One good indicator to use as part of answering that question is the Dow/Gold Ratio.
This ratio compares how many ounces of gold are required to purchase one share each of the 30 stocks on the Dow index. Historically, the ratio is 1:1. In the Fall of 2011, as the price of gold was going down and the Dow stocks were increasing, the ratio hovered around 5.8:1. This means that stocks are way over-valued or Gold is way under-valued. Something has to give.
Now, in a time of turmoil that spanned the credit downgrade and debate over raising the debt limit in the USA to the growing financial crisis in Europe and worries of slow growth across the globe, gold still dazzles investors.
Gold is a sweet spot among the elements. It is rare but not too rare. It is chemically stable and all the gold ever mined, is still around. Also, it can be divided into small amounts without losing its properties.
Ultimately, though, gold is valuable because we all agree it is. It was used around the world as currency for thousands of years and then it gave value to paper currencies for a couple of hundred more years.
According to a recent story in the AP, Sharlett Wilkinson Buckner, of Humble, Texas, recently took an old bracelet, ring, and necklace to her local jeweler and walked out with $1,070. The next day, her husband sold an old gold necklace for $650.
What we see, is that the average person is still “out to lunch” and has not idea what is happening. Desperate for cash in this Age of Turmoil, they still sell gold in order to load up on … paper!
The whole world is drowning in a tub of debt. As debt drains away as part of the Great Correction, when debt is reduced, money goes down the drain too … it becomes worth less than it was before.
This is all based on the fractional reserve banking system and the printing presses of the Central Bankers of the world economies.
In an expansion, the banking system turns on the printing presses. It magnifies the purchasing power by making loans. For every $100 dollars a customer has put on deposit at the bank, the bank only has to keep $10 on its bank vaults so it lends out $90. This fractional reserve banking system works as long as there is not a run on the bank.
When times get bad, a contraction occurs and purchasing power goes down as loans are repaid or written off. Once a $100,000 loan is repaid, the supply of money is reduced from the overall economy (unless it is lent out to someone else).
If a $100,000 loan can not be repaid, it reduces the money supply as much as $1M due to the reverse effect of the fractional reserve banking system. This default causes the bank’s lending capital to be wiped out forcing it to reduce its loans outstanding.
This deleveraging process should help support the value of the dollar and guide the economy back to an equilibrium and reduce the demand for gold. However if the Federal Reserve keeps intervening with TARP, QE2, QE3, or so on by printing more dollars and putting in the system, gold will soar.
Experts will say that they can’t call gold a bargin today but there is simply no other place for people to try to safeguard their wealth as the dollar, euro, and other currencies plummet toward their intrinsic values … paper with pictures of dead presidents on them is essentially worthless.
What else could people buy as they get more and more afraid of paper currencies losing acceptance.
What are corporations going to do with the billions of dollars of profits they have earned when their management gets frightened? Where else can they go when they need to get rid of dollars, euros, yen, and yuan?
Also, what about Central Bankers? What will they do when they need to dump dollars in favor of something that will hold value? They are going to go into Gold as there is no viable alternative when the paper-money con game is over. Gold is the ultimate cash and that is where people will go when there is a global total, panic to cash.
Is it too late to hitch your wagon to the Gold train?
Is the bull market in Gold now over?
Historically, the peak of a Gold bull market or a bear stock market occurs when you can purchase one share each of the 30 stocks on the Dow index for one or at most two ounces of Gold.
At that point in time, the Dow/Gold ratio is said to be at 1:1 or at most 2:1.
During the furor of the tech mania in the late 1990s to early 2000s, when most people laughed at owning Gold (the Dow essentially reached 11,800 and gold dropped to essentially $255), the Dow/Gold ratio reached 45:1 to 46:1 ish. In other words, at that time, it would take you (45 or 46 divided by 16 oz in a pound) 2.8 to 2.9 ish pounds of Gold to buy the Dow.
