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LETTER 1487

February 2, 2011

January 14, DJIA 11787.38; PTI 6211; A-D Ratio +53.63

GOLD BOTTOMING? Gold has risen a fantastic ten
years in succession. Gold, of late, has been receiving a lot
of interest and publicity and advertising. Gold is probably
overdue for a correction in this ongoing bull market. Ana-
lysts are talking about “gold correcting down to 1200 or even
1000.” However, I believe that the more important picture
is that the gold bull market has much further to go on the upside.
January 21, DJIA 11871.84; PTI 6200; A-D Ratio +52.53
January 28, DJIA 11823.70; PTI 6208; A-D Ratio +52.90
Dow Div. Yield: 2.43% Dow P/E: 14.49
S&P 500 Div. Yield: 1.86% S&P 500 P/E: 17.76
Gold 50-Day MA: 1375.85

I’ve been reading the McClellan Market report for years. It’s one of the better and more intelligent reports that I read.
McClellan does a good deal of research on cycles, and I must say some of their cycle studies work out quite well.

McClellan has discovered that there’s a cycle low appears for gold roughly every 12.5 months. The cycle lows have run as
follows: Jan 6, ’06, Jan 8, ’07, Jan 7, ’08, Jan 5, ’09, Jan. 4, ’10, Jan 8, ’11. McClellan puts the next cycle bottom for gold at
February 8, 2011. Which means that the cycle low for gold should arrive at any time between now and February 8, give or take
a few weeks before or after that date.

Interestingly, the McClellan cycle bottom for gold is due to arrive amid a good deal of professional bearishness regarding gold
(“gold overdue for a major correction”). Thus, many traders have traded out of their gold positions, just as we near the date
for the McClellan cycle bottom. Below, the red arrows mark the McClellan cycle lows.

The Russell view — It’s virtually impos-

sible to successfully time in-and-out trades
during an ongoing primary bull market.
Usually what happens is that the trader has
moved out of the market just as the bull trend
resumes. Thus, the bull market does what
it’s supposed to do — advance while leav-
ing most traders and Johnny-come-latelies
behind.

I’ve already discussed gold and the

McClellan gold cycles, which suggest that
gold is currently close to a cycle low. To-
day I received the “Bullish Review of Com-
modity Insider”. I’ve been reading this ex-
cellent publication for years, and it’s proved
its accuracy many times over. The “Re-
view” is based to a large extent on the ac-

http://www.dowtheoryletters.com • staff@dowtheoryletters.com • Letter 1487 • February 2, 2011 • Page 1

 tion of traders (large speculators, commercials and small
speculators) on the COMEX. The latest issue of the Bull-
ish Review has just arrived, and it features gold. About
gold, the Review writes, “Commercials were quick to jump
on a relative small price correction; with enough buying to
trigger a major COT (commitment of traders) buy signal.”

So as for gold, we have a McClellan cycle bottom and a

COT major buy signal from the Bullish Review,both in
force in the current area. So let’s see what happens. To
the right I show a P&F chart of GLD. If GLD hits the 128
box, it will be giving a sell signal for GLD and obviously for
gold as well. GLD has support in the 114 to 122 zone.
GLD closed at 130.10 on Tuesday.

BULLS WIN — The stock market is a “weighing ma-

chine.” Daily it weighs the net opinions and actions of
millions of traders and investors in the US and around the
world — all attempting to discount the future. When opin-
ions are divided, the stock market reflects this by becom-
ing erratic and almost schizophrenic. Which is where we
are now. However, I have my faithful PTI to depend on.
My PTI has been bullish for months on end, and during the
few times when it has turned temporarily bearish, it imme-
diately swung back to the bull side.

Conclusion — This has been a difficult stock market to follow, but the verdict must go to the stubborn bulls.

