Gold at $400 an Ounce is Dirt Cheap

By Richard Russell For The Gold Report November 2003 www.theaureport.com

I believe gold (and very probably silver) will make fortunes for those who now take major positions in the precious metals. . .

So this is my position — I believe gold below and even somewhat above 400 dollars an ounce is dirt cheap. In view of the amount of Fed-generated fiat paper that will have to be churned out in coming years (it will be in the multi-trillions of dollars), gold is the cheapest thing around. The U.S. government, states, cities, corporations and individuals are currently loaded with $32 trillion in debt. On top of that, the U.S. government has additional unfunded liabilities of around $44 trillion, all of which will have to be financed.

For these reasons, it’s my thesis that gold at $400 an ounce is ridiculously cheap. As a comparison, gold today is less than half the price it was at its 1980 high.

I believe three or four or five years from now we’ll look back at today’s price of $400 dollar gold and ask ourselves, “Where the devil were we? What were we thinking about? Gold at $400 was cheaper than dirt. What didn’t we recognize this back in the year 2003?”

As I see it, this is one of those rare times in an investor’s life when he can buy an undervalued asset at a bargain price. This is a time when you can buy real money with fiat paper. At this time you can buy real money, gold, with “junk” fiat paper which is created “out of thin air” by the Federal Reserve.

Big profits have already been made by those who bought gold and gold shares two or three years ago. But that is nothing compared with what I see ahead — as the bull market in gold moves on. We are now in the accumulation phase of the gold bull market, This is the phase where seasoned, knowledgeable investors build their positions — even while the public and most neophyte “investors” are either ignorant of what’s happening or at a time when the public actually dislikes the very product which could make them a future fortune.

But the secret to all this is the necessity to ACT. Knowledge is wonderful, but in this business, knowledge isn’t worth a damn unless you have the courage to “pull the trigger” — to ACT. . . (November 15, 2003)

Here's my "take" on the big picture. As I see it, the primary trend of the stock market turned from bear to bull in 1974 and the great bull market continued in force until 1999-2000. Why do I put the bull trend that long? I do so because every bull market ends with a frothy, wildly-speculative third phase, and I don't believe the bull market that started in 1974 really saw a true speculative third phase ending until 1996 to 2000. That wild, frothy period ended the bull market.

If I'm correct on the above, then we experienced a bull market that lasted a record 26 years. Most bear markets tend to last a third to half as long as the preceding bull market. That suggests to me that the bear market that began in 1999 (1999 according to Dow Theory) should last eight to 13 years, or as a guess maybe about a decade. That could take the current primary bear market to around the year 2010, give or take a few years.

How about the manipulations of the Fed, won't those manipulations extend the bear market? My answer is that I really don't know, but I suspect that they will. In re-inflating the bubble to the best of their ability, the Fed has introduced many new excesses into the economy. Ultimately, I believe those excesses will result in a worse bear market than would otherwise have been the case.

Let me put it in Dow Theory terms. We went through the most speculative bull market third phase in stock market history. The years 1996 to 2000 took stocks to overvaluation levels that have never been seen before. In fact even now, following the most flagrant Fed manipulation in U.S. history, stocks are still chronically overvalued with the S&P selling at 30 times trailing earnings while yielding a piddling 1.70 percent.

The end result of all this will, in my opinion, result in the worst bear market third phase since 1932. Values at the final bear market lows will be as outrageously low as values were outrageously high during 1996 to 2000.

At any rate, this is the voyage for the markets and the economy that I see coming up over the next decade or perhaps even longer. The pain on this trip will be very high and the cost will be huge. But we've been enjoying a fabulous party for decades, and over coming years we and our children will have to deal with the extended hangover.

How do we protect ourselves against the coming hard times brought on by the bear? My only thought, and I've thought about this a lot, is real money -- gold. Gold, the metal, is the rock-solid island of safety. Secondarily, we have the gold stocks, which have the leverage, but also more of the potential risks.

The question is asked, "What else can I do or buy in this long bear market that you are talking about?

I wish I had some brilliant answers to that question. I guess the first thing that occurs to me is that you might buy some investments in currencies other than the dollar. It seems to be that the euro is fated to be a major competitor (let's call it an alternative) to the dollar. I've suggested this before but I'll repeat it -- I bought short-term German government notes denominated in euros. . .

Next I want to talk about silver. The world is using more silver now than is being mined. The U.S. government stock of silver is gone, and whatever silver is needed has to be bought from above-ground sources.

Silver hit a low of 3.51 back in 1993. From there silver advanced to 6.16 in May of 1995. Down went silver to 4.15 in July 1997. Then came the big rally to 7.40 in February of 1998. From there silver sank to a low of 4.11 in November of 2001.

All of which brings us to the present. Silver, like gold, is now on the move. In July, 2003 the 30-month moving average of silver broke above the 40-month MA of silver. That confirmed, for me, that silver was in a primary bull market.

To take it even closer, back in June of this year silver broke above its 200-day MA. On July 2 silver broke above its 50-day MA. Dec. silver rose to a high of 5.39 on September 25, then corrected sharply lower. Last week Dec. silver surged to a new closing high of 5.41, then backed off. This morning Dec. silver is selling at 5.33.

In the "old days" an ounce of gold would buy 15 ounces of silver. Over the years that changed, and on average since WW II an ounce of gold would buy 35 ounces of silver. But by September 1992 silver was so out of favor that an ounce of gold would buy 92 ounces of silver. The ratio changed drastically and by March of 1998 an ounce of gold would buy 46 ounces of silver.

Taking it to the present, in May of 2003 an ounce of gold would buy a whopping 80 ounces of silver. By July an ounce of gold would buy 67 ounces of silver. This morning one ounce of gold will buy 74.45 ounces of silver. Russell opinion -- silver is too cheap compared with gold, and in turn gold is just plain too cheap -- period. (November 18, 2003)

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