April 13, 2005
Richard Russell snippet
Dow Theory Letters
Extracted from the April 12, 2005 edition of Richard's Remarks
Now I want to turn to gold and the dollar.
The conventional wisdom is that gold is simply a protection against inflation. Not so, I buy gold on the thesis that US government finances are completely out of control, and that ultimately this must reflect is a falling dollar. So when I buy gold, I buy on the thesis that when the dollar fades or crashes, gold will still be (as it always has been) money.
The chart below shows the Dow/gold ratio. History tells us that ultimately the ratio drops to 1 to 1. In other words, one share of the Dow buys one ounce of gold. At the recent 1999 highs, the Dow/gold ratio climbed to a record high of just over 40. The ratio has now dropped to 24.2, a decline in the ratio of 40 percent. Over time, I see one chart of the Dow again buying just one ounce of gold, at which time the Dow/gold ratio will again be at 1.
At what price will gold and the Dow meet? Nobody knows, but if I had to guess I'd say around 3,000.
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