Posted by Richard Russell - Dow Theory Letters

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KWN RR I 10-7

T”he US dollar is poised right on the edge of a cliff.”  said the Godfather of newsletter writers. A lot below in this powerful commentary – Ed

“The chart below shows the S&P Composite, and the red line is the VIX or volatility index.  As you can see, the VIX has risen to its highest level since July.  Thus, the VIX is sensing some volatility to come over the next few months.  As a rule, I usually ready myself for some market volatility when the VIX climbs from a dull period to over 20.  We’re not quite there yet.

KWN RR I 10-7

The chart below is the one that I believe is critically important — it’s the US dollar.  The US dollar has acted as a safe haven for money in the US and all over the world.  Thus, if we get a sell signal on the dollar it will have international implications.


Because it is so important, I am also including this P&F chart of the US dollar.  The dollar appeared to be ready to break out on the upside, but a sudden reversal took the dollar down to the 80 box.  The dollar is poised right on the edge of the “cliff.”  A decline to 79 would look bad, and a further decline to 78 would result in a sell signal with the possibility that the dollar would then test its most recent low at (god forbid) 73.

KWN RR II 10-7

This chart of gold offers a portion of hope. We now have a four-box rally off the low of 1280.  If gold can hit the 1340 box we will have what every gold-bug is praying for — a reversal to the upside, taking gold above the bearish red trendline.  What are the odds that this will happen?  If I knew, I’d be richer than Warren Buffett.


Below we see my inflation-or-deflation chart.  Here we see the bond/gold ratio.  When deflation is seen ahead, gold will tend to decline and bonds will tend to advance.  The chart shows the bond/gold ratio rising. Thus, the markets are saying that deflation lies ahead. 

KWN RR IV 10-7

This is very important since as I’ve noted before, Ben Bernanke will not tolerate deflation.  Thus, this chart is telling us that tapering is not in the cards.  As deflation becomes more visible, I expect the world’s central banks to battle against it with ever-greater portions of quantitative easing.  This, of course, will set off a bull market in gold and silver.”


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About Richard Russell

Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.

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-’66 bull market. And almost to the day he called the bottom of the great 1972-’74 bear market, and the beginning of the great bull market which started in December 1974.

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