Seeking Alpha
, Retirefund (8 clicks)
Special situations, contrarian, value, microcaps
Profile| Send Message|
( followers)  

The Dow, measured in dollar terms, is at 12,000 at this writing. All things being equal, that doesn't sound like a disaster, but like a market that has chugged along, albeit slowly, through ups and downs, like you might expect. However, if one measures the Dow since 2000 in gold terms, the picture is much, much different. Here is a chart depicting that difference:

To demonstrate the effect of currency dilution, Casey Research developed a tool for re-indexing popular indices from dollars to gold. As they point out, doing so provides a more accurate picture of the dilution of investments made in dollars (and would work just as well in euros or other currencies).

As you can see from their chart, the Dow, priced in gold since 2000, instead of dollars, is now at 2,100.

A Dow at 2,100 in U.S. dollar terms would be an unmitigated disaster. Yet, there is no hue and cry from the investment intelegentsia. The reason is, they are still seeing gold as having a price in U.S. dollars, instead of the reverse.

In August I wrote that "gold does not have a price, it is the price!" That statement has even more meaning going into 2012. The euro is on the brink of change. (That is an understatement, as it may not even survive.) The United States in so much in debt that it will never pay it off.

China is juggling an economy that is slowing, and has a tremendous over supply of real estate after a building boom that has no rival in history. Whole communities of high rise buildings remain empty because no one can afford the rents. Hotels are in extreme oversupply, and will remain so for years. Pumping more liquidity into economies throughout the world is now a fait accompli. Over this past weekend, China announced it bought another large amount of gold.

The current Euro mess is only a part of this ongoing saga. However it is a part that could lose American investors a lot of money. I refer to those investors who only compare the U.S. dollar with the Euro and other fiat currencies. It has become quite apparent to anyone paying attention at all that, in this over indebted environment, that no country, including, and especially the USA and China, want a strong currency. From America and China, to Brazil, Australia, Canada, Mexico, Russia, Japan, Indonesia (just name the country of your choice) you can bet that there are strong efforts afoot in each country to keep their currency from strengthening.

Politicians very seldom make the hard choices. They are like the flow of water, which always takes the easy route to a final destination. That destination is inflation, period. Central banks always err on the side of inflation. They always do. They always will. Western politicians will argue, and bluster, then they will sit back and watch Central banks do their thing. Their thing is inflation.

Investors who ignore gold do so at their own peril. Sovereign countries, who recent history suggests have been net sellers of gold, have now become net buyers of gold. After 6,000 years of digging, all of the gold above ground, if melted down, would only fill two Olympic sized swimming pools. Now picture 7 billion people lining up with their thimbles, to get their share of the precious metal.

As much of the world rushes into the U.S. dollar as a perceived safe haven, it is only a matter of time before that cash comes pouring out into equities, gold, silver, oil, gas, lithium, potash, copper or anything solid. Miners will be winners, and gold and silver miners will lead. Miners are equities. Miners own gold. This is a solid combination in this pre-inflationary environment.

Gold and silver miners have lagged the price of gold for several years now. The obvious picks are some of the majors like Barrick (NYSE:ABX), Goldcorp (NYSE:GG), and Kinross Gold (NYSE:KGC). They are all good choices; however, prices for some of the mid tier companies are at all-time lows. These are companies with producing mines, solid new discoveries, and low overhead costs of $600 to $800 dollars per oz.

Personally I like, and am invested in, San Gold (OTCQX:SGRCF) and Brigus Gold, (BRD), two mid-tiers with solid management, solid operations, producing mines in mining friendly jurisdictions in Canada, and great new finds.

I have heard much talk of a gold bubble since about 2004.The real bubble is in fiat currency, especially the U.S. dollar trade. I believe a new gold standard of sorts has been forced upon the financial world. The price of gold cannot go up or down. The price of fiat currencies now do that in correlation to gold. When the USD, the euro, the yen etc bounce up, then buy some gold. Better still, buy a solid gold miner. Do your own home work, and find miners with these same traits, and it is my belief that you will thank yourself in two years.

Disclosure:

I am long SGRCF.PK, BRD, TLTHF.PK, RDNAF.PK, SU.

Source: What If The Dow Were Measured In Gold?