When the Dow/Gold Ratio is 1:1

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The Daily Reckoning | Saturday, August 20, 2011 -------------------------------------------------- Another golden record...and another week in the red for stocks, Readers weigh in on Ft. Knox, hanging politicians and an end to imperialism, Plus, all the rest of this week's reckonings, neatly archived for your records... -------------------------------------------------- The Single Most Powerful Secret Behind America's Wealthiest Empires It's the secret behind some of the most successful, iconic S&P 500 firms over the last half century... Now you can use it to boost your retirement nest egg higher than you've ever dreamed. Find out how here in this FREE presentation. When the Dow/Gold Ratio is 1:1 Joel Bowman En route to Buenos Aires, Argentina... Did you see that, Fellow Reckoner? Gold hit another all-time high this week. Many of them, in fact. Yesterday, the price rocketed to within a couple of bucks shy of $1,880 an ounce. Stocks, meanwhile, had a tough time of it. The S&P 500 slipped 4.7% for the week. The Dow lost 450 points. Ouchie! By week's end, the Dow/Gold ratio (which we last wrote about here) contracted to 5.8:1. We guessed it would fall to between 3 and 3.5:1 by this time next year, meaning it will take between thee and three and a half ounces of our favorite metal to purchase one share each of the 30 stocks on the Dow index. Bill reckons the two will eventually meet again, as they have done historically, at 1:1. That could mean gold at $10,000 per ounce or $10 per ounce. His guess is that they'll rendezvous somewhere around 3,000...though that's probably a ways off yet. In the meantime, investors want to know where gold is headed over the short term. Is it due for a snapback? Are we going to get some buying opportunities over the coming months? Or is it headed from here to the moon? Here is our Reckoner-in-Chief on the subject. (This week's feature column originally appeared on Thursday, August 18, 2011.) Please enjoy... Is Gold Still a Buy? Bill Bonner The price of gold jumped above $1,800 today. We can imagine $2,000 by the end of the year. Meanwhile, Wells Fargo, among others, is warning of a 'bubble' in gold. Is there a bubble in the gold market? An AP report explains why people are buying gold: In October 2007, it sold for about $740 an ounce. A little over a year later, it rose above $1,000 for the first time. This past March, it began rocketing up. On Wednesday, it traded above $1,793 an ounce, just shy of last week's record of $1,801. Meanwhile, stocks, despite rising sharply in the last two and a half years, are only slightly higher in price than they were a decade ago. Since hitting a record high in October 2007, the Standard & Poor's 500 index is down 23 percent. Gold hits a sweet spot among the elements: It's rare, but not too rare. It's chemically stable; all the gold ever mined is still around. And 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 a currency for thousands of years, and then it gave value to paper currencies for a couple of hundred more. Now, in a time of turmoil, from the credit downgrade and debate over raising the debt limit in the US to the growing financial crisis in Europe to worries of slow growth across the globe, gold is dazzling investors. But wait....there's more to the AP story: Sharlett Wilkinson Buckner, of Humble, Texas, recently took an old bracelet, ring and necklace to her local jeweler and walked out with $1,070. "I couldn't wait for my husband to come home," she said. "I fanned my money in front of him and said, 'Look what I got for my gold.'" The next day, he sold an old gold necklace for $650. Do you see what we see? The average person is still 'out to lunch.' He has no idea what is happening. Desperate for cash, he sells gold in order to load up on – paper! Of course, it may turn out to be a good move. At least, in the near term. The whole world is drowning in a tub of debt. As debt drains away – we are in a Great Correction, remember, a period of debt- reduction – 'money' goes down the drain too. In an expansion, the banking system turns on the taps. It magnifies purchasing power...by making loans. In a contraction, purchasing power goes down...as loans are repaid or written off. A $100,000 loan that is repaid reduces the 'money' supply by $100,000 (unless it is lent out to someone else). In a fractional reserve banking system, a loan that can't be repaid...reduces the money supply by as much as $1 million. It wipes out the bank's lending capital, forcing it to reduce its loans outstanding. This de-leveraging process should help support the value of the dollar and reduce the demand for gold as a refuge. But so far, gold is still going up. And in the long run...after the feds have intervened...it should soar. Here's our old friend Doug Casey on the subject: I hate encouraging people to buy gold at $1,800 an ounce, because that level is already more than 700% above the bottom in 2001, and I'm a bottom fisher. I like bargains, and I can't call gold a bargain today. But it's plain as day that gold is going to go higher. There's simply no other place for people to try to safeguard their wealth as the dollar, euro, and other currencies plummet toward their intrinsic values. 