I’m posting two daily charts. The first chart below shows the D-J Industrial Average surging to a new high for the advance.
The next chart at the top of Page 3
shows the D-J Transporation Aver-
age not only failing to confirm the
new high in the Industial Average
but breaking below its most recent
ascending trendline. What does this
mean? In Dow Theory terms, we
have a clear and flagrant non-con-
firmation. Now, either the Trans-
ports will follow the Industrials to
new recovery highs -- or the Indus-
trial Average will follow the Trans-
ports to lower levels. Or , the stock
market advance may now stall out
and work sideways, remaining at a
high level. I’ve dealt with messy
and confused markets before, but
this one takes the cake.

Ordinarily, this action would have set

the alarm bells ringing, but so far, weakness has been subdued or pretty much absent.

I’ve been following the Lowry’s figures since the 1960s. Their statistics are not a matter of opinion, they are the actual facts

Page 2 • http://www.dowtheoryletters.com • staff@dowtheoryletters.com • Letter 1487 • February 2, 2011

 of the stock market action. You can believe
the Lowry’s figures or ignore them but al-
ways remember that they are facts.

Lowry’s Buying Power Index (investor de-

mand) is at its bull market high, its highest
level in three years, and Lowry’s Selling
Pressure index (stocks for sale) is at its low-
est level since August 2005. Now we have
a flagrant Dow Theory non-confirmation.
Combining Lowry’s with the Dow Theory
non-confirmation, this tells us that we are
facing a period of correction or perhaps even
a consolidation — preparatory to new highs
in the Averages. If that isn’t confusing
enough or “iffy” enough, I don’t know what
is.

How serious is the current overall situation? Very little is crystal clear at this point. The reason I say that is because the
Lowry’s statistics remain steadfastly bullish. This puts us, as investors, in an unusual predicament. What to do? I fall back
on the thesis that “When you don’t know what you’re doing, don’t do anything. Just sit tight.” That’s the advice I follow for
myself, and that’s the advice I give to my subscribers. In other words, “First, do no harm.”

The fact is that we haven’t done too badly over the last three years. We circumvented one of the worst stock market crashes
(2007-2009) in post-war history, and we show great paper profits in holding gold over recent years. True, we never loaded up
with the Dow (diamonds) following the 2009 low, but missing an advance is a far different matter than taking a loss.

In the meantime, the “building bricks” of the entire US economy (the dollar) is providing some confusing action of its own.
But why take my word for it. I include an up-to-date daily chart of the Dollar Index below. As you can see, the Dollar Index
has broken below three preceding lows, and is now at its lowest level of the last two months.

YUAN — It was a little article on page A8 of Saturday’s (Jan.22) Wall Street Journal. The article caught my eye because
it confirmed something I’ve been thinking about. The headline ran, “US Sees Shift in Tone on Yuan.” The article begins,
Washington: US officials, parsing every word the Chinese president and his delegation uttered in a visit here last week said
that there were subtle signs the Chinese
were preparing to let the yuan appreci-
ate faster.”

I’ll go further than that. I believe the

Chinese are preparing to revalue the
yuan, thus creating a higher yuan and a
depreciating dollar. If the yuan is reval-
ued higher, the Chinese people will be
able to buy more with the stronger euro.
Also, a stronger yuan will be deflation-
ary for China, since it will cut into Chi-
nese exports. China’s leaders are wor-
ried about the near-bubble in Chinese real
estate, and a bit of deflation would suit
Chinese economists just fine.

