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The Dow to Gold ratio is something I harp on again and again. Why? Well, two reasons. The second I'll mention later. The first reason is that it is a very big step for stockbugs to step away from their addiction with all things Wall Street. The long term chart of the Dow to Gold ratio tends to induce cognitive dissonance in stockbugs and may help them get to rehab. In other words, to change their thoughts on investing "for the long haul." Most Americans of investing age right now are bred to be stockbugs and are saturated with messages about investing in stocks that are, quite simply, ridiculous and biased.
A piece of metal has vastly outperformed the stock market and holding cash since 1999. And it's going to continue for a while longer. It is up to you to do something about it if you haven't already.
Yes, 401(k) plans are restrictive and screw the average guy or gal. Yes, it's true that most plans won't let you invest in Gold or Gold mining stocks. Yes, it's true that nobody cares about you or your savings and you will get screwed if you leave your money in one of the lousy, overpriced stock mutual funds in a typical retirement plan. And U.S. short-term bonds are holding up nicely but leave you at risk for a currency crisis or one-time currency debasement in the future, which is now an almost certainty for U.S. investors as the international monetary system deteriorates and global capital races in and out of paper currencies looking for safety (the current intermediate bear market rally aside). As the greatest debtor nation on earth, the United States is not in a great position to dictate terms to the rest of the world any longer now that the secular credit contraction has begun in earnest.
But rather than give up and leave what's left of your money to the wolves, there's a shiny piece of metal available to you that can protect your savings from the further destruction in financial assets that is inevitable. The Dow to Gold ratio will reach 2 and may well go below 1 this cycle. The ratio is currently around 9. Do the math. When it's a choice of stocks or no stocks, the choice is "no stocks" for now, assuming you are not a good trader who can play the swings both ways. But if it's "no stocks" and if corporate bonds and real estate are in the same price collapse boat, what are your options? The oil bubble has popped and dragged most commodities with it.
Gold stands above the rubble looking down with disinterest. The value of Gold is that it has a stable value while the things around it fluctuate in value. After all, it's just a hunk of freakin' metal - how can its true value change? Right now, financial assets and asset prices that rose due to heavy leverage (i.e. real estate) are falling in value as the leverage is taken away by the credit contraction. This is one of the reasons that Gold is rising relative to stocks and has been since 1999.
Cash is king during a secular credit market contraction because other asset classes are declining in value so that cash can buy more of these assets at a later date. But you'd better be holding the right form of cash during a Kondratieff Winter to come out ahead! The best form of cash is Gold. It cannot be debased by apparatchiks, while every paper currency on the planet is being mismanaged right now by bankstas and bureaucrats trying to borrow their way back to prosperity. Never mind that impossible-to-service debt cannot be cured by taking on more debt when there is not enough underlying productive capacity to make good use of the new debt. Officials are not in the business of making sense or being prudent - why bother when the money you are spending and debts you are taking on are not yours?
The Dow to Gold ratio simply reflects this decline of confidence in financial assets. Now that we have reached the point of recognition in the minds of institutional funds and many retail investors, the Gold and Gold stock mania can begin. The current breakout of Gold to all-time new nominal highs in U.S. Dollar terms corresponds with a breakdown in the Dow to Gold ratio that looks very good technically. Here's a 3.5 year weekly chart of the ratio up thru yesterday's close:
And here's a long-term 20 year chart of the Dow to Gold ratio with a prediction on where and when this ratio will next bottom based on the channel in this ratio chart that has formed:
This should be a big move and since it's a ratio chart, the move can be accomplished many ways. What I believe will happen is that Gold will rise significantly (30-75%)and the Dow will fall significantly (40-75%). This intermediate-term move will not be a straight line but I think it will be mostly over before the end of June based on Gold's seasonal price run patterns that tend to start in the late-summer to early-fall and complete in the spring.
Oh, and that second reason I keep harping on the Dow to Gold rato? Because I am using it as my long-term road map for knowing when it is time to sell my Gold and get back into general stocks, corporate bonds and/or real estate. I'll probably keep a few Krugerrands as a souvenir once this cycle is over, though...
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21 comments:
keeping a few krugerands as a souvenir. LOL! I love it.
I'm a recovering stockbug. I couldn't agree more on 401k's/IRAs/ABCs/734z's/whatever. They may not technically be ponzi schemes, but they're darn close as far as I'm concerned. I've spent the last couple years giving myself an independent crash course on economics, the history of money, the banking system, etc. What an eye opener. I just wish I had done it 12 or 14 years ago when I started "dollar cost averging" into stock mutual funds "for the long term" like I was told to. Oh well. Better late than never!