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 in their treasuries when their management gets frightened? Where else can they go when they need to get rid of dollars, euro, yen, and yuan? Central banks, too – what will they do when they need to dump dollars in favor of something that will hold value? This is why I see a bubble in gold still ahead. It has nothing to do with the supply and demand for gold in the jewelry trade, or whatever – it's going to be a result of there being no viable alternatives when the paper-money con game is over. Gold is the ultimate cash, and that's where people will go when there's a global, total, panic to cash. Gold is fundamentally a bet that the financial authorities are losers...that the world's paper-based monetary system is headed for destruction, and they can't stop it. It is a good bet. Regards, Bill Bonner for The Daily Reckoning America's Last Judgment Judgment, pestilence and bloodshed – are they headed for the USA? An extremely controversial "R-rated" documentary seeks to answer these urgent, historic questions. Don't wait – watch it now. ALSO THIS WEEK in The Daily Reckoning... Heirs to A.W. Jones By Chris Mayer Gaithersburg, Maryland Last week, in The Daily Reckoning column entitled, Hedge Yourself!, I shared a few highlights from the investment philosophy of Alfred Winslow Jones, the "father of hedged funds." Today, I'll share some insights about some very smart guys who manage money in the style of A.W. Jones. The "Other" Precious Metal By Byron King Pittsburgh, Pennsylvania When you hear the term "precious metals," you likely think of gold and silver. That's what the Spanish conquistadors had in mind, of course, when in the 15th and 16th centuries they trekked inland from their beachheads on the sands of the New World. But there are other metals of great value besides gold and silver. Bernanke to Savers: Save This! By Dan Amoss Jacobus, Pennsylvania Last week, Fed Chairman Ben Bernanke shocked the world – or at least that portion of the world that tries to save money and earn interest – by announcing he would suppress short-term interest rates to near- zero until 2013. Armageddon Can Wait By Bill Bonner Poitou, France Until August 15, 1971, wealth was tallied in units of a real and natural thing – gold. It measured out the world's other real things – its resources and its output. Its main advantage was that it couldn't be diddled. That turned the authorities against it; they couldn't make more of it. Legally Collect Money Each Year... From the OTHER government-backed "retirement program"! Finally – you can get on the inside! Here's why you must do so now... Starting Sept. 30 last year, your US government sponsored "safety net" officially started to shrink. So start collecting money every year for retirement. Get full details here. The Weekly Endnote... And now, it's over to a few readers for some thoughts, ideas and rumors... First up, this one from Reckoner Glen B: My favorite story about Nixon and gold is this: (I have embellished the rumors somewhat.) The main reason that Richard Nixon made it so paper dollars could no longer be exchanged for gold in this country, was that there was hardly any gold left in Fort Knox and that would have been earth- shattering for the US economy if the truth were known. What happened to the gold? Good old Lyndon Johnson sent it off to England to be used there to control the price of gold and keep it from rising above 35 dollars an ounce. England was still selling this gold in the late 1990s and early 2000s when gold was languishing around 275 dollars for several years. Now it is gone out of the US and England's control. Can you say that the gold is still in Fort Knox. How long has it been since it was assayed and audited? Not since Lyndon was president. There may be bars that look like gold and weigh like gold there but drill a hole through them and see if the center of the bars is really gold. I bet that gold would double in price if it turned out Ft Knox is really a repository for tungsten and or lead!!!!!!! Respectfully submitted for your enjoyment. And this, from Reckoner Dave J: I like your plan to save the economy by presidential decree. It makes more sense than anything coming out of Washington and would stand a good chance of working. Why is it that those who propose spending cuts focus almost exclusively on programs here at home that actually help people? If we brought all our troops home from all over the world, we would probably find that we had few enemies remaining once they realized we had abandoned our Imperial policies. But the budget-cutters are all professional paranoids. They make Richard Nixon seem like the life of the party. We're still screwed. And finally, one from Reckoner Monte B: Bill Bonner is the best! I particularly liked his thoughts on hanging...much more precise and conservative than mine...but the only way to let the political class know the seriousness of the situation. In the inimitable words of George Washington Hayduke, "When the situation is hopeless...there is nothing to worry about." --- As always, we welcome your thoughts. Email them to the address below and... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Stocks and Gold Point to a Hellish Outcome We keep an eye on stocks and gold. Stocks measure the value of America's businesses. Gold measures the value of America's – and the world's – money. What are these measures telling us? That we're on the road to Hell! Of the two measures, gold is harder to figure out. Armageddon Can Wait Zombies Born of Government Spending China: Where Money Is Treated Best I am sure that Mr. Pento is right because every country on the Face Of The Planet (FOTP) is desperately creating more and more money, and the money will eventually find its way to the place where it is treated best and/or has the best prospects, which is, in this case, Bob. Oops! I meant "China." Buying Gold on the Price Inflation Guarantee Awaiting the "Zero Hour" of Available Credit Gold Sets Record Highs With Every Tick Higher Well, folks... Today it's all about gold... Gold this, gold that, and hey you should know that gold right now is trading at $1,866! Future expectations of slower global growth, which means interest rates won't be rising, thus keeping gold at the top of investor's lists, and... Future expectations for inflation... Hmmm... Gold Rallies to $1,800 Again! BOE Unanimously Leaves Rates Unchanged The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. 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