment that the world economy was entering.
In the chart below, we observed that a significant drop-off in mentions of gold after 1987 may have to do with the fact that gold stocks declined equally as much as the Dow in the same period of time.  Since the decline in gold stocks couldn’t offset the losses of stocks as anticipated, anyone who would have claimed that gold stocks were a refuge during a declining market had all the evidence to demonstrate that such a notion was foolhardy.

In light of the fact that we believe that we’re in a secular bull market in gold stocks, as indicated in our 2010 article (found here) or in our September 2009 article on silver being the best play on the rise of gold (article here), our expectation is that the number of mentions in gold need to match the levels of 1980 or 1932 before we’d be concerned that the lagging contrarian indicator of Barron’s mentions of gold has any relevance on future long-term price declines in the metal and gold stocks.
Because we believe that gold stocks act like perpetual options on the price of gold, we’d select the gold stocks from the Philadelphia Gold and Silver Stock Index (XAU).  The following are our top choices from the XAU index:
1. Freeport-McMoran (FCX)-  Freeport-McMoRan is within 10% of the 52-week low and has a dividend payout ratio of 17%.  The P/E ratio is at a modest level of 7 times earnings.  Value Line indicates that FCX is selling at least 35% below historical fair value.  Since 2004, FCX has traded up to its estimated fair value and then retrenched.  Investors in FCX should expect to sell at the $62 level and rotate into other relatively underpriced gold stocks at that time.
2. AngloGold Ashanti (AU)- At the end of last year (2010) AngloGold's total reserves amounted to 71.2 million ounces. The stock is within 15% of the 52-week low and has a dividend payout ratio of 13%.  The trailing P/E is 22 but they are expected to grow their earning next year, which brings their forward P/E to 9.5.  According to Value Line, AU is trading only 6% below its historical fair value.  Using the 5-year historical book value of 4 as a benchmark, the current book value of 3.8 suggests a 5% discount to the average.
3. Kinross Gold (KGC)- Kinross operates in hte Americas, Africa, and Russia.  At the end of 2010, its proven reserves were 62.4 million ounces of gold, 90.9 million ounces of silver, and 1.4 billion pounds of copper.  The stock is currently trading just 1.3x its book value.  If the 5-year history is any measure, the stock should rise 77% and trade at 2.3x book value.  The company continued to increase its dividend over the years.  Started in 2008, Kinross paid $0.08 per share and now it pays $0.10.  The current payout ratio of 10% along with current gold price implies that dividend increases maybe around the corner.
4.Gold Fields (GFI)- Gold Fields engages in acquisition, exploration, development, and production of gold.  At the end of 2010, their gold equivalent reserves stood at 78 million ounces.  The company's P/E of 40 is high and price-to-book ratio is fair.  While the current dividend yield of 1.7% appears to be high for a gold stock, that dividend is heavily dependent upon the profitability of their business. GFI's dividend policy is to pay out 50% of its cash earnings depending upon investment opportunities.
    

 5. Barrick Gold (ABX)-  According to Value Line investment survey, Barrick Gold is fairly valued at 10 times cashflow.  With an estimated 2011 cash flow of $6.10 per share, Barrick Gold (ABX) is selling 13.72% below fair value as of September 13, 2011.  Despite having a low dividend yield, Barrick has a sustainable dividend payout ratio of 12%, allowing for a substantial decline in earnings if necessary.

Our ranking of the gold stocks above is strictly based on those that are closest to the low and part of the Philadelphia Gold and Silver Stock Index (XAU).  Aggressive precious metal investors can also participate in the extremely popular SPDRGold Share (GLD) ETF or the highly volatile iShares Silver Trust (SLV) for greater potential gain and/or loss. 