Anon-
You and me are in the same boat! I, too, wish I knew now what I started to learn the hard way in 1999 as a late-stage retail investor in the internet bubble.
Let me just say that all these bubblevision "experts," who get on t.v., or pen commentary in the Wall St. Journal, and cite declining jewelry demand or industrial demand as reasons why the price of gold is at a top and going lower, have absolutely no clue what they are talking about - in fact, they look like absolute idiots to those who do (see the recent article by Dave Kansas of the Wall Street Journal. I am in shock the WSJ published such sloppy, incompetent reporting).
http://truthingold.blogspot.com/2009/10/still-waiting-for-gold-to-crash-better.html
Watch for a potential overshoot of the Dow to Gold ratio to below 1. Basically, the higher the Dow to Gold ratio goes, the harder it falls. The stock bubble in the late 90's brought the Dow to Gold ratio to record levels. I suspect a panic into gold of sorts will precipiate the overshoot. That said, I would probably start scaling out of gold positions when the ration hits 2.
Adam, I was hoping you could help me on this one, I have money invested in a Canada Life fund - I have it in the cash fund for safety at the moment - I pulled out of the Gold & General fund -Invested in Gold, Gold Mining, Gold Shares - just as Gold went up! I want to buy back in but waiting for prices to come down. Is this likley to happen to this fund when stocks inevitabley crash? Thanks in advance
As I read the various public comments coming from bureaucrats like Bernanke, I have been wondering to myself: Do any of these guys EVER have second thoughts about how, maybe, they are working within a system that is fundamentally flawed? They they're just a bunch of guys trying to blow air into leaks in their lifeboat while sharks swim around, waiting?
If they're as smart as they're supposed to be, you'd think they would. I know I'm not all that smart, but I see it plain as day. Why can't they? Is it because they have no choice but to work within the system rather than declare it "not worth saving"?
Expected Returns-
I agree, less than 1 would be appropriate but trying to get that last 10-20% is always tricky. We'll see how things look when we get to 2.
Mick-
Sorry. I'm not familiar with Canada Life Fund specifically. But I do know this. This is the beginning of a potentially very strong strong bull move in Gold and Gold stocks. Waiting for a pullback may or may not work. I have given up trying to predict the very short term 'cuz I don't think it's possible (and if it is, I'm not the guy who can do it). Fiat cash is trash but is better than general stocks. Because I think this will be a good move in Gold, I don't think it's too late to get in for the ride but risk in all stocks is high right now, as the bear market will be resuming soon. I think there's still time to get in for a few good months of a rally in Gold stocks. Good luck!
Geoff-
What?! You're not that naive, I know you're not. Do you know how much money the federal reserve makes? The federal reserve doesn't care if the U.S. economy is in shambles and they know exactly what they're doing. When you own and run the printing press, it's a great system for you! It's only the masses that suffer, not the bankstas. And the bureaucrats get to promise bread and circuses ad nauseum until the final fiat explosion (and then they just start the game all over with a new fiat currency unless the people rise up and refuse to allow it).
Adam, you're probably right that the Fed knows exactly what they're doing and what its ultimate result will be.
I say "probably" because, if true, that makes everyone at the Fed, especially Bernanke, complicit in pure evil. I can't think of a better word for what you describe: knowingly and directly causing the masses to suffer and even die.
It's a little fantastic to believe this is true, but all evidence seems to verify it.
Geoff-
Have you ever read Greenspan's pre-public office essay about the importance of Gold and a Gold standard? It's wonderfully written and accurate. He has to know the hazards of a fiat system to have written such things. Are we to believe he forgot those things accidentally when he took office?
If you haven't read it, check it out and decide for yourself:
http://www.321gold.com/fed/greenspan/1966.html
Adam, thanks for the link, I'll read it. I was indeed aware of Greenspan's views on the gold standard - I think some short articles by Ron Paul have mentioned that. I really don't get it. I guess when you enter a public role, you leave your values and beliefs behind...because if you don't, you won't stay in that role for long.
I think I'm just a teensy bit more disillusioned about our government than I was already, which isn't saying much.
Hi. You say you are looking at the Dow/Gold ratio as a measure to find a target as to when exit long gold positions. What about a stop? What about the unlikely case of the target not getting hit, and the Dow/Gold ratio reversing in the adverse direction, when would you cover? Oh wait, that's impossible. Sorry for asking.
http://web.mit.edu/krugman/www/goldbug.html
The legend of King Midas has been generally misunderstood. Most people think the curse that turned everything the old miser touched into gold, leaving him unable to eat or drink, was a lesson in the perils of avarice. But Midas' true sin was his failure to understand monetary economics. What the gods were really telling him is that gold is just a metal. If it sometimes seems to be more, that is only because society has found it convenient to use gold as a medium of exchange--a bridge between other, truly desirable, objects. There are other possible mediums of exchange, and it is silly to imagine that this pretty, but only moderately useful, substance has some irreplaceable significance.
