Dow Theory’s Richard Russell: Gold $1,880

As the gold price doggedly trades above $1,600, the Godfather of stock market newsletter writers, Richard Russell, recently wrote that he’s targeting $1,880 for the king of currencies, gold.

“There isn’t much clear and defined in this market except for gold,” stated Russell, the author of The Dow Theory Letters.   “How much of this is based on the Washington shenanigans I don’t know, but once the debt boost is solved the test will be whether gold tends to hold its gains.  By the way, the P&F [Point & Figure] chart shows a price objective of 1,880.”

Incidentally, according to stockcharts.com, the technical rule for a breakout price objective for gold suggests a target of $1,910.

Nevertheless, today’s GDP report only buttresses Russell’s assessment for the future direction of the gold price.  Friday’s GDP report came in at a dismal 1.3% rate for the second quarter, while the real shocker in the Commerce Department announcement was the drastic downward revision for the first quarter to 0.4% from the initially published pace of 1.9%.

Plunging GDP and jobs puts the Fed in a situation not dissimilar to the summer of 1933, but, back then, the debt levels were a mere fraction of Boston University Professor Laurence Kotlikoff’s estimate of $200 trillion in today’s unfunded federal liabilities—which is an amount too unimaginable for creditors to anticipate anything other than a some form of default.  Under that scenario, gold could be just beginning to gather additional steam.

“I’ve studied bull and bear markets for over half a century,” added Russell.  “In my experience, great extended bull markets, such as the current ten-year bull market in gold, don’t die with a wheeze and a whimper.”

The gold market is telling Russell the American public has yet to fully comprehend the no-win policy decisions yet to be made in Washington and at the Fed, as well as much higher food and energy prices in store for Americans during the second half of 2011 due to the Fed’s QE2 (inflation) program—a prediction made this week by Euro Pacific Capital’s Peter Schiff.

And like Schiff, the older Russell relies upon his more than 50 years of acquired instincts for anticipating another gold craze he thinks is destined to be launched by the retail investor—a craze he’s stated in the past could dwarf the gold mania of 1979-80.

“They [gold bull markets] die amid excitement, torrid speculation and finally the wholesale entrance of the retail public,” continued Russell.  “I’ve yet to see any of those characteristics in the current gold bull market.  Therefore, I’m trusting history, and I’m sitting (in) the gold bull market.”

Russell also sees the possibility for a divergence in the Dow and gold, which, from the start of the rebound in both assets off the March 2009 lows have moved in tandem between a ratio of as high as 10:1 and 7.8:1.  But this week, the Dow-to-gold ratio has fallen through the 7.8 level to the 7.5 level—a sign that gold has usurped the dollar as the premier safe haven asset.

“Wait, does it make sense for the Dow to sink while gold moves higher?” Russell asked rhetorically.  “Under one scenario it does.  Here’s the scenario.  Bernanke continues to stimulate, but the newest stimulation (like the old ones) don’t work, and the declining stock market is already discounting Bernanke’s continuing failure.”

And what does Russell say about this year’s rage of the precious metals—silver?

In his latest edition of his daily newsletter, he wrote, “Silver broke out above both its 50-day and 200-day moving averages, and its MACD has turned bullish.”

Growth in gross domestic product — a measure of all goods and services produced within U.S. borders – rose at a 1.3% annual rate. First-quarter output was sharply revised down to a 0.4% pace from a 1.9% increase.

Economists had expected the economy to expand at a 1.8% rate in the second quarter. Fourth-quarter growth was revised to a 2.3% rate from 3.1%.

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