Ignore That Man Behind the Curtain–Buy Gold

3-24-09 Tuesday After Lunch Money Memo

Bloomberg: 3-19-2009: John Paulson, the hedge fund manager who was up 37% in 2008 by betting against subprime housing bonds and the investment banks, has purchased an 11% stake in Anglogold, the hefty South African gold miner. Paulson also disclosed that his fund owns 4% of Kinross Mining, a major gold producer based in Canada. [Just to show that great minds run in the same channel, here's what another savvy investor has to say about gold.]

Waaaay back in the exciting 1980s, when the bull market was genuine and unbelieved, I was a little Foghorn working as a retail stockbroker in the middle of California. I was also a member of a pool of copyright violators in the office that subscribed to a number of market newsletters under assumed names. And with the aid of a market-neutral Xerox machine, distributed said market letters willy-nilly among the broker pool, and to sundry favored clients.

One of those market letters I used to receive was Richard Russell's. The man must be 108 years old by now, (He's only 82) but he's still the Dean of Market Letter Writers…having published his Dow Theory Letter since 1958. Russell has been wary of the stock market since the turn of the century, and his been repeatedly recommending gold for several years now. I include his letter of last Friday, wholeheartedly endorsing gold, and also suggest that you could do worse than take a shot at the low cost offer of the perceptive musings of a true market veteran.

From http://www.gold-eagle.com/gold_digest_08/russell032209.html:

March 20, 2009 — I've written in the past that if you want to make 'BIG' money in the market, you have to take an over-sized position and be dead right on the trend. The last time I did that was in late 1958. I was very bullish on the market at that time. It was during a severe recession, but the stock Averages were singing an entirely different tune. I was so bullish that I wrote a bullish article for Barron's — that was my first Dow Theory article for Barron's, and that article put me in business (December 1958). At the time I had invested ALL my money in various stocks, everything from Texaco to Sparton to Avco to Baldwin Lima. The market turned up in December and never stopped climbing. Breadth was terrific, there was a huge short interest that was getting killed, and I was on margin up to my ears. Whenever I had "extra money" in my margin account I bought more stock. I did extremely well on that fateful ride, and I never again had the nerve to take that large a position — until now.

I started building my gold position in 1999. At the time gold was flat on its fanny well below 300 — what few gold mining shares were still alive were selling under $5. I wrote at the time that many gold shares were so cheap that you could buy them as if they were perpetual warrants.

My gold position now is comparable to my market position back in 1958. My gold position represents maybe 30% of my total worth. Why have I done this again? For the following reasons:

(1) I believe gold is in a major or primary bull market. I believe the gold bull market is currently in its second phase. This is the phase where sophisticated and seasoned investors and the funds enter the market. I don't believe the public is in the gold market to any extent. They are interested and watching the action, but they do not have the nerve to buy gold. In fact, the public doesn't know how to buy gold, although ads are now appearing telling them of the "wonders" of gold and how they can buy the coins (at huge premiums over spot gold).

(2) If there is only one bull market in progress, it will attract broad new coverage and attention — just as Thursday's $70 rise in gold did.

(3) I believe the bear market in stocks will continue erratically and the deflationary trends will persist. This will drive Fed Chairman Bernanke up the wall, and I think he will stop at nothing (including massive printing of dollars) in his effort to halt deflation. The real story will be as I've been saying for years –

"INFLATE OR DIE."

This will serve to feed the gold bull market.

I'm in no hurry. Gold will ultimately fully express itself. The gold bull market, like all bull markets, will do its best to shake us off its back. The gold bull market wants to go up without us. The gold bull market will roar when least expected, after it's worn out many of its followers.

I watch most of the gold indices and averages, including GDX, the gold miners' index (NYSE). This important index has rallied to a critical level — 37 on the P&F chart. A rise to one box higher, to the 38 box, would represent a bullish breakout with a P&F [point and figure] "count" to 52. If GDX breaks out, it will be a bullish signal for bullion.

Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com

The inimitable and venerable Mr. Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late '50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-1966 bull market. And almost to the day he called the bottom of the great 1972-1974 bear market, and the beginning of the great bull market which started in December 1974.

Postscript: I said in my first book (Terror Proof Your Mind and Money) in 2004 that European asset allocation devotees almost always held a small position (5%) of their assets in some form of gold - usually physical gold. And investors should add perhaps a similar amount of gold to their asset mix each year if the economic weather worsens appreciably. Well, the weather outside is frightful, and a bigger gold position would seem delightful. To further underscore Russell's and Paulson's gold activities, you might want to take note of recent financially outrageous events:

On March 5, the Bank of England announced they were buying £150 billion worth of government "gilts," corporate bonds and commercial paper.

On March 12, the Swiss National Bank sold Swiss francs against Euros to lower the value of their franc, thus protecting their manufacturers and shooting into the temporary lead in the currency devaluation race.

And on March 18, Helicopter Ben announced that our national bank would be buying $100 billion of Fannie and Freddie paper, 750 billion of mortgage backed crap, and $300 billion of basic U.S. Treasury bonds from the long end of the curve. Those three actions together are skywritings that Quantitative Easing (BIG money inflating) is coming in earnest. You've got time to build your gold position, but don't be dawdling. And don't worry about overpaying. Dollar cost averaging will work to secure low overall costs for you.

Also, gold prices, adjusted for inflation, are actually still cheap: