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I love Richard Russell, but I don’t agree with his “chart-driven” analysis of gold.  He is wrong!  The bull market is NOT over.  Furthermore, he is not allowing for hyperinflation by the Fed and other global central banks to prop up their deleveraging economies.  Here is what he wrote yesterday:

I believe we are in a period of world deflation and deleveraging. Why kid myself, gold after eleven years of successively higher year-end figures, has lapsed into a bear market. The huge rise from 200 to 1900 has never been corrected, and the rise is over. We are now seeing a correction of the entire gold bull market. To make it more dramatic, neither the public nor the funds have been participants in the gold bull market, and they are smarting and angry at having missed out on the greatest bull market of the postwar period. Thus, they are publicly gloating and gleeful as the dollar price of gold sinks.

Dow Theory Letters, June 26, 2013

$GOLD 6-25-13 Dow

Gold Spot Price P & F Pattern

I am surprised, because he has written time after time that bull markets only end with a blow-off top.  We have not seen the final stage of this bull market, and it will be a whopper.  Russell is mainly a chartist and a technician, but he is losing sight of the fundamentals, particularly considering the state of political economy in the world.  This is a surprise because he, more than most, understands the time-tested role gold has played and the destructive policies embraced by the Fed.  He is a big picture guy but he is letting his beloved “Point and Figure” and Daily charts influence him without balancing it with reality.

Still, I sense he is speaking out of both sides of his mouth, a talent that has been perfected by our politicians.  He also says:

You’ve been hearing essentially two different versions of what the nearer-term outlook for gold is lately. One is based on the premise that certain interests manipulated the market a couple of months ago, sending gold’s price way below what it should be, and it would soon return to its “rightful” price (above $1500). The other version is that the forces of supply and demand simply responded to changing fundamentals, and gold’s price fell to levels that more properly accounted for those changes. People are going to believe whichever version fits their own worldviews, but last week the gold market confirmed that at the least, gold’s weakness was not just a one-day, temporary aberration.

As the P&F chart above shows, gold has now crashed through a second level of major support in the low $1300s. Earlier this year, I suggested prices could drop to the $1100 level or even lower. What may have seemed like unwarranted fear-mongering back then now looks like a reasonable probability. It would be imprudent wishful thinking to suppose that we’ve seen the end of gold’s weakness. Nevertheless, the precious metals are once again quite over-sold, but what’s different this time around is that now we are in the middle of the time period when the metals tend to bottom out, from a historical seasonal perspective. Therefore, we might reasonably expect to see gold, silver and the mining shares make their lows for the year in the next few weeks, even if those lows don’t turn out to be the ultimate bottoms in this bearish cycle.

Dow Theory Letters, June 25, 2013

Russell is very aware of the rising interest rates.  He fully well knows that they will threaten all aspects of the economy including the bond market, the stock market and the real estate market.  Russell is the man who coined the phrase, “Inflate or die.”  He knows the Fed’s reaction to falling bonds and rising interest rates will be to inflate and he knows when they do, gold will soar.  It seems like he is stuck between his short-term deflation and chart-driven view and his understanding of the big picture and the role the Fed plays in all of this.

Here is a chart he is very worried about – falling bonds, rising interest rates…

$UST 6-24-13

His indecision is clearly stated here; where he says it is wise to hold gold for the very long-term as we can expect the dollar to decline and gold to rise.  But he is stretching out the time frame for the rise to decades.

There’s little question about the wisdom of holding gold for the very long-term. As the value of conventional “money” – currency and coins – inexorably declines over time, the price of gold rises. And of course there’s always the probability that, at some point, any country’s fiat currency will simply cease to be worth anything at all, something that the Fed’s QE operations have made even more likely. But again, in the long-term we’re all dead, so it’s incumbent upon us to also assess investment outlooks in chunks of time shorter than decades.

Dow Theory Letters, June 25 , 2013

My time frame is a bit shorter.  I expect gold to resume the bull market this fall and to reach a crescendo by 2015/16.

For me, the only thing that is confusing is Russell’s waffling on the inflation/deflation issue (charts say deflation; common sense and his understanding of the Fed say inflation).  He is the last person I would expect to be caught in the eye of the hurricane here.  He hasn’t abandoned gold and is not telling his readers to sell their gold but he is very bearish in the short-term.  He is not factoring in the probability of a black swan event or the results of QE to infinity or the strong possibility of hyperinflation, caused by a collapse in the dollar and the bond market.  There was a song in my youth by Manfred Mann titled, Blinded by the Light.  I think Richard is blinded by the charts.

Those who are bearish on gold are focusing on charts and not fundamentals.  The bulls, people like Jim Sinclair, Bill Murphy, Eric Sprott, James Turk, Jim Willie, Ted Butler and John Williams (to name but a few) focus on the heavy-handed manipulation of gold and silver and use Shadowstats data, not BLS data to see the rot beneath the headline optimism.

The person who I find most interesting is Larry Edelson.  He is a chartist, but he also pays close attention to the fundamentals.  He has been bearish for nearly a year (and was correct) but he now says the bottom is here, or very, very close and he recommends that you start buying slowly NOW and get ready to load up fast when the price bottoms and reverses as gold will head to $5,000 or even $10,000.

Just remember, us Gold Bugs are not popular with mainstream investors (and that probably includes your friends and family who sat on the sideline on the way up and missed out on the rise).  Their anthem should be the lyrics from Don Henley’s (Eagles) hit, Dirty Laundry, released 31-years ago, where he sings, “kick em’ when they’re up, kick em’ when they’re down.”  They rolled their eyes at us for 12-years as gold kept going up and up and now they are laughing hysterically at our losses.  I hope they have a good hard laugh, because it won’t last for long – and remember, “He who laughs last laughs best!”  When the bull market resumes and gold passes $3,500 on the way higher, they will be ones with the wrong assets.  They won’t feel foolish for missing out on the bull market of their lifetime; they will be angry and jealous.  We will be relieved to know that yes, we really were justified in our belief in gold and silver.  Sometimes it’s just damn hard to know you are right and to do the right thing in the midst of criticism and a falling market.

I will close this rant with a dose of perspective – in the 1970-1980 gold bull market; in 1975 there was a major 18-month correction that took gold down 44%. The correction in the mid-70s was the springboard to a 850% rise in the price of gold ($100 to $850).

Gold London PM Fix 75-79

In the current time frame, the correction is about 20-months old, and the correction is around 40%; roughly the same in duration and degree as the 1970s correction.  Should gold fall to 1,000? If it followed the last bull market rebound, it would rise to $8,500 in the next three and a half years.  Edelson and Sinclair would not argue with these numbers.  Neither would history.

And please don’t forget, gold is really cheap now, and when you look at its price adjusted for inflation, you get a very different picture.

Inflation Adjusted Gold Price Shadowstats

Be sure and Read Bill Holter’s EXCELLENT essay on deflation, below… It stands in stark contrast to Russell’s views on deflation.  I love Russell, but Holter has got it right here.