The other side of the coin is that with the

http://www.dowtheoryletters.com • staff@dowtheoryletters.com • Letter 1487 • February 2, 2011 • Page 3
stronger yuan, Chinese goods would
cost more: As a result, China would
be exporting inflation to all its cus- 1/27/11
tomers (of which the US is a major 6214
buyer of Chinese goods). 10/9/07
PRIMARY TREND INDEX
5974
(PTI)
Therefore, I took the Chinese 12/5/06
president’s words as an early hint 5796 1/18/10
(warning) of things to come. The 89-Day Moving +53.73
2/11/04
item I expect to come will be a world 7/16/99 Average (PTI)
5439 6/4/07
5382
shocker — a revaluation of the yuan +42.03
(if it happens, the Chinese will say, 12/5/06
“We tried to warn you.” +34.53
5/26/00
What would be the Fed’s and the 11/20/08
5109 12/30/03
+30.84
administration’s reaction be to a yuan +13.21
revaluation? They would be all for 1/6/99 ADVANCE
-6.16 5/3/02 DECLINE
it. A stronger yuan would be infla- +3.75 RATIO
tionary for the US. And, of course, (NYSE)
what Bernanke has wanted was “a
little inflation,” just enough to move 10/9/02
housing prices and stocks higher. 3/14/00 -5.33
Rising inflation in the US would al- -8.14
low Bernanke to boast, “See, I told
you that QE1 and QE2 would work.”

Furthermore, if inflation takes hold, consumers would be tempted to buy more “big items,” thinking that it would be wise to buy
now, since prices will only be higher later.

Ironically, I just received the latest “Insight” report by my friend, Dr. A Gary Shilling. Gary, to my mind, is one of the best
economists in the nation. Gary’s new book is titled, significantly, “THE AGE of DELEVERAGING.” Gary’s latest report
starts, “Semi-annual US Economic Outlook. Slow growth and looming deflation.” Gary goes into great detail as to why he
sees deflation in our future.

So here I am, caught between the extremes of looming inflation and looming deflation. Which will it be? At this point, there’s
absolutely no way of coming up with the definitive answer. My own inclination is to stand pat.

Here’s what I “think” may be about to happen. The stock market is seriously overbought, it is overvalued (dividend yield) and
it is overloved (too many bulls). Therefore, the stock market is, at least, overdue for a correction. But maybe “super-liquidity”
trumps every other consideration.

Here’s something I’ve been thinking about. The Chinese have a near-monopoly on rare earths. They produce about 95% of
all the rare earths now being used. Lately, the Chinese have announced that they will be cutting back on their exports of rare
earths. This will mean that companies that depend on rare earths in the production of certain items will be forced to
manufacture these items in China.

Market Vectors has an ETF (symbol REMX) traded on the NYSE that includes companies that are geared around the
production, refining and recycling of rare earths and strategic metals. This ETF aims to track the Market Vectors Rare Earth/
Strategic Metals Index. It’s a new ETF, and I have posted its chart at the top of Page 5. Note the contraction of volume as
the ETF has corrected. I intend to buy an initial lot of REMX as a speculation on the future of rare earths. Subscribers who

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wish to buy REMX might want to wait until MACD
turns positive (MACD is now on a sell signal). But
I like the concept, and I like this ETF.

The following is from the latest, always informative

Kiplinger Letter out of Washington DC. “Many
local government face a painful 2011. Tens of thou-
sands of jobs will be eliminated, services trimmed
and local procurements scaled back.....

“The Washington money pipeline is drying up. For

local governments, that’ll make 2011 even worse
than the recession years, when federal aid flowed
freely. Congress has no appetite for more stimulus,
especially with GOP cost cutters running the House.
... So cities, towns and counties are on their own.
All told they face a staggering combined shortfall of
$94 billion in this fiscal year. ... That plus rising de-
fault worries, means muni bonds are a tougher sell.
For many, programs cuts are the only path remain-
ing to erase deficits.”

Russell Comment — 48 states are now running

deficits. In the face of this, tax receipts are running
behind in most states. You do the math. Below I
have posted the Dow going back to 1980. I keep staring at — and analyzing this chart. And I wonder, is this the biggest
market top in history? Just a thought, but I can’t get it out of my mind. With the greatest injection of liquidity in history, that
14000 top seems to be impregnable.
A government will stoop to any depth to
ensure its own existence. This includes
lying, cynical propaganda, imprisoning
people, raising taxes, sequestering pri-
vate property including gold. The Con-
stitution was created by the Founding Fa-
thers to protect the people from the gov-
ernment. No wonder so many politicians
hate or willingly ignore the Constitution
of the United States.” Richard Russell,
January 2011.

