Richard Russell: Competitive devaluations to spur on gold

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I often quote Richard Russell, the 85-year-old writer of the Dow Theory Letters, in my blog posts. Although I may not necessarily always agree with his views, they are always stimulating and important to consider when piecing together the financial puzzle. His article on competitive devaluations and the implications for fiat currencies and gold bullion makes for particularly interesting reading and the paragraphs below have been excerpted from it.

“Every nation wants to export. The obsession to export has resulted in filling the world with products, things, and merchandise of every kind. There’s a world overflow of products, and the result is deflation. Just too much stuff being manufactured. Buyers from importing nations can’t handle it all. The result is asset deflation.

“One reason why every nation wants to export is to lift employment. Nothing scares politicians like unemployment. Why? Because unemployed workers VOTE just the way employed workers do. The lesson – if you want high employment, learn to export. Exporting creates jobs. China and Asia learned that lesson, and they captured world export markets with the help of one valuable item – low wages – that along with no Social Security, no medical, no pensions, no anything, just plain low wages with none of the extras.

“Ooops, I left something out. What I left out was the big second advantage – cheap currency. Every nation, particularly the exporters, wants a cheap, competitive currency. The US is no exception. Obama tells the world that the dollar is a strong, hard currency, but the dollar has been weak. The administration’s policy is to talk a “hard dollar” but hope for a soft dollar.

“The result of all this is competitive devaluations. Nations no longer devalue their currencies against gold, they simply print oceans of their own currencies, and with that paper they buy dollars, hoping to raise the price of dollars against their own currencies. The result is a growing sea of fiat junk paper.

“The greater the world ocean of fiat paper, the higher gold goes. You see, gold is the secret, unstated world standard of money. Gold can’t be devalued or multiplied out of thin air. So as the various currencies of the world decline in relation to each other, gold stands alone. It can’t be cheapened or devalued or bankrupted. While the currencies of the world decline in purchasing power in relation to each other, they all decline in purchasing power against gold. In other words, as time passes, it requires more of each currency to purchase one ounce of gold.

“In the meantime, the US continues to spend outrageously, not only running up debts for the present but also for the children of the future. The US deficits and national debt will run into the multi-trillions in coming years.

“How will these monster debts ever be paid off? They’ll be paid off by devalued dollars, they’ll be paid off by additional borrowing, they’ll be paid off by inflation, they’ll be paid off with higher taxes and probably a VAT tax, they’ll be handled by projecting them into the future for other administrations to struggle with.

“As they say in New York, ‘all right already, so what do we do about it?’.
“Short and medium term, you want dollars, as many of them as you can save. Long-term you want gold. Somewhere ahead gold will come into its own. I can’t time gold, but I can identify the time when gold is ready to ‘take off’. When gold climbs above 1,004 it will be the signal for the beginning of the third phase gold rush. What I’m saying is forget quick profits in gold, forget timing gold, just own some.

“The way the world is going, ‘gold will be the last man standing’. Gold will be wanted because unlike everything else, gold can not go bankrupt. Gold has no debt against it, gold is not the product of some nation’s central bank. Gold is pure intrinsic wealth. It needs no nation to guarantee it. Gold is outside the paper system.”

Source: Richard Russell, Dow Theory Letters, June 25, 2008.

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3 comments to Richard Russell: Competitive devaluations to spur on gold

  • B. Ray

    A good aticle.
    Telling us to hold gold with patience.

  • Thomas Bach

    I see major logical fallacies and contradictions in Richard Russell’s predictions (just to name a few):

    1. “The greater the world ocean of fiat paper, the higher gold goes”. This statement is not true. For example, from 1980 to 2000 price of gold depreciated by 55% (from ~$650 down to ~$300), but during the same period supply of USD increased by 350% (from ~$2,000B to ~$7,000B).

    2. Many “gold bugs”, including Richard Russell, assume that supply of gold is constant, but it is not true. The supply of gold is constantly increasing every year (more and more of gold is extracted from dirt every year). There are also risks of technological advances that could exponentially increase the supply of gold. Aluminum once was considered a precious metal more valuable than gold. For example, Napoleon III, emperor of France 1852-1870, had banquets where the most honored guests were given aluminum utensils, while the other guests had to make do with gold.

    3. The value of gold is determined by psychology (almost no industrial demand). As we have experienced recently, human perceptions and believes can change fast. Selling of gold by the Central banks (to feed hungry population for example, population is constantly growing) can precipitate a major violent selloff (a violent bubble burst). For example, just a year ago almost everyone was saying that the world was running out of oil. Nowadays, we are running out of places to store it.

    4. Everything is relative. As Richard Russell said, every nation will want to devalue their currency (many as Swiss and UK are already devaluing their currencies). USD devaluation will be followed by even greater competitive devaluation of other currencies; therefore, USD will remain relatively steady in relation to other currencies. There is no nation in the world that could afford its currency to significantly appreciate vs. USD. The USA is still a superpower (economically, technologically, military, etc.)

    P.S. I prefer commodities that have intrinsic value because of industrial demand for that commodity. I believe that gold is in a bubble (“gold bugs” are playing “musical chairs” game).

  • Sam

    Thomas Bach above.. several ridiculous assertions in your comment.. let me take them apart one by one..

    On point #1, I assume you are familiar with the fact that US bullion banks dishoarded US gold over the period of 2 decades, in order to keep gold from taking off. Evidence for this is overwhelming to anyone who cares to go through the facts collected by GATA. They consult with Russian and Chinese governments, by the way :)

    Point #2 what tipped me off regarding your true motive – spreading false information about Gold. For anyone who follows the market fundamentals with the least bit of interest knows that Gold production in the world has been in decline since 2001 or so. It is not expected to perk up by any experts. Why do you think IMF is desperate to sell its Gold? Its the only viable way for the Gold cartel to conduct a managed retreat.

    On #3, Gold has been money for 5000 years, dude… across wars, famines, plagues, multiple civilisation collapses.. That kinda perception does not change in timeframes less than several generations. Ask Indians why they buy gold; because their parents insist on it based on >50 years of life experience.

    On #4, Russell says hold Dollars for the short term because other currencies are just as bad. Long term, you should be holding gold or anything whose supply cannot be increased artificially by Central Banks of the world.

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