Could Gold Really Fall to $500?

The recent market uncertainty isn’t any doubt causing investors some worry. That’s especially true for those within or nearing retirement.  The actual ‘professionals’ keep reassuring us the global economy is slowly recovering which this will underpin future market overall performance.

But this ignores the fact that the actual economy and markets have the twin props of money printing (QE) and zero interest rate policies (ZIRP) supporting this so-called ‘recovery’.

So when or if main banks remove these items what are the consequences?

The unprecedented amounts of central banker intervention are a result of The truly amazing Credit Contraction (GCC). The GCC isn’capital t your ‘run of the mill’ economic downturn. It’s a result of the collapse of a credit bubble the likes of which the globe has never seen before.

And so a genuine recovery can only take place after slowly and painfully removing the massive build-up of debt in the system.

Therefore, it’s dangerous with an investment strategy that thinks the worst is over which you’ll shortly see a return to ‘normal service’.

My guess is actually those who believe in the ‘reveal market always goes up’ mantra may run out of money and patience long before this market delivers with that Secular Bull Market guarantee.

Central Banks Can’t Deny This particular Major Trend  

Recent data through Europe and the US show these economies are, at best, limping along. The inclusion of vast amounts of stimulus money has inflated the anemic growth numbers. Take out the government giveaways and you’lmost all see their real economies are well and truly backwards gear.

That means in this new world of credit contraction, an investment strategy based on how things labored in recent decades is actually destined to make you much poorer. And as this loss of wealth effect slowly embeds within society’s psyche, you can expect to observe more direct intervention through policy makers.

Forget taper, they’ll continue to tamper.

The central lenders are trying (in vain) to alter the actual market’s destiny with financial reality. Based on previous interventions, any success will be fleeting. The fact is markets respond to the stimulus steroid until they don’t. As well as the central bankers, withdrawal isn’capital t an option so the market will probably ‘die’ from a stimulus overdose.

Having a big image strategy and a good deal of patience enables you to view these market movements as part of the longer-term trend. It’s the trend in which the market goes much lower.

Holding cash while marketplaces fall is the first 1 / 2 of the strategy. The other part is actually deciding when to begin purchasing markets again. One of the indications to watch is the Dow/Gold ratio.

History has shown which gold is ‘the ultimate shop of wealth’.

In the good times traders chase markets (paper money) and in the bad times they go back to gold (real money). The Dow/Gold ratio monitors this ‘greed and fear’ connection.

The following chart of the Dow/Gold percentage shows how investors fall interior and exterior love with each asset class:

Note: Prior to 1896 a surrogate index can be used for the DJIA Index.
Source: www.bullmarketthinking.com

It’s interesting to note the amount of volatility before and after the creation of the united states Federal Reserve. After the Panic of 1907, the creation of the US Fed had been supposed to be the great stabiliser – at least according to the Act. The following is an extract from www.investopedia.com :

Definition of ‘1913 Federal Reserve Act’
The 1913 U.S. legislation that created the current Federal Reserve System. The Federal Reserve Act meant to establish a form of economic stability through the introduction of the Central Financial institution, which would be in charge of monetary policy, into the United States. The Federal Reserve Behave is perhaps one of the most influential laws concerning the U.S. financial system.

The graph confirms what we know – that when authorities and bankers meddle, the markets go haywire. Bernanke and co are continuing a long tradition associated with central bankers who believe they are smarter than the collective.

(The fact we don’capital t need central bankers whatsoever is a discussion for another day.)

But let’utes go back to focusing on what history may tell us about the near term destiny of these two asset classes.

Your Best Bet May Be to Take a View From Here

At the peak of the ‘tech boom’ in 2000, the Dow Johnson Index was 11,700 points and the gold price was at a minimal of $280 per ounce. That means the ratio was 42 (11,700/280).  In a two-century period, the 2000 Dow/Gold ratio peak has been the pinnacle of greed and over-optimism.

The Dow Jones index is currently around 14,900 points and gold is $1,365 per oz, giving a ratio associated with 10.9. Previous secular bear markets show the Dow/Gold ratio reaches a low of 1 to two before a market collapse is complete (the depth of fear and pessimism).

How do we get to the ratio of 1 or 2? There are four main equations (and a number of variations on them):

1. The Dow stays around current levels as well as gold rises to $7500/oz or more – these were the dynamics which caused the Dow/Gold ratio in order to bottom out in 1980.
2. Gold stays about currently levels and the Dow jones falls to 2700 points or lower – these were the characteristics that caused the low in the Dow/Gold ratio during The Great Depressive disorders.
3. The Dow falls in worth (say to 7000 points) as well as gold increases to $3500/oz or more.
4. Both gold and the Dow drop to much lower levels – state gold at $500/oz and the Dow jones at 1000 points – this really is the deflationary scenario The Great Credit score Contraction may deliver to us.

The previous lows in the Dow/Gold ratio have come about by differing characteristics. This tends to add credence to the saying, ‘History does not always repeat itself, but it does rhyme.’

If the long-term cycle of a lower Dow/Gold is in our future, it’s unlikely the actual Dow will increase from current levels. Best case may be the Dow remains stagnant. The higher probability is that it falls – perhaps 50% or more.

A fall of this dimensions are also reflective of the pattern of past Secular BearMarkets. There are times to be brave and occasions to be cautious. For me caution is the better option.

In short, my position is to remain on the sidelines in cash and be an interested viewer.

Vern Gowdie+
Editor, Gowdie Family Wealth