We believe that a correction in gold stocks, beyond the trading range that has been established in the XAU since October 2010, is still on the horizon.  Therefore, we believe that these stocks and funds can be bought at lower prices.
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iShares Silver Trust (SLV) Debrief

Posted on May 5, 2011 by | Leave a comment
On April 14, 2011, we provided what we believed to be the downside target for the Philadelphia Gold and Silver Index (XAU) in anticipation of the current decline that is taking place using Edson Gould’s speed resistance lines (article here).  Although appearing to be very similar, there is a distinct difference between Gould’s resistance lines and Charles Dow’s 1/3 support levels.  Gould’s lines have support levels based on 1/3 of high while Dow’s support levels are based on 1/3 the difference between the prior bottom and the most recent high.

 

In this review we’re going to tackle the trading pattern of the very controversial iShares Silver Trust (SLV). In the chart below we have drawn the Dow Theory support levels where the price of iShares Silver Trust (SLV) is likely to revert to as part of a normal reaction.  As a point of clarification, according to Dow Theory, a bear market does not begin until the index or stock falls by at least 1/3 of the prior rise.  In the case of (SLV), today’s closing price at $33.72 heralds what is sufficiently below the first support $34.52 and should be considered to be a bear market. 

 

Although this could be considered a bear market based on Dow Theory, we only need to look back to 2008 to know how quickly and viciously a bear market in precious metals can begin and end.  The precious metals bear market of 2008 crushed the XAU gold and silver stock index with a 68% decline in eight months.  During the same time, the iShares Silver Trust (SLV) declined slightly more that 55%.  

 

Bear market or not, some observations are worth considering.  First, in the chart below, the overall pattern of the price decline in (SLV) for the Dow Theory indication numbered 1 (in green) is very similar to the current decline represented with the Dow Theory indication numbered 2 (in blue).  Since Dow Theory works on a relative basis, once initiated at a major low, the signals provided are not confused through the distortions of large or small numbers.  Headlines about SLV having declines of historic proportions are grossly exaggerated if there is no comparison on a percentage basis and compared to prior declines.

Second, at the beginning of each run at point 1 and 2, the price of SLV bounced off of the middle line B (also known as the 2/3 support line) before going parabolic. 

Finally, the decline from each peak was rapid and vicious.  One-third of the prior rise was wiped out in a matter of days after the peak.

 

 

What remains is a high level of uncertainty for (SLV) going forward.  However, in general, we should see SLV tread water for a brief period of time before falling back to the prior low which began with the current run back in November 2008.   Dow Theory suggests that a reasonable buying opportunity would exist at below line B (blue line B).  However, we wouldn’t jump in at the slightest move below line B.  Instead, we’d like to see the price decline to the dashed blue line at $15.41 or below.

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Posted in Dow Theory, Edson Gould, gold, iShares Silver Trust, Silver, SLV, XAU

Dollar Down, Gold Up?

Posted on April 24, 2011 by | 1 comment
We're not the best observers of the dollar/gold relationship.  However, We have noticed some discussion of the idea that if the dollar declines then the price of gold will (continue to) rise.  This logic seem to make perfect sense, on the surface.  However, we couldn't help but notice that when viewed over a long period of time the idea of gold going up while the dollar is going down doesn't add up.
In the chart below, we see point A as the peak in the price of gold (red line) and point B as the trough.  Correspondingly, we have the trade weighted dollar (blue line) with point C being the peak and point D as the trough.  Because the period of time that lapsed was nearly ten years when the "price" of both the dollar and gold declined at the same time, it seems challenging to cling to the belief that if one falls the other rises in value.
1973-2001
Interestingly, in the period before point A, both indexes rose for a short while.  During points A-C and D-B there was an inverse relationship.  Additionally, the period from 2001 to the present has maintained an inverse relationship with the price of gold going up while the dollar has fallen.

Overall, the number of years that there is a correlation between the dollar and gold is almost the same as the inverse relationship.  Because of the inconsistency of the relationship between gold and the dollar, the "obvious" conclusion doesn't seem to fit.

