If inflation continues, gold will do well, since it will simply take more dollars to buy a specific quantity of gold.

If deflation takes over, then the task of carrying the massive levels of debt in this country will cause such hardships and so many bankruptcies that we could see a run on the dollar as foreigners question the wisdom of holding dollars or dollar-denominated assets at all. The alternative to the dollar would be to hold other currencies or gold.

Up to now, the best bet has been a bet that inflation would continue. But very recently we have seen the turnover or velocity of M-3 slow down. In fact, last week M-3 broke below it 20-week moving average for the first time since July 1994. And some observers are now wondering whether the Fed has "run out" of their ability to stimulate the economy. To put it another way, the money is there, but the consumer may not be using it. God help us, consumers may be cutting back on their spending and even thinking of ways to save.

If this happens, my guess is that the Fed would open the flood-gates even further, which would, if anything, send the dollar down to still lower levels.

All of this comes down to the following. The rich man -- the fellow who doesn't need any income -- is in the best position, because he can load up on gold. Gold is the ultimate safety, but gold pays no interest.

Everybody else is faced either with speculating for total return or opting for income which means buying bonds or possibly utility stocks.

But underlying all US investments is the problem of the declining dollar.

So aside from gold, this leaves us with one other choice. Investments denominated in foreign currencies. Here we have a collection of open-end and closed-end funds. Take your choice. Personally, I've recently bought limited positions in GIM and FCO. Check 'em out.

I continue to receive e-mails from subscribers who wonder how to buy gold. Call my old friend, Leon, at 1 858 459 2228. If you happen to visit Leon here in La Jolla, be prepared. He doesn't shave a lot, but he's honest, knowledgeable, and I've known him and dealt with him for 30 years.

Leon will be happy to sell you all the gold you want. And best of all, you can trust Leon. I do, or I wouldn't be recommending him.

Richard Russell
Dow Theory Letters
© Copyright 2003 Dow Theory Letters, Inc