But there are many people--nearly all of them ardent conservatives--who reject that lesson. While Jack Kemp, Steve Forbes, and Wall Street Journal editor Robert Bartley are best known for their promotion of supply-side economics, they are equally dedicated to the belief that the key to prosperity is a return to the gold standard, which John Maynard Keynes pronounced a "barbarous relic" more than 60 years ago. With any luck, these latter-day Midases will never lay a finger on actual monetary policy. Nonetheless, these are influential people--they are one of the factions now struggling for the Republican Party's soul--and the passionate arguments they make for a gold standard are a useful window on how they think.
here is a case to be made for a return to the gold standard. It is not a very good case, and most sensible economists reject it, but the idea is not completely crazy. On the other hand, the ideas of our modern gold bugs are completely crazy. Their belief in gold is, it turns out, not pragmatic but mystical.
The current world monetary system assigns no special role to gold; indeed, the Federal Reserve is not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate. There are powerful advantages to such an unconstrained system. Above all, the Fed is free to respond to actual or threatened recessions by pumping in money. To take only one example, that flexibility is the reason the stock market crash of 1987--which started out every bit as frightening as that of 1929--did not cause a slump in the real economy.
hile a freely floating national money has advantages, however, it also has risks. For one thing, it can create uncertainties for international traders and investors. Over the past five years, the dollar has been worth as much as 120 yen and as little as 80. The costs of this volatility are hard to measure (partly because sophisticated financial markets allow businesses to hedge much of that risk), but they must be significant. Furthermore, a system that leaves monetary managers free to do good also leaves them free to be irresponsible--and, in some countries, they have been quick to take the opportunity. That is why countries with a history of runaway inflation, like Argentina, often come to the conclusion that monetary independence is a poisoned chalice. (Argentine law now requires that one peso be worth exactly one U.S. dollar, and that every peso in circulation be backed by a dollar in reserves.)
o where does gold enter the picture?
While some modern nations have chosen, with reasonable justification, to renounce their monetary autonomy in favor of some external standard, the standard they choose these days is always the currency of another, presumably more responsible, nation. Argentina seeks salvation from the dollar; Italy from the deutsche mark. But the men and women who run the Fed, and even those who run the German Bundesbank, are mere mortals, who may yet succumb to the temptations of the printing press. Why not ensure monetary virtue by trusting not in the wisdom of men but in an objective standard? Why not emulate our great-grandfathers and tie our currencies to gold?
Very few economists think this would be a good idea. The argument against it is one of pragmatism, not principle. First, a gold standard would have all the disadvantages of any system of rigidly fixed exchange rates--and even economists who are enthusiastic about a common European currency generally think that fixing the European currency to the dollar or yen would be going too far. Second, and crucially, gold is not a stable standard when measured in terms of other goods and services. On the contrary, it is a commodity whose price is constantly buffeted by shifts in supply and demand that have nothing to do with the needs of the world economy--by changes, for example, in dentistry.
he United States abandoned its policy of stabilizing gold prices back in 1971. Since then the price of gold has increased roughly tenfold, while consumer prices have increased about 250 percent. If we had tried to keep the price of gold from rising, this would have required a massive decline in the prices of practically everything else--deflation on a scale not seen since the Depression. This doesn't sound like a particularly good idea.
So why are Jack Kemp, the Wall Street Journal, and so on so fixated on gold? I did not fully understand their position until I read a recent letter to, of all places, the left-wing magazine Mother Jones from Jude Wanniski--one of the founders of supply-side economics and its reigning guru. (One of the many comic-opera touches in the late unlamented Dole campaign was the constant struggle between Jack Kemp, who tried incessantly to give Wanniski a key role, and the sensible economists who tried to keep him out.) Wanniski's main concern was to deny that the rich have gotten richer in recent decades; his letter is posted on the Mother Jones Web site, and makes interesting reading.
ut, particularly noteworthy was the following passage:
First let us get our accounting unit squared away. To measure anything in the floating paper dollar will get us nowhere. We must convert all wealth into the measure employed by mankind for 6,000 years, i.e., ounces of gold. On this measure, the Dow Jones industrial average of 6,000 today is only 60 percent of the DJIA of 30 years ago, when it hit 1,000. Back then, gold was $35 per ounce. Today it is $380-plus. This is another way of saying that in the last 30 years, the people who owned America have lost 40 percent of their wealth held in the form of equity. ... If you owned no part of corporate America 30 years ago, because you were poor, you lost nothing. If you owned lots of it, you lost your shirt in the general inflation.