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Sundry Items

Posted on April 21, 2011 by | Leave a comment
  • Biogen Idec (BIIB) and Teva Pharmaceutical (TEVA) are doing a dance as both are members of the Nasdaq 100 index. As one stock is at a new high the other is reaching a new low. The two-step that is being done by the stocks is quite amazing. Back in October 30, 2009, we pointed out that the concentration of biotech stocks at a new low meant that they were possible takeover candidates. From that list in 2009, GENZ and CEPH were actually tendered buyout offers. 3 of the remaining 5 biotechs have had gains of 40% or more since then. The remaining two stocks, Amgen and Gilead Sciences, are essentially at break even. BIIB has been the leader in terms of price appreciation with a gain of over 100% since October 30, 2009. At that time TEVA was near a new 52-week high. However, BIIB’s recent success is actually impacting the performance of TEVA since both companies are involved in the development in MS drugs. TEVA is now on our new low list for the Nasdaq 100 and should be consider as a top acquisition candidate for your portfolio. Anyone who bought BIIB based on our watch list from October 2009 should now consider securing a large portion of the gains and possibly funding the purchase of TEVA with the proceeds.
  • Our September 5, 2009 article titled “Silver Should be the Focus” recommended that anyone interested in investing in gold should instead put there investment funds towards silver. The chart below reflecting the silver (SLV) and the gold (GLD) ETF demonstrates the accuracy of our recommendation and highlights what we believe is likely to come. Those interested in determining an entry point should reference our latest article on April 14, 2011 highlighting the downside targets for precious metal stocks based on the Philadelphia Gold and Silver Stock Index (XAU).

  • The results are in and our article titled “A Comparison Between Dividend Strategies” has demonstrated, so far, that the New Low approach has returned 19.52% while the list of stocks we compared ourselves to has returned only 1.39%. We believe that, although the two list have similar companies, the quality and timing has made the difference in performance. As a note, we only made the comparison because the author of the other list indicated that it was for the purpose of trading. In our view, stocks that can be considered for trading are worth comparing since we only aim for 1-year performance.

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Projecting Downside Targets for Gold and Silver Stocks

Posted on April 14, 2011 by | Leave a comment
In our prior work on the topic of gold and silver, we indicated that the precious metals market had entered into a secular bull market. Our confidence in that thesis was based on the works of Edward Dewey and Edwin Dakins 1947 book titled Cycle: The Science of Prediction. In that book, Dewey and Dakins illustrated the cycles for inflation which indicated that a peak in inflation would occur in 1979 and a trough of inflation would occur around 2006. While the 1979 peak was accurate the 2006 bottom was off by a few years. However, we feel confident that being off by a few years within the context of a 50-year cycle allows for some margin of error.


As investors, the NLO team is primarily concerned with the downside risk and major downside targets. For the gold and silver market, we will use the Philadelphia Gold and Silver Stock Index (XAU) to determine where the next low might occur.


To project the downside target for the XAU, we will use speed resistance lines as pioneered by Edson Gould. William X. Scheinman wrote a piece in Barron’s titled “600 on the Dow” on February 9, 1970 that outlined exactly how Gould’s resistance lines work.


The forecast by Scheinman of a closing low for the Dow at 600 was off by 2.57% when the index closed at 584.56 on October 4, 1974. [As a sidebar, Dow Theory gave a bull market indication in January 1975 that would have investors fully invested.] Although being off by such a small amount, Scheinman also said that the low would occur approximately a year from the date that the article was written. We believe that the tactical error on the part of Scheinman was to expect that the decline would be based strictly on a set time frame rather than based on the level of the resistance line. The chart below is the original piece that was generate by Scheinman from 1970.


In our chart of the Gold and Silver Stock Index, we have drawn the XAU on a daily basis from 1983 to the present. As described by Scheinman, the counter-trend movement should revert to the speed resistance line or two-thirds of the established high. As an example, the previous peak of the XAU on March 14, 2008 was at the 206.37 level. 206.37 divided by 3 is 68.79. The reversal from the 2008 decline was 65.72 on the XAU. This was within 4.5% of the speed resistance level.



Based on the most recent high of 228.95 the downside target for the XAU index is 76.32. We recommend that whenever the XAU index falls at or below the speed resistance line drawn on the chart, between now and just before 2028, as part of the secular rising trend in interest rates/inflation, we would expect that the stocks in the index are underpriced. Confirmation of fair values should be determined for possible speculative positions at these times.


