Zero Hedge tweet

The Plunge Protection Team will undoubtedly be working overtime this weekend.

Only levels that matter AAPL over $500, DJIA over 15,000, gold under 1400
— zerohedge (@zerohedge) August 23, 2013

Food stamp nation with inflation

It's incredibly cruel and in poor taste to see pundits, analysts, and experts hail the Dow Jones Industrial Average cross the 11,000 threshold. And it's disheartening to witness the Bureau of Labor Statistics under-count unemployment and understate inflation at 1% for the Consumer Price Index, when a quick trip to the grocery store and gas station reveals much higher inflation. They're all lies perpetuated by the government, hiding behind flawed, official calculations to calm the growing social unrest. Meanwhile, the underclass and disappearing middle class have seen their purchasing power evaporate.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/10/9_Food_Stamp_Nation_With_Massive_Inflation.html

Are government economists and central bankers even looking to solve our economic problems? Or are they merely interested in covering up their treasonous actions? Debates of recovery vs. double dip recession seem pointless when the reality is that we are in the midst of a Greater Depression, with at least a decade of lower growth and higher inflation staring us in the face.

Dow Jones / gold ratio revisited

I earlier blogged about the Dow Jones Industrial Average-to-gold price ratio in this entry.

The graph above is basically the same graph charting the ratio, only the number of years in the dominant trends are delineated (click on chart to enlarge). The duration of an increasing ratio--indicating rising equities markets and a positive slope in the chart, is between 20 and 32 years in the last century. The periods when the ratio contracts lasts about 14 years. We are currently in the midst of a contracting DJIA/gold ratio, currently around 9.

If history is any indicator, the ratio will drop to below 2--or to unity before the downtrend reverses itself. Since the last inflection point occurred in 1999 when the ratio peaked at an all-time high of 44, we can expect the ratio to bottom out around 2013. Gold's nominal low of approximately $250/ounce occurred in 1999 and 2001, inferring this current downtrend has legs until 2013 - 2015.

So unless the DJIA plummets to 2000, expect higher gold prices over the next several years.

See sidebar for disclaimers.

Disclosure: long gold and silver mining shares.

A Tale of Two Cities (part 2)

Here's the bad news for equities. This graph (click to enlarge) charts the DJIA relative to the price of 1 ounce of gold. At the height of the internet bubble, the DJIA/gold ratio was 44--and clearly unsustainable. At the depths of previous bear markets, the ratio was unity (1:1).

Currently, the ratio is around 10:1, and trending downward in the short- and mid-term. In order for the ratio to reach unity, the Dow Jones index has to either decline by a significant amount, or the price of gold per ounce has to increase by a significant amount--or both have to occur simultaneously. Simply put, the numerator (DJIA) has to match the denominator (gold price per ounce).

The take away message from the disaggregation of both charts is that while financial asset values may increase appreciably in nominal terms, in real terms (i.e. inflation-adjusted or indexed against gold), the returns for equities do not appreciate nearly as much when measured over a long period of time. In other words, the rate of return for equities is impaired due to the devaluation of the USDollar.

No one has a crystal ball, but the short US equities / long gold trade seems like the logical play going forward. Of course, with governments and central bankers wreaking havoc by manipulating markets worldwide, logic doesn't always win out initially. Fundamentals become distorted beyond recognition as bubbles are created and burst, causing investors to lose money, despite making correct market calls. Timing becomes the enemy, not the ally. So tread carefully. Read the disclaimers in the sidebar. Perform your own due diligence.

Disclosure: long biotech and energy sector equities, long gold and silver mining shares.

A Tale of Two Cities (part 1)

First, the good news. The equities market (as measured by the Dow Jones Industrial Average, or DJIA) has done remarkably well for over a century--in nominal terms (click on the chart to enlarge). The overall trend looks positive, foreboding continued long-term appreciation--probably due to monetary growth. In between periods of consolidation are years of bullish stock markets.