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Last night while surfing the web, I came upon a site with historical quotes for stocks and for gold, dating back to 1896.

Interesting.  I downloaded the quotes for the Dow Jones Index/Industrials and  for gold, and then divided stock prices by gold prices.  I'm sure this chart is available in many places, but I had not seen one dating back to the last century.

Anyone familiar with my writing will know that I believe American financial cycles consist of 18-year expansions/inflations (which I call Day-Cycles) followed ALWAYS by 18-year contractions/deflations (which I call Night-Cycles).  Those who are interested in these ideas can review a manuscript I am working on developing these ideas:

I have marked dates on the chart corresponding to the time-frame I list as the points of change from Day-Cycle (Cultural Expansions) to Night-Cycle (Cultural Contractions).  Note: the Business Cycle reflects the Day/Night Cycles but do not CAUSE the cycles.  The CAUSE is the cyclic nature of Nature's Laws governing periods of amplification and de-amplification of Light.

Day Cycle: 1901-1929
Night Cycle: 1929 - 1947
Day Cycle: 1947 - 1965
Night Cycle: 1965 - 1983
Day Cycle: 1983 - 2001
Night Cycle: 2001 - 2019

These dates correspond pretty exactly to the chart above.

So, what does the above chart suggest?  Well, first, it suggests that we are no where near the bottom of this Night-Cycle.  Judging from comparable declines (draw a line horizontally from 2010 across the chart), we are at comparable levels to 1973 and (believe it or not) 1930.

The Dow Jones/Gold ratio compares stock prices to the price of gold.  This means that the ratio, during declines of the ratio, consists of gold prices climbing faster than stock prices.  It can consist of both stock prices and gold prices climbing together -- that is possible -- with gold rising faster than stocks.  It can also consist of both gold and stocks declining, with stocks declining much faster than the price of gold.  Since gold is generally an anti-dollar indicator, a declining Dow Jones/Gold ratio suggests that the value of the US Dollar is declining.  Currently stocks are rallying, even as (until very recently) the Dollar is declining.  The Dollar decline effectively cancels out the gain in stocks (for those holding Dollar-denominated assets), even before the Gold side of the ratio is taken in to consideration.

Based on past patterns, how much further does this ratio have to fall to reach a bottom?  Based on the range established in this latest advance (see below), the current Dow Jones/Gold ratio still has about 25% decline ahead, in order to reach the 2.4 ratio bottom averaged during the past three historical declines.

Bottom     Top
1901 2.641 14.514 1929
1947 2.973 27.693 1965
1983 1.593 39.611 2001
2010 8.262    

A Dow Jones-only decline of 25% would take the DJIA down to about 8558, SPX down to about 930.  However, it is possible that the stock indexes won't fall that much, but that gold will continue to rise, lifting all boats with it, except the Dollar probably.  Of course, gold continuing to rise implies inflation.  If Ben Bernanke's goal is a repeat of the 1970's stagflation, in order to avoid the 1930's deflation, he must understand that his policies will necessitate a massive ratcheting up of interest rates in the final analysis (such as Paul Volcker's 1981-1983 22% plus inflation-fighting move, which helped cut the annual inflation rate from 13.5% in 1981 to 3.5% in 1983, triggering two recessions in the process).

It is also possible, as I have suggested, for both gold and stocks to fall, in order for us to get to our 2.4 average bottom in the Dow Jones/Gold ratio, with gold prices falling less than stock prices.

What this chart says to me is that anyone who is 'bullish' on stocks, except as a period trader, during the next decade is not paying attention to history.  The best we can really hope for is a break-even decade.  This may mean stock prices appreciate as the Dollar declines -- if you are investing in Dollar-denominated assets, this is a break-even situation.  From 1965 to 1983, the Dow Jones Industrial Average traded in a tight trading range, moving from about 950 in 1965 to 1183 in 1983, with many up and down movements -- it was a stock market going no where.  With the rampant inflation that occurred because of unprincipled Fed leadership during this period, this was, in fact, a full generation (two decades) of lost time in terms of traditional buy-and-hold US investment. 

Chances are good as well that 2001 - 2019 will represent a similar lost generation in terms of US investment -- unless one is quite fast on his trading feet, or unless one is buying gold and other hard assets and commoodities.  The investor who began buying gold in 2001 is certainly smiling; he should continue to smile, and hold his ground until about 2019 (I'd be wary earlier), at which time gold will again become a dud and a shortsale until about 2037.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.