Never mind the question of whether the Dow Jones industrial average is the proper measure of how well the rich are doing. What is fascinating about this passage is that Wanniski regards gold as the appropriate measure of wealth, regardless of the quantity of other goods and services that it can buy. Since the dollar was de-linked from gold in 1971, the Dow has risen about 700 percent, while the prices of the goods we ordinarily associate with the pursuit of happiness--food, houses, clothes, cars, servants--have gone up only about 250 percent. In terms of the ability to buy almost anything except gold, the purchasing power of the rich has soared; but Wanniski insists that this is irrelevant, because gold, and only gold, is the true standard of value. Wanniski, in other words, has committed the sin of King Midas: He has forgotten that gold is only a metal, and that its value comes only from the truly useful goods for which it can be exchanged.
I wonder whether the gods read SLATE. If so, they know what to do.
Madball-
Huh? Bottom line: I'm all in on Gold. It's a long-term buy and hold until this Dow to Gold ratio bottoming occurs. It sounds crazy to stockbugs and yet that is their advice to people for the long term!
If we bottom at 5 and turn the other way and don't look back, I'll miss the bottom in stocks in terms of their true value. Such is investing/speculating.
Anon-
Anyone who quotes Krugman is too lost to address in a short reply. Sorry, but I think you may have drank a little too much of the kool-aid...
Good luck!
Ad hominem rebuttals indicate a lack of understanding or a weak counterargument. Usually the ploy of hacks like Bill Maher and Rush.
Anon-
Anonymous comments by rogue elements with no interest in a discussion indicate a lack of understanding or a fear of being discovered. Rush and Paul Krugman are closer together than you think. I wouldn't quote either one unless to point out the folly of their opinions.
Krugman is a distraction, much like the democrat vs. republican debate is a distraction. How about corporate fascism supported by academic mouthpiece clowns like Krugman? Meaningless arguments about stimulus#1 versus #2, versus pulling lever #4, are irrelevant. Paper money vs. Gold is an argument about the rights of the individual vs. the rights of the state and a private central bank.
I believe the rights of the state should be limited and the point of Gold is to put a leash on statists. Gold is indeed just a shiny piece of metal and yet it is a better investment going forward than the S&P 500. Why?
And why has Gold been a better investment than stocks over the last 10 years? It's just a matter of cycles, really.
"...countries with a history of runaway inflation, like Argentina, often come to the conclusion that monetary independence is a poisoned chalice."
You mean like every country in the history of the world that has run a fiat system? Precisely because ours has managed to create the wealth discrepancy you point out doesn't mean it can last forever because we are blessed to have people like Krugman tell us how to make dreams come true by counterfeiting money the right way. Keynesian economics is a fraud and ad hominem attacks are appropriate for anyone that has an education and believes in it IMO.
Gold is not magical, it is a reliable constant. I am not interested in worshipping a piece of metal, rather I am interested in pointing out the folly of apparatchiks like Krugman who think they can change the cycles of history. These are the people who think the government and central bank didn't do enough to stop the so-called great depression in the 1930s when in fact they helped cause it. It is Gold's chance to shine now, but it won't be in a few more years.
again dismissing the person indicates an inability to engage the argument. I'd quote Maher and Rush and O'Reiley or Colbert if they make valid arguments (outside of Colbert, this rarely occurs). Tin foil hat theories about the collusion of academics with titans of finance fall into the same area as 9-11 and walking on the moon conspiracys .....absurd to any thinking individual willing to examine the evidence.
You wrote: "Yes, 401(k) plans are restrictive and screw the average guy or gal."
I agree.
Aren't withdrawals from 401ks taxed at ordinary income tax rates, regardless of what or how long they were invested in?
In other words, you could be taxed at 28, 33, 35 percent rates (2009), NOT at the lower long-term cap gains rates.
Also, isn't investing in a 401k a long-term bet on the (possibly higher) level of future tax rates?
Herb, I think you're right about 401(k) tax rates.
Investing in a retirement plan assumes a lot of things - that your investment will grow; that the dollar value of your growing investment will be similar when you retire; that tax rates won't be sky-high when you start withdrawing.
As we have seen, none of these are a "sure thing." Years ago, some AmEx financial advisers looked at me blankly when I suggested that it may be possible for me to save up $1 million for retirement, only to find that, by the time I retire, $1 million will buy a loaf of bread.
These days, that scenario is not so far-fetched.
Hey Adam can you e-mail me and explain how to recognize the gold/dow ratio bottom from a technical analysis point of view?
Besides such things as interest rates, reducing the money supply ect. im interested in knowing how to tell if we have reached the bottom.
please email me at pmasuccess@gmail.com
Thanks.
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