Where Is Gold Going?

The chart above is taken from year-end gold and Dow Jones Industrial Average data dating back to 1916. Since that time we have had three distinct equity market peaks as measured vis-à-vis real money—gold. At the close of business in 1929, the Dow was at 300 and gold was fixed at $20.67 for a Dow/Gold ratio of 14.51 times. At or near the next major equity market peak, the Dow closed at 943.75 at the close of 1968 and gold closed at $41.72 for a ratio of 22.67. At the end of 2000, about three months before the NASDAQ peak at over 5000, the Dow closed at 10,786.85 and gold was selling at 271.75, which equated to a Dow to Gold ratio of 39.74.

At or near bear market bottoms for equities, the value of stocks collapsed vis-à-vis gold toward a 1 to 1 ratio. So for example, at the close of business in 1934 the Dow, which had fallen from 300 at the end of 1929 was now priced at 60. Meantime, gold had been revalued and fixed upward from $20.67 to $35, leaving the Dow/Gold ratio at a mere 1.71 times compared to 14.51 times just 4 years earlier. In other words, gold rose in value by a factor of 8.5 times relative to stocks during those years. Gold Mining shares performed even better vis-à-vis other equities.

The next major bottom for equities in terms of gold took place sometime in January 1980 when gold briefly shot up to $850. Since I keep only year end data for the Dow, I don’t have the exact date and ratio for the Dow/Gold ratio bottom, but when gold briefly hit $850 it was very close to a one to one ratio. What I do know is that on December 31, 1979, the Dow was at 838.74 and gold sold for $526.50 leaving the Dow/Gold ratio at 1.59 times. One year later, at December 31, 1980, the ratio stood at 1.61 times with the Dow at 963.99 and gold at $598.50.

Clearly a glance at the Dow/Gold chart above suggests the ratio is working its way down toward that magical 1:1 ratio were stocks become cheap relative to gold. But we have a long ways to go. At the close of this past week, the Dow was at 11,120.04 and gold sold for $587.80 for a Dow/gold ratio of 19.92. That is still below where it was in 1929 when the Dow was 14.51 times greater than the rice of gold. So it would seem gold has a long ways to rise vis-à-vis the Dow.

How far will gold go? I think it is far more meaningful to measure gold in terms of what it will buy rather than in absolute terms as measured in terms of increasingly worthless fiat money. There is reason to believe gold will continue to rise until it approaches parity with the Dow. Whether the ratio tops out at Dow 10,000 and gold $10,000 or Dow 100,000/gold $100,0000 or Dow 1,000 and gold $1,000 will depend on whether Jimmy Rogers scenario of endless commodity inflation prevails or whether Ian Gordon’s or John Exter’s vision of a deflationary collapse prevails.

In terms of gold, it will matter little which side of this great pide this huge global monetary debacle falls. However, in terms of what we invest in, the question of which way we go will be of paramount importance. Inevitably we will have a deflationary collapse. Once again in the words of Ludwig von Mises,“There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”

Ultimately a collapse will involve a massive deflation and debt repudiation process. In the mean time,how do we play this maddening gold rat race and rising levels of inflation? I believe one strategy should be to continue to profit from the inflation play as long as it exists by taking profits out of gold stocks as well as energy and base metal stocks and apply some of the proceeds of those sales to the purchase of real money, namely gold. And toward that end, what I hope to do for you in the near future is to interview someone who is knowledgeablein the gold bullion trade.

Might the Government Confiscate Gold Again?

The big question in my mind and one that Congressman Paul raised in my interview with him was whether the truth about our impending economic collapse would be known. That is, would fiat money and the excessive money creation that resulted from the detachment of gold from money be understood to be the main cause of the market collapse? Or would politicians find something else to blame? As Congressman Paul pointed out, the establishment (this would include folks like Dennis Gartman for example who says he doesn’t care if the government manipulates the gold price) maintains that the Great Depression resulted in large part because of the gold standard, even though Alan Greenspan in his 1966 paper, “Gold & Economic Freedom,” blamed England going off the gold standard, for the Depression.

When we are faced with a market meltdown—whether because of an inflationary or deflationary collapse—will the government do what it did in the 1930s and make gold illegal again for Americans? In my interview with Congressman Paul, he was clearly worried about the prospects for the establishment blaming anything but themselves and their lack of honesty in managing money for their problems and once again blaming gold and choosing to confiscate it as a result.

On the other hand, Richard Russell thinks it is highly unlikely that gold will be confiscated in the future. I sure hope he is right, but I am skeptical. If gold rises in value to $10,000/oz,those of us who had the foresight to buy it will reap windfall profits. Can you imagine a government that is going broke being willing to allow that wealth transfer to take place without a challenge or at least without taking a good part of it away via taxation? Can you imagine a hungry fox guarding the chicken coop being fair and loving toward the chickens in the coop?

In any event, here is what Richard Russell had to say on this topic in his April 5 “Richard’s Remarks.” “I've received a lot of mail about confiscation of gold. In a sentence, I don't see it happening. First of all, what purpose would it serve? Secondly, it would be almost impossible with gold ETFs,gold stocks, gold held by Americans in other nations, gold physically hidden by many people, gold in bank vaults, and on and on. “Furthermore, it's clear to me that the US government would want its citizens to hold gold. Isn't the government churning out gold coins? Aren't they coming out with a new 100% gold coin this year? If the US sees other nations (China, India) encouraging their people to collect gold, why would the US want to confiscate gold from its people? It doesn't make sense, and I don't think it's going to happen. It's just one of the things I don't worry about. If you want to worry about something, worry about the dollar. To me, that makes a lot more sense.” I wished I could be as confident as Richard is on this matter. All I can say is I hope he is right.

What? Greenspan Wants His Pay in Gold!

I don’t usually waste much time on CNBC these days. I find Bloomberg to be much better in terms of its objective reporting, and neither of these two networks is nearly as good as ROBTv with respect to objective reporting or—and this is especially important—with respect to the resource industry. It may be well worth your while to subscribe to ROBTv for its nominal rate of $6 or so per month to have access to its live broadcasts via the Internet.

But I just happened to tune in to CNBC late Friday afternoon to hear an exchange between Ron Insana and Maria Bartiromo concerning gold and Alan Greenspan. Maria noted that recently when Mr. Greenspan was speaking in front of a hedge fund group, he was asked how he wanted to get paid for his appearance. Did he want dollars or euros or what? According to Maria, he responded by saying he wanted to get paid in GOLD! This man has always known what is going on and he always knew he was taking the U.S. economy on the road to hell, long-term. As recently as 2002, he told Congressman Paul that he had recently read his (Greenspan’s) 1966 essay titled, “Gold & Economic Freedom,” and commented that if he were writing it in 2002, he “would not change a word.”

No doubt until and unless the republic falls, Mr. Greenspan has nothing to worry about, because he has been an ultra good “German” in that he has done exactly what his bosses demanded, even though he knew what he was doing was immoral and would destroy our nation. And now this man wants to get paid in what he knows is honest money, unlike the trillions of fantasy dollars he created in his tenure at the Fed. If future historians record the events of Greenspan’s time at the Fed honestly, they’ll have recognized that his money printing bailout policies were the seeds of America’s destruction.

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