Posts Tagged ‘Stocks’

Has gold reached an intermediate top and entered into a multi-month correction phase?

September 13, 2011 3 comments

After the massive silver take down on May 1, and after several weeks of consolidation, there was much uncertainty as to the direction of silver. On June 21, we featured an article from Richard Guthrie which helped answer the question Silver: Will it be Up or Down? He wrote:

I implore all those still nervous about getting onto this silver rocket to take a long hard look at the following graph.

Based on his analysis, he was certain it was going to be UP. Sure enough, 1 week later, silver started its climb from $33.50 right up to $44, when it was taken down yet again on Aug 23, together with gold. Now, after about 3 weeks of consolidation, there’s this lingering question - Has gold reached an intermediate top and entered into a multi-month correction phase?

True to form, Rich has written another great analysis on why he think it has not, this time by looking at the gold miners price action. This is his story, told with a series of 7 convincing charts.


By Richard Guthrie (Live from ‘The Bridge of the Silver Rocket Ship’)

Much of the technical commentary I’m reading is still short term bearish on the direction in the precious metals and there are concerns we’re started a multi-month correction.

However they have conveniently forgotten to include within their analysis the recent action of the miners.

I have charted below the action of the Price of Gold and circled each occasion in the last 8 years when the Price of Gold has topped out and has entered a multi-month correctional phase.

Now let’s look in further detail at the action of the Hui (Gold Miners) Index during those periods of topping out.

The charts below show the Hui price action (Candlestick) with the Price of Gold overlaid (Black line).

Early 2004:

Late 2004:

May 2006:

March 2008:

December 2009:

So on every multi-month Top in the price of Gold throughout the duration of this Bull Cycle to date the Hui index has always topped out before the price of Gold.

Now let’s look at the present action in Gold and the Hui Miners.

As the graph clearly attests while the Gold price peