Dow Will Equal Gold in 2009 55 comments
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If you have to pick one investment class that will shine in 2009, then choose gold, and probably silver. My prediction is that this will be the year when the Dow Jones to gold ratio goes to one.
That is to say the Dow Jones Index will plunge again, way beyond the 7,000 limit target I suggested long ago for 2008, and head to 4-5,000, while at the same time the price per ounce of the yellow metal will tip the $4-5,000 an ounce level, way above the $2,000 now predicted by Citigroup.
US economic implosion
Obviously only a terrible implosion of the US and global economy could produce such a massive shift in asset values. But I fear that is what is coming in 2009 and the moment to prepare for it is now before it is too late.
Just look at those US auto figures for November, down 37 per cent, and that is the figure across the board. The Japanese and Korean manufacturers also got their sales walloped, albeit Chrysler took the biggest hit of 47 per cent.
No manufacturer on earth has profit margins big enough to absorb that sort of a sales collapse. That it is the largest consumer goods section of the world’s largest economy just sets the whole US economy up for a collapse. The only historical parallel is 1930.
Now the Federal Reserve and US Treasury have been on to this case for some while, pumping money into the US economy - around $8 trillion on the last count, or more than half the annual GDP. That must have some countering effect to this collapse in the real economy.
Bailout trillions
Any observer can see that money produced and spent this fast is not being invested wisely. Trillions to support banks on the brink of collapse can surely only put off the evil day, while running up bigger debts that have to be repaid in devalued dollars - or defaulted on - later.
What we have in motion is a downward spiral of mounting debts and falling production in the US economy. You really have to be hopelessly blind not to see it when you think about it. And spirals continue down until they reach a bottom. We are not there yet.
If the US was a Third World country, the IMF would be called in to run the economy. Debts would go into default, uneconomic companies and projects would be allowed to fail, putting people out of work and interest rates would shoot up.
The US authorities have been acting as though they could spend their way out of this fate. It might work to some extent, but all logic suggests this will not be enough to prevent an economic implosion. For 2009 that looks far too close to the Third World model for comfort.
Buy precious metals
What are investors to do in such circumstances? Personally I would avoid US treasury bonds which look like the next asset bubble about to burst, and go for gold and silver which will be the next bubble to form as the world struggles to dig itself out of this very big hole.
Eventually the world will emerge from this crisis, just as it emerged from the Great Depression of the 30s, but we have not even seen the bottom yet, let alone begun the recovery phase.
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This article has 55 comments:
I'm not convinced the main outcome is massive increase in gold prices, but other commodities should reflate, a good thing if not over done as that ensures planting and harvesting of crops. I'm sure some very smart people in our Treasury have calculated what might happen. Don't forget the last few months have destroyed $100's of millions of money supply that was erroneously deployed to pump up asset prices (houses and ABS's) just so that investment banks/realtors/mortgag... brokers could collect management fees. The bank writedowns mean the $ are no longer available, and the TARP $250B must still be raised (by debt or equity) in order to repay Uncle Sam. I think of this as a stool, where one leg was knocked out and temporarily replaced with government funds - the banks must remake the lost leg and replace it.
There is a small chance things can work out without disaster happening, but now would seem a good time to buy as much of the commodity ETF's as you can as a hedge against rising prices in the stores, and gold as an investment. It's pretty obvious, as stated above, that defaulting on our debt through inflation is the only logical outcome, and we need to convince ourselves to contribute to debt reduction by halting Social Security COLA(remember those from the 80's?) for a while, or reducing like President Reagan wanted.
Anyway, The Saudi plans call for the construction of 1 million new homes over the next few years. Where will the money come from if the Deflationary collapse predicted comes to pass? I'm making the assumption that the dollar collapses as well, am I wrong?
There is another factor is see happening along the way. That is; rising interest rates.
When the legs of banks are repaired, and leverage and regulations are renewed and in place within a few years from now. You are going to see the dollar economy on the brink of collapse. Deleveraging will continue at a slower pace for a minimum of 5 years in my opinion. It could even extend for a decade from now before the fundamentals are healthy again.
And at the center stage of that recovery, when the financials are stabilized, we'll see a huge shift in consumer spendings to consumer savings. Rising interest rates to double digit levels. A mass attraction of credit (foreign and domestic) to build up new wealth and power for America.
But the struggle will be large and deep for America. Because this recovery has got resistance from emerging countries (BRIC) and other money attracting economies. The coming decade will not be all too bullish for equities (although bullish to a large degree). The most significant profits can be found in commodities sectors. This relatively small sector is going to be the most crazy investment area you've ever experienced. The bubble level will be expected, although the demand around the world, will defend the exploding prices, as long as ETF parties are not overly manipulating the markets, like they do in copper, gold and silver for instance.
brgds,
History shows these runs take longer than a year, but we are in a unique time for sure.
Also...too much exuberance for a rally? Isnt that when rallies occur?
Lastly...the dollar as a safe haven? I literally laughed when I read that.
I have an idea. Anyone who wants to bet me the dollar is a safe haven:
1. Email me so we can exchange info, and the amount you wish to bet (you can get my email from my blog)
2....put your money in dollars...I will put mine in gold and silver.
3. Lets compare notes in three years.
Gold will shoot thru $1000 just about the time the typical investor realized their T-bill money is a honey trap losing 5% a year...Fringe players have been talking about "fiat" money for decades...that's another concept that will not be fringe anymore..it will be on everyone's lips.
As for the Dow..it will move WITH..not against gold and silver...but it's % gain and future will not protect against the pernicious inflation we'll see..TRILLIONS ARE COMING HOME TO ROOST..and befor they're done there will be plenty more where that came from.
If blue chips tank hard and for good, it will ruin every insurance company and pension fund in existence. If there is any way to avoid this the PPT will gamble and prop up stocks hoping that they can avoid a financial disaster. What index level(s) they choose to defend and whether they succeed or not will be the issue.
If they fail, things will get very ugly. If they succeed, they will add fuel to the bonfire of inflation the FED is building now. Either way it won't be pretty.
There is nothing wrong with dollar except the fact that our economy is not properly handled. US must step up its own production of daily needs rather than import and put dollars in the hands of other countries thereby puting more dollars in the hands of it's own citizens.Oursourcing of jobs is a bad idea and the same jobs can be offered to US citizens.Also recently oil price is now reasonable for US economy.The big three automakers must run their companies more economically thus paving the way to less and less imports. Further,we must acknowledge the fact that US is a much much better country in respect of natural resources.
Anybody else seen all "Buy Gold Now!" infomercials on TV and the radio lately? I'm not going to start investing in an asset class that is currently at it's peak.
On Dec 04 10:56 AM Byron_G wrote:
> Dow equal to Gold almost happened on January 21, 1980 -- followed
> by a 20% drop in gold within two days, and a 50% drop in gold prices
> within 2 months. So, gold "might" be equal to the Dow at some point
> in the near future, but it would not be a sustained event.
>
> Anybody else seen all "Buy Gold Now!" infomercials on TV and the
> radio lately? I'm not going to start investing in an asset class
> that is currently at it's peak.
Stock market will crash during summer 2009.All you have to do is to bet against dollar, before the summer of 2009.
On Dec 04 08:39 AM Bigwavedave wrote:
> The 1930s depreation was salvaged by income tax being imposed, does
> anyone read up on our history?
Everything has dropped by 50% or more, is it physical Gold's turn? The Blood in the streets idea still has Gold to contend with for a final capitulation. IMHO
1. A big war broke out.
2. People in fear bought gold relentlessly. Gold price skyrocketed. Rice price plummeted.
3. The merchant bought rice at super-low prices.
4. As war drags on and on, people needed rice more and more to feed themselves, and demand for rice skyrocketed, and demand for gold plummeted.
5. The merchat sold his rice to the market for triple digit prices and bought back the gold for super-low prices.
6. The merchant instantly became the richest man in ancient China 3,000 years ago.
Of course, this kind of dramatic and monopolized transaction would not happen in the modern world. However, if you compare US stock market to rice, you will see why this 3,000-year old story still applies today. As time goes on, people's thirst for higher return will come back. People's thirst for return cannot be satisfied with the bank-offered CD rate or treasury rate of less than 3% - 4%. It could be end of 2009, 2010 or 2011, no one knows. However, I'm confident that within the next 5 years, one of the greatest thirst for return will come back to the stock market, and people who bought gold and previous metals now will regret so much for plummeted prices of them and lost return from the stock market.
I'm sitting back waiting to see how Obama's guru--VOLKER-- pushes inflation off the cliff with interest rates to 15, 18, 23 percent! Then, things will get dicey.
Of course, in the mean time I am BUYING PHYSICAL GOLD and SILVER!!!
Thanks so much Peter, loved this reality check!
What is your logic for gold NOT to increase in value as the Dow increases?