Note: A variation on this method is to divide the high by three then adding the first major low after the start of the bull market, in this case the October 27,2008 low for the XAU. An example of the usefulness of this technical approach to projecting downside targets can be found by dividing the 2007 top in the Dow Jones Industrial Average (14,164) by three and adding the 1987 low (1738.74). This provided a speed resistance line of 6460.07 which was within 2% of the actual March 9, 2009 low. The blue horizontal line, in our chart of the XAU above, represents the expected downside target when adding the October 2008 low to the speed resistance line.
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Posted in Edson Gould, gold, William X. Scheinman, XAU

Richard Russell’s Miscue

Posted on April 6, 2011 by | Leave a comment
On the Dow Theory Letters (http://www.dowtheoryletters.com/) site yesterday, there was an interesting admission by Richard Russell. Russell said:
“I mistakenly took the vicious decline of 2007 to 2009 as a turn in the tide and a bear market.”
This comes as a shock since most market veterans would say that when almost every market, foreign and domestic, declines by 30% or more then it would be sufficient to label it as a bear market. When the gold stock index (XAU) declines 62% along with almost all other commodity indexes then a reasonable person, lacking any other term for it, would call that a bear market.
Instead of being a bear market, according to Russell, the decline from 2007 to 2009 was simply a “…correction in an ongoing bull market.” As I attempted to process this thought, I only wonder what Russell would re-characterize the stock market decline in Japan (from the 38,000 to 8,000 level) as. Dow theorists like Hamilton, Rhea and many others are very clear on what constitutes a bear market. Russell’s assertion that 2007 to 2009 was simply a “correction” was in complete contradiction to his prescient call of an eminent bear market in Barron’s in November 2007. Nor does Russell’s latest missive add credibility to his prior claims that the rise in the market from the 2003 low was a bear market rally.
To top off Richard Russell’s wild claim that a year and a half decline of over 40% in global equity price was only a “correction” is the fact that he omitted any reference to Dow Theory having any role in his sudden realization that he was wrong about his belief that we were only in a correction rather than a bear market. Russell credited his not so secret Primary Trend Indicator, Lowry’s Selling Pressure Index and Lowry’s Buying Power Index. Apparently, Dow Theory plays a small or non-existent role in a publication that is titled The Dow Theory Letters.
By inference, not crediting Dow Theory for his change in thinking suggests that Dow Theory doesn’t work. However, the NLO team has been adamant that up to this point, Dow Theory has indicated that we’re in a bull market and that a bear market has not been signaled since the July 23, 2009 bull market indication. This is in stark contrast to Russell’s back and forth calls of a bull and bear market as early as January 2009.
So what is Russell’s remedy for his error in judgment for the last 2 years? In today’s note (April 6, 2011) Russell says, “If this market is going to turn primary bearish, I would want to see an orthodox Dow Theory bear signal.” Wait a minute, as the market was rising Russell arbitrarily misapplied his version of Dow Theory and now he thinks that he’ll turn bearish when he receives “…an orthodox Dow Theory bear signal.”
As an attempt to salvage some sort of credibility Russell says, “In the meantime, all is not lost. Gold is at new highs as are the gold ETFs, and silver is at a 31-year high.” This comes after Russell said on March 1, 2011 that if the Dow Industrials fall below 11,800 then investors should sell all stocks “including gold stocks." Well, on March 16, 2011, the Dow fell to 11,600 leaving anyone who believed Russell’s commentary on March 1, 2011 in the lurch.
The NLO team is disappointed since Richard Russell has been the primary inspiration for our work in Dow Theory and critically analyzing financial markets. In addition, we’d rather have Russell retire as a legend with a legacy that will continue to inspire. However, Russell’s latest work comes off as sloppy and requires significant willingness to view his work as entertainment, at best.
 
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Posted in Dow Theory, gold, Richard Russell, Silver

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