Wait a moment, is this really the plan?

Is the US government’s strategy to dig
the dollar’s grave, and in that way de-
fault on our outrageous sovereign debt?
How do you get out from under $13.9
trillion (some say it’s over $50 trillion) in
debt? There’s only one way — you de-
fault. But if you have a policy of allowing your currency to sink into a financial grave, isn’t that really a method of defaulting
by proxy?

Is this going to be the US’s “cynical strategy” for handling our incredible debt mountain? And if it is, doesn’t the rest of the
http://www.dowtheoryletters.com • staff@dowtheoryletters.com • Letter 1487 • February 2, 2011 • Page 5
world know about it? Let’s not kid ourselves, there are a lot of very smart people living outside the US. Don’t you think they
have figured out the US’s strategy? The US could default outright on its debt — that’s unthinkable, it would be an outright
admission of bankruptcy. But there’s another very real possibility — the US will default by paying off its sovereign debt with
near-worthless dollars.

Worthless dollars? It’s a horror story for the US’s creditors. But how about the poor American tax-payer? Won’t he literally
revolt? The poor Joe on the street has been hit by job lay-offs or lower wages, investment losses (assuming he had any
investments), severe whack on the value of his home, higher taxes, rising oil prices (gasoline at near four dollars a gallon),
higher food prices, rising medical bills, higher local and state taxes, rising college tuition. The fact is that the price of almost
everything has been rising. And Joe-voter has no savings, no income even if he had any savings (zero interest rates) and many
Joes have no jobs or they’ve found new jobs that pay lower wages.

What’s the government going to do about it? The government will do what it always does — it simply lies. It’s obvious, the
government remains in denial, and issues phoney inflation figures. The CPI tells us that there is no inflation — none. Of
course, it’s an utterly phoney statistic, because the government omits food and energy from its CPI Index.

But what about the stock market? The “market” has been heading higher, because the lead Average (the one that the man on
the street follows) is the Dow. The Dow is made up of thirty giant corporations, most making products that are essential to the
functioning of the US economy. The Dow has been called “the backbone” of the US economy. The Dow has been rising
along with gold and oil. These three are linked together — the Dow, oil and gold. As the dollar slides, it takes more dollars to
buy a barrel of oil, more dollars to buy an ounce of gold and more dollars to buy a piece of the thirty stocks that make up the
Dow.

You own the Dow, and you’re making

money, right? Well, not in terms of true
international buying power. To the right
I’ve posted a chart of the Dow in terms
of gold. In terms of real money, you’ve
been losing real purchasing power it
you’ve stuck with the Dow.

The KEY, the absolute KEY to the fu-

ture is the dollar, or correctly the Federal
Reserve Note. The world has become
highly suspicious of the dollar, and the
single smartest move my subscribers can
make is to get OUT Of dollars or dollar
denominated assets. Two ways of doing
this (1) buy gold, (2) buy silver. The pros-
perity and health of the US depends on
the world accepting US dollars. Which
is a very thin and risky premise to base your investment future on..

So far, the one thing that has “saved” the US from calamity is the reserve status of the US dollar. The coming disaster will
be ushered in if, or when, the US dollar loses its reserve status. That will mean that the US will no longer be able to print itself
out of trouble and potential bankruptcy. As it is, the US is the only nation in the world that can “manufacture,” at no cost, the
currency that its debts are denominated in. And because of the dollar’s reserve status, our creditors have accepted our
dollars. However, that’s beginning to change. But just imagine what will happen if our creditors refuse to accept dollars. It
will be like an nuclear bomb hitting the US stock and bond markets (it’s already hitting the bond market).

My advice: Get out of dollars and into gold and silver. A lot of nations are now following this strategy. China is probably
foremost among them. My best advice — Follow China’s lead, and do likewise.
Next Mailing: February 24, 2011

Page 6 • http://www.dowtheoryletters.com • staff@dowtheoryletters.com • Letter 1487 • February 2, 2011