If you care to look, you will see the DECOUPLING of gold from the dollar, and oil. Granted, it is somewhat insignificant at present, but it IS starting to occur. When that DECOUPLING occurs in earnest, LOOK OUT! The 1 to 1 ratio will be "around the corner". Whether the dow is at 10,000, 20,000, or 4,000 it WILL happen! In the instant senario gold will benefit from the DOW's rise...as it will from the DOW's fall.
What I fail to understand is how a potential inflation (that many say it's inevitable) would affect the housing market.
In theory, if hard assets go up in terms of dollars, it will be easier to pay off a mortgage in devalued dollars.
Example: if you owe 300,000 today for a house worth 600,000, you may still owe 290,000 for a house worth 800,000 in one year.
In absolute terms, maybe your house is worth less in terms of gold, but who cares - you're paying back dollars.
Would the same logic apply for a stronger currency, supported by commodities, such as the Canadian dollar?
Any comments appreciated - thanks.
The airlines don't do it. They set their own prices and see how many seats they sell. Sure, one will try an increase and if the rest don't follow, they may have to cut it back to where it was. They need $ now to pay the bills, just like the miners.
But Freeport McMoRan CEO Richard Adkerson said recently that they are selling all the copper they produce. The only reason they are cutting production is because it's unprofitible to mine at full productoion at these prices.
He seems to accept the idea that it's not up to him to set the price of his goods.I think his company is big enough to put a price on their goods and make the buyers pay it.
Maybe Congress should take a good look at these Futures markets and limit the participants to those who have an interest in production or consumption. I know I got emails from Northwest Airlines last summer asking me to write my congressman about this very issue. It was their opinion that oil prices were being run up by day trading speculators who collectively made a few bucks for themselves while transferring billions or trillions of our $ to the Middle East.
On Dec 04 10:56 AM Byron_G wrote:
> Dow equal to Gold almost happened on January 21, 1980 -- followed
> by a 20% drop in gold within two days, and a 50% drop in gold prices
> within 2 months. So, gold "might" be equal to the Dow at some point
> in the near future, but it would not be a sustained event.
>
> Anybody else seen all "Buy Gold Now!" infomercials on TV and the
> radio lately? I'm not going to start investing in an asset class
> that is currently at it's peak.
You think these hedge funds are telling mainstream media the truth about 'being halfway over with' as far as selling? Of course not, they're probably nearly ALL the way done. They'll start buying again before anyone knows about it, and once average Joe jumps in again they'll be selling again at higher prices.
They started delevereging well before you read about it or heard it on TV, so what makes you think we're only partially way through this?
All I know is it's funny how when oil was climbing you heard about $250 bbl oil, and now we're under $50 and there's now talk, as of today, about $15 bbl oil and .89 gas prices.
The pendelum always swings too far doesn't it.
Inflation WILL result in 2009, just watch you deflationists..
Smart money will be withdrawn from money markets and the like, and put into hard assets including real estate, so owning property will once again become attractive. Just look at the 1976-1980 period. Huge inflation, which led to high rates, which led to a recession in '82, however, most properties during that small window doubled in value. Even with 10-15% mortgage rates.
On Dec 04 07:00 PM danc wrote:
> Please help.
>
> What I fail to understand is how a potential inflation (that many
> say it's inevitable) would affect the housing market.
>
> In theory, if hard assets go up in terms of dollars, it will be easier
> to pay off a mortgage in devalued dollars.
>
> Example: if you owe 300,000 today for a house worth 600,000, you
> may still owe 290,000 for a house worth 800,000 in one year.
> In absolute terms, maybe your house is worth less in terms of gold,
> but who cares - you're paying back dollars.
>
> Would the same logic apply for a stronger currency, supported by
> commodities, such as the Canadian dollar?
>
> Any comments appreciated - thanks.
Smart money will be withdrawn from money markets and the like, and put into hard assets including real estate, so owning property will once again become attractive. Just look at the 1976-1980 period. Huge inflation, which led to high rates, which led to a recession in '82, however, most properties during that small window doubled in value. Even with 10-15% mortgage rates.
On Dec 04 07:00 PM danc wrote:
> Please help.
>
> What I fail to understand is how a potential inflation (that many
> say it's inevitable) would affect the housing market.
>
> In theory, if hard assets go up in terms of dollars, it will be easier
> to pay off a mortgage in devalued dollars.
>
> Example: if you owe 300,000 today for a house worth 600,000, you
> may still owe 290,000 for a house worth 800,000 in one year.
