Here's what I've been thinking...

Richard Russell snippet
Dow Theory Letters
posted Dec 14, 2009

December 11, 2009 -- In my business, you're never living in the present (which is kind of crazy). You're always focused on the future -- the unknown future. At any rate, here's what I've been thinking.

Globalization has occurred over the last decade. This is why the world is now different, different than it has ever been before. In the space of a few years, three billion souls have joined the world economy. This has never happened before in the history of man.

Let's just talk about China and Asia. The Chinese are hungry and eager to learn. They are voracious learners. There are multi-millions of Chinese who want to work, and they'll work for very low wages and with no extra benefits. They want, as do all people, to improve their lives and the lives of their children.

How will the Chinese people learn in the quickest way? They'll learn from the US and the developed nations. Right now many of our leading universities are packed with Chinese students. The Chinese government encourages that. As I see it, the Chinese want to compete; with everything the US and the West makes or manufactures. And they can and will produce products cheaper than we can. More recently, the Chinese are rushing into research, and tech products and bio-tech items. The Chinese want to lead the world in products, merchandise and innovation. In fact, already, the Chinese are preparing for the future; they are buying commodities, rare earths, copper, steel, everything that they believe will put them in a leading and impregnable position.

What does all this mean? I think it's going to mean exactly what it's meant over recent years -- deflation. The Chinese and Asians will continue to envelope the world with their output -- and with significantly lower prices.

As world deflation becomes more obvious and more ominous, it's going to impact on world employment. It's going to be harder to find and hold jobs. Furthermore, jobs in the developed nations are going to pay less. Global competition will force labor in the West to face lower wages. They'll have to, because whatever you do, the Chinese will do it for less money. All of this will foment deflation.

What will be the reaction of the world's central banks to slower output and unemployment? We already know the answer. Fed. Chairman Bernanke has shown us the way. The way will be quantitative easing, better known as printing money.

The Chinese yuan has been pegged to our declining dollar. This is scaring hell out of China's neighbors. They must be able to export. As a result, their central banks are "printing" money with which to buy dollars. They are doing this in the hopes that the dollar will be driven higher, causing their own currencies to be "cheaper" against the dollar. That, of course,will make their exports more competitive.

The world is now being flooded with fiat currencies. Ultimately, these currencies have to be devalued against some stable standard. That standard is gold. World deflation and accompanying devaluation will boost the competitive value of gold. In the end, investors and savers will distrust all fiat currencies. There's too damn much of it, and the stronger the deflation, the more fiat currencies will be created to fight the deflation.

As oceans of fiat currencies are created, it will be seen that the nations issuing these currencies will be piled high with liabilities. The result -- all central bank paper will be suspect. There is only one money that is not some one else's liability -- and that's gold. Gold is not a product or a liability of any one nation. Gold is wealth on its own. In time, savers and investors will understand that. Once that's understood, there will be a panic own real money -- gold.

And that, as I see it, is how gold will fare in the new world of deflation.

Question -- But Russell, can't the central banks defeat deflation simply by printing endless quantities of their so-called money?

Answer -- The fact is that gold is finally reasserting itself as a currency instead of just a commodity. As I see it, gold will be "the last man standing." The wild printing of money throughout the world is very liable to create hyper-inflation. The more stubborn the deflationary forces, the more printing we will see.

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Richard Russell
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