Recently (circa Fall 2011), Gold was at $1,780 and the Dow was at 10,720, the Dow/Gold ratio was 6:1. So in a decade, from when the tech bubble burst, the Dow/Gold ratio dropped essentially from 45:1 to 6:1. Stocks stagnated and gold rallied fourfold and the ratio slipped dramatically.
We are in the era of the Great Correction and still have a way to go.
A bet on Gold is a bet against the likes of Bernanke, Obama, and Geithner around the world … the central bankers, the politicians, and head of Treasuries of the world. It is saying that, “I do not believe, sir, you know what you are doing” and that the Dow/Gold ratio is going to decrease some more.
All sorts of things could happen over the next 12 months to jolt markets lower and gold higher. The stagnant economy and high unemployment rate could cause Bernanke to launch QE3 providing stimulus to the market and more money printing … cheaper money would cause commodities to rise and the price of Gold could increase. The Arab Spring across North Africa, continued trouble in the Middle East, and the fracturing of the Eurozone could all cause excessive money printing further weakening the currency again causing commodities to rise and the price of Gold to increase.
Printing more money so speculators can pump up the stock market, only paves over our problems and delay our Day or Reckoning … and the price of commodities, including Gold goes up.
If the Dow bounces up and then drops down but stays around 10,700, and if you do the math with the Dow/Gold ratio was to drop from 6 (which is approximately where it is now, circa Fall 2011) to 3, then Gold would double from $1,780 to around $3,500. In that context, Gold would still be a good investment.
The point in using this ratio is to use it as a guide as to whether purchasing Gold is still a good investment. Gold will be a good investment until the Dow/Gold ratio gets down to 1 or 2. When this happens, it will be an indication that we have reached a peak in the Gold bull or a bottom in the stock bear market.
At that time, the Great Correction will be over and a new economic and investment cycle can begin.
What should you do until the Dow / Gold ratio gets to 1:1? Obtain more financial education and learn how to protect yourself during these trying times of massive money printing, fiat currency, and soon-to-be runaway inflation. Purchase precious metals, including gold, to hedge or protect your net worth against the decreasing value of the US Dollar, which is just paper money.
I favor a quote from Steve Forbes … Forbes says that pursuing additional financial education and the resulting increase in our financial literacy will open our eyes to being savvy with our money and using alternative wealth creating strategies; this will be they key to resolving our financial crisis.
To gain the necessary financial education, it is best to pursue association with, access to, and membership in, a wealth creation community. As a result, you will learn about alternative wealth creating strategies and consider investments in non-dollar denominated assets … perhaps emerging markets … perhaps energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … perhaps precious metals, rare earths, water rights, oil, natural gas, potash mines, or gold mines … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.
For those wanting protection of their purchasing power in gold, there are several ways that may be appropriate to obtain this protection. These include direct ownership in minted coins, use of gold exchange traded funds, gold mutual funds, and junior gold stocks. Many are investigating having part of their IRAs in gold, silver, precious metals, and non-dollar denominated currencies.
In addition, for those that truly believe default of sovereign debt is the greatest risk we all face, it is wise to learn how to implement a multiple flag strategy to diversify this risk or provide protection against higher taxes, capital controls, hyperinflation, civil unrest, erosion of personal liberty, and the rise of a police state. With a multiple flag system, you consider taking preparations like, but not limited to, establishing a foreign bank account, purchasing some real estate overseas, seeking alternate sources of income, dual citizenship, and carrying multiple passports.
I will continue to provide examples of things we need to learn, the secrets of the insiders, as part of being savvy with our money, and introduce alternative wealth creating strategies, in future articles and updates at my blog over the next few weeks.
I want to thank Joel Bowman and Bill Bonner of Agora Financial, as they were the source of some of the material mentioned in this post.
In closing, be sure to Meet Me at my website, WhoIsMikeFarrell; Read Posts about my Internet Marketing Business at myaspenIbizBlackBox website; Obtain Some Tips About Being No 1 on Google at aspenIbiz My Go-To-Market Partners website; and Learn How to Live Longer at aspenIbiz My Life’s Advantage Today site.
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Finally, I would like to provide Best Wishes for a Happy Holiday Season and a Prosperous New Year!
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