> In absolute terms, maybe your house is worth less in terms of gold,
> but who cares - you're paying back dollars.
>
> Would the same logic apply for a stronger currency, supported by
> commodities, such as the Canadian dollar?
>
> Any comments appreciated - thanks.
1. Do not ever touch hot investment vehicle with your capital:
Your capital will burn brightly sincet it was put on hot vehicle, and you will feel rejoyced and satisfied watching the flame from your capital. Gradually or instantly, your capital will turn to ashes.
2. Always touch cold investment vehicle with your capital:
Your capital will stay cold for a certain time. It could be 5 years or more. And, you will feel disappointed for no hot flames right now. Gradually, your capital will start to burn flames out, and you rejoyce over the warmth from the flames.
Which investment vehicle do you think is colder now? Stocks or gold?
Silverbids.com is providing these charts, for free!
You can even put them on your blog and we'll host them for you.
Just like KitCo charts, but with real prices included for comparison purposes.
On Dec 04 08:00 AM Top Gun wrote:
> The dollar remains last safe place to hold reserve wealth as worldiwde
> assets deflate. Once the deflation stops elsewhere, dollars will
> be switched back to local currencies, just at the time a bigger supply
> of $ hits from our absurd deficit.
>
> I'm not convinced the main outcome is massive increase in gold prices,
> but other commodities should reflate, a good thing if not over done
> as that ensures planting and harvesting of crops. I'm sure some very
> smart people in our Treasury have calculated what might happen. Don't
> forget the last few months have destroyed $100's of millions of money
> supply that was erroneously deployed to pump up asset prices (houses
> and ABS's) just so that investment banks/realtors/mortgag... brokers
> could collect management fees. The bank writedowns mean the $ are
> no longer available, and the TARP $250B must still be raised (by
> debt or equity) in order to repay Uncle Sam. I think of this as a
> stool, where one leg was knocked out and temporarily replaced with
> government funds - the banks must remake the lost leg and replace
> it.
>
> There is a small chance things can work out without disaster happening,
> but now would seem a good time to buy as much of the commodity ETF's
> as you can as a hedge against rising prices in the stores, and gold
> as an investment. It's pretty obvious, as stated above, that defaulting
> on our debt through inflation is the only logical outcome, and we
> need to convince ourselves to contribute to debt reduction by halting
> Social Security COLA(remember those from the 80's?) for a while,
> or reducing like President Reagan wanted.
signed ~ DeBunker
On Dec 08 02:26 PM DeBunker101 wrote:
> Your way out of insight, making a suggestion to "halt COLA payouts"
> for Social Security recipients. Obviously you have no clue to the
> hardships "seniors" go through, and particularly in 2008 with high
> fuel costs, electricity, and related fed,state,local taxes that accompany
> those two expenses alone. No doubt you are among the still working
> class, oblivious to the years of toil the seniors today went through
> that paved the way for YOU to enjoy better income -- incomes they
> never were able to get by today's standards. And all you can do is
> spout off about cutting their 09 COLA out. Another Bushite.
>
> signed ~ DeBunker
Holding 10% of your portfolio in Gold is not a bad idea to hedge against catastrophic monetary collpase but betting the farm on Gold falls into the realm of stupidity. Placing a portion of your $$ into high quality stocks with dividends will yield better results and position you for significant upside when the economy turns the corner. Keeping another portion (50%) in cash is smart as well .
If inflation starts ticking upwards it will be because US Treasury credit worthiness has come into question and rates will be risk adjusted. But credit worthiness is a relative concept and as the richest nation on earth our credit will always be viewed as superior to other borrowers despite our poor condition and the haven of last resort. Literally, the economies of the entire world must implode before Gold will be substantively supported at $4,000 (of course at that point $4,000 US Dollars won't mean anything anyways).
Does ANYONE have a reason why this won't happen? Seems to me like the laws of physics -- absolutely inevitable.
On 2008 Dec 04 05:32 AM AaronDB wrote:
> Interesting prediction. I think there's still too much exuberance
> and bullishness about Gold for it to rally in the short-term, let
> alone be on it's way to 4-5k, but I suppose that could change. I
> would think if Gold went to 4-5k/oz, the Dow would go much lower.
On 2008 Dec 04 05:32 AM AaronDB wrote:
> Interesting prediction. I think there's still too much exuberance
> and bullishness about Gold for it to rally in the short-term, let
> alone be on it's way to 4-5k, but I suppose that could change. I
> would think if Gold went to 4-5k/oz, the Dow would go much lower.