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LETTER 1486

January 12, 2011

December 23, DJIA 11579.49; PTI 6191; A-D Ratio +52.39

I want to start this letter off wishing all my subscrib-
ers a fantastic 2011, every month of it.
CYCLES — We’ve moved into what I call “Cycle time.”
Let’s run through some of these supposed cycles.
December 31, DJIA 11577.51; PTI 6201; A-D Ratio +52.30
January 7, DJIA 11674.76; PTI 6205; A-D Ratio +52.41
Dow Div. Yield: 2.46% Dow P/E: 14.89
S&P Div. Yield: 1.86% S&P P/E: 17.69
Gold 50-Day: 1381.22

First, we have the so-called Presidential Cycle. This cycle runs through the four-year US presidential term. The idea is that
the new US President handles the “hard stuff” during his first two years in office. Then as re-election time comes up during
the last two years of his term, the Prez doles the “good stuff,” the bills that are calculated to make Wall Street and voters
happy.

Now, starting in 2011, we move into the bullish half of the Presidential cycle when Obama is supposed to make us happy.

Then we have the “better six month” cycle which includes the period from November to the end of April. For whatever
reason, studies show that the period of November through April tend to be bullish periods while the periods from April to
November tend to be bearish for stocks. So happily, we are now moving into the bullish part of the six-month cycle.

Next and maybe last, we have the so-called Santa Claus rally, which supposedly takes place in December and even into
January. December tends to be the most bullish month of the year, and last December appeared, to be just a high level
stand-off. C’mon, Santa.

Then we have the “January effect.” This is the period during January when small caps tend to outshine their big brothers.
We’ll see if this works next month. Keep your eye on the Russell 2,000.

So with it all, what have we got? Figuring in the presidential cycle along with the good six months that are coming up, the
cycles, if they mean anything, should be favorable for stocks.

So the real question is — Is there any sense or predictive value in a study of cycles and seasonal trends? Personally, I’m
not sure that there is. The stock market, on a near-term basis, is famously unpredictable. This is because of the discount-
ing feature. If a period ahead is “supposed” to be bullish, then investors will invest accordingly; they will discount the
cycle. If they do that, if the cycle is discounted in advance, then the opposite is likely to occur.

For instance, at present the cycles say that good times should lie ahead for stocks. But I have to ask, have stocks dis-
counted the supposed good times already? If the future “good times” are already discounted by the market, then the result
will probably be the opposite. If the supposed good times have already been built into the structure of the stock market (as

http://www.dowtheoryletters.com • staff@dowtheoryletters.com • Letter 1486 • January 12, 2011 • Page 1

they may have been already), then only difficult times should follow. You see, investing on the basis of cycles is no sure thing.

I had dinner with my oldest daughter, Daria, last night. Daria has thee kids, the youngest being a daughter, age 15. Daria
tells me that her beautiful daughter, Nina, spends most of her time on Facebook or on her computer socializing with her
friends.

We both agreed that the age of electronic is turning our kids into mush-brains. Nobody reads the newspapers any longer.
Most of the nations newspapers are on the edge of bankruptcy. Nobody talks to anyone else, they simply communicate via
electronics.

A democracy depends for its existence on an informed electorate, and that worries me. If all the kids are spending their
time on Facebook, what the hell are they learning?

When a tyrant takes over a nation, he does three things. He outlaws guns, which many states in the US have already done.
Thus the people cannot overthrow a dictator. The second order of the dictator is to outlaw the ownership of gold — or tax
gold profits so heavily that it makes buying gold a handicap. In this way, no one can use gold to escape the nation and get
across the border. The third venture of a dictator is to take over the newspapers, which act serves to keep the population
out of touch and ignorant of the actions of the dictator.

In the US, in most states, “open carry” is not allowed. This is the right to carry a loaded pistol in public. The right to own
gold is now legal in the US. However, gold is not on a par with most other investments since gold is considered by the IRS
to be a “collectible,” meaning it is taxed no matter how long you own it, at the same rate as income. As for newspapers,
they are dying on their own without the government’s help.

The Constitution of the United States is basically a document that defends the people from the state. My bet is that 90%
of Americans don’t know what is in the Constitution. Today the Constitution is largely ignored by our politicians. The word
is that “The Constitution is what the Supreme Court says it is.”

In Christian Science it is said that “The only power that evil possesses is the power to destroy itself. I think that’s what’s
currently happening to the Federal Reserve. I believe the Fed is fundamentally evil and that due to its incompetence it is
currently in the process of destroying itself.

In 1913 Congress voted for the creation of a central banks that was called the Federal Reserve. It was a private bank, so
that it was not federal. And ignorant Congress voted to place the power of creating money into the hands of a private
cartel. We, the people, have paid for Congress’ mistake with inflation ever since 1913, the year when the Federal Reserve
came into existence.

Now, for the first time in my lifetime, the Federal Reserve is being attacked by the voters. Under the sponsorship of the
Fed, the US dollar is now dying. Today, the dollar broke badly — to its lowest level since mid-November. The voting
public does not follow the dollar. But it does follow gold.

As the dollar weakens, it requires more dollars to buy an ounce of gold. When the Fed was created you could buy an
ounce of gold for twenty-two bucks. Now it takes over 1400 Federal Reserve notes to buy that same ounce of gold.
Rising gold is writing the dollar’s epitaph. Note: The word epitaph comes from a Greek word meaning “on the grave-
stone.”

Question — What is the Fed’s attitude towards new highs in gold?

Page 2 • http://www.dowtheoryletters.com • staff@dowtheoryletters.com • Letter 1486 • January 12, 2011

 Answer — Three words, “It
1/5/11 hates it.”
PRIMARY TREND INDEX 6209
(PTI) 10/9/07
5974 I have talked a lot about the
ignorant know-nothings who
12/5/06
5796
claim that gold is in a danger-
12/29/10
ous bubble. But why aren’t
+52.62
89-Day Moving 2/11/04 these same fools talking about
7/16/99 Average (PTI) 6/4/07
5439 the crashing dollar? To talk
5382 +42.03
12/5/06
about a dying dollar is too
+34.53 frightening and besides, it’s not
5/26/00
patriotic.
5109 11/20/08
12/30/03
+30.84 The beauty of gold is that it’s
+13.21
1/6/99
ADVANCE international and beholden
5/3/02 DECLINE
-6.16 RATIO
to no one. If the Fed could put
+3.75
(NYSE) a cap on gold it would. But
gold is traded 24/7 around the
world. Gold is the ultimate
10/9/02
3/14/00 economic independent. It’s
-8.14 -5.33
outside the grasp of any politi-
cian, which, by the way, is why
most politicians despise gold.
GENERATIONS — Ah, a new decade, so let’s start by seeing what we’ve got, generational.

First we have the so-called greatest generation, those born prior to 1928 (of which your editor is one). These poor devils
lived through the Great Depression and fought in World War II.

Then we have the “silent generation,” born 1928 to 1945. Not a heck of a lot happened with the “silent ones.”

Next came the Baby Boomers, born 1946 to 1964. The Baby Boomers felt pretty good about themselves, and as a result
they were good at making lots of babies. They lived through the Cold War, Vietnam and had lots of money. Actually, they
were “spoiled” by money and debt. This was a huge generation, and by 1970 they constituted half of all Americans by
population.

Then came Generation X, born 1965 to 1980. This was the first generation born after the “pill,” so there was lots of sex
and fewer babies.

Bringing it to the present, we now have Generation Y, born between 1981 and 1999.

Generation Y is a smaller bunch than the boomers, and their numbers account for a fourth of the US population. The YOs
are computer-minded and they live on their IPhones.

Problem, the smaller Generation X and Y will have a real job supporting their elders and dealing with the debts the
preceding generations left for them. As Founding Father Benjamin Franklin said, “We give you a republic — if you can
keep it.”

If we only knew what the stock market knows. If we could only “read” the message that the stock market gives us.
http://www.dowtheoryletters.com • staff@dowtheoryletters.com • Letter 1486 • January 12, 2011 • Page 3
 Today, on the third day of January, we see the stock
market appearing, according to most of the experts, to
be heading due north.

Just to make sure, let’s check it out on a point&figure

chart of the S&P 500 Composite. Here we see the S&P
on a “high pole” and looking quite impressive. The mar-
ket is overbought, and volume has dropped off dramati-
cally over recent weeks, so we may be over-due for a
correction. What happens during the next correction will
be critically important. If the S&P retains half or better
of its high pole, that will qualify as bullish action. That
means that the Composite will have to hold at 116 or
better. Sinking below 116 would be bearish. We’ll await
the verdict of the market on this one.

Gold below. The chart will remain bullish as long as gold

holds above the 1360 box. Below 1360, and gold will
enter a deep correction.

I show on the top of Page 5 a daily chart of the Dollar

Index (the dollar pitted against six major currencies). The
Dollar Index looks bearish, and as of last Friday the In-

dex (which is below its 200-day moving average)

broke below its 50 day moving average. What can I
say but that it’s bearish action.

OUT CATARACTED — Well, I had the eye op-

eration yesterday, and despite what everybody told
me (“it’s just a piece of cake”) it was no fun. The
cataract operation took 40 minutes (the Doc inserted
another lens in my eye), and yes, it did hurt, although
I was under-sedated. I had the surgery at the fa-
mous Shiley Clinic here in San Diego. Today I have
the use of my right eye, while my left eye has a plastic
patch over it.

I’m almost tired of reading know-nothing articles

about gold. Most of the gold nay-sayers are too
embarrassed to remain bearish on the metals, so they
grudging advise putting maybe a “safe” ten percent
of gold into your portfolio because, “well, just in
case.”

Page 4 • http://www.dowtheoryletters.com • staff@dowtheoryletters.com • Letter 1486 • January 12, 2011

While I’m at it, and I can still see, I’m posting
the gold price for the end of the year 2010.
That’s quite bull market, and it could be a few
generations before we see its equal again. Of
course, what those figures tell us is that year
after year, ten years in a row, it’s taken more
Federal Reserve Notes to purchase one ounce
of gold

I remember back in the early ’70s you could

buy a one-ounce gold coin for about 70 bucks.
Today, if you want to buy the same gold coin it
will cost you about $1500, assuming you can
find some one who is willing to sell bullion coins
for “federal reserve notes.”

2000 — $273.60
2001 — $279.00
2002 — $348.20
2003 — $416.10
2004 — $438.40
2005 — $518.90
2006 — $638.00
2007 — $838.00
2008 — $889.00
2009 — 1096.50
2010 — $1421.40

Today, as the new year gets under way we see that gold from the end of the year 2009 to the end of 2010 has risen over
400 dollars. That’s more profit than most people have ever made in the market. Therefore, heavy profit-taking was to
be expected. Today, as I write, February gold is down 44 points, which, I believe, is due to an avalanche of profit taking
in early year 2011. I don’t believe it marks the end of the gold bull market, but it’s going to take a good deal of re-building
before gold can climb back into the 1400s again. Well, what’s the hurry?

As for stocks, we saw a dramatic break out to new highs for the move yesterday, and then a dull market today with
divergence — Dow up and Transports down.

Because of my surgery I’m not thinking straight and I’m sort of dazed. I don’t want to write a lot of nonsense and I don’t
want to fake it so I’m going to close this site now, and probably write very little for Wednesday. Sorry, but the surgery took
more out of me than I thought it would — probably it’s my age. Ah, to be young and beautiful again. I’d settle just to be
young.

THE MARKET — One-eyed Russell says, “On to the stock market.” Charts can be misinterpreted, but they don’t lie.
The daily Dow chart on the top of Page 6 tells the story. All the action since last September has taken place above the
long rising trendline that I have drawn on the chart. December’s action was characterized by a downtrend in volume,
which is usually a danger sign — but not this time. Monday saw the Dow surge above its sideways formation and rising
to a new high, which also took RSI to a new overbought level. With the action yesterday, we’ll see what this chart tells us
in the days ahead. The stock market is in overbought territory.

http://www.dowtheoryletters.com • staff@dowtheoryletters.com • Letter 1486 • January 12, 2011 • Page 5

 WILD & WOOLY SILVER— Silver has been manipu-
lated for years by some of the large banks, and this has
gone a long way towards holding the price of silver back.
A new COMEX rule now limits how many contracts any
one entity can own. This may have effectively ended the
manipulation. For whatever reason, silver has been “taking
off.” The ETF for silver is SLV, and I show that chart of
SLV below, and you can instantly see the silver is very
much part of the bull market in precious metals. The record
high for silver occurred in January 1980 at $49.75. At the
bottom of the Great Depression, silver sold at 23 cents an
ounce. It now sells for close to $30 an ounce.

I keep wondering when we are going to enter the specula-

tive phase of the gold bull market. The bottom chart may
provide hints. This is GDXJ (small and speculative gold
mines) divided by GDX (large gold mining companies).
What’s so interesting is that GDXJ is now out-performing
GDX on a trend level. In other words, the speculative gold
mines are outperforming the large gold mines. When the
“cats-and-dogs” out-perform the “big guys,” it’s often a
sign of speculation and even intense speculation ahead.

In the meantime, the stock market continues to “climb

the steps” all the while heading due north. Subscrib-
ers know my doubts and worries about the stock
market, this despite the fact that my PTI remains in
its bullish mode. So in my mind, the question is —
gold or common stocks? I feel safer with gold. It’s
as simple as that. To put it another way, I feel there’s
less risk holding gold than there is in holding the Dow.

Note — In the 6th century BC, King Croesus first

minted gold coins as money. This occurred in the
country we now call Turkey. By the 20th century

the US and most countries had adopted gold in what

was called the “gold standard.” The price of gold
was effectively set at $35 an ounce until Richard
Nixon took the US and the world off the gold stan-
dard. Why did Nixon do that? The US was simply
losing too much of its gold in international settle-
ments. The US now holds the greatest hoard of
gold in the world, 8133.5 metric tons of gold. Why
doesn’t the US sell its gold? Because the huge
hoard of gold continues to back the financial power
of the US. Does the US really own that much
gold? We don’t know, because for decades the
US has refused to audit its gold holdings.
Next Mailing: February 2, 2011
Page 6 • http://www.dowtheoryletters.com • staff@dowtheoryletters.com • Letter 1486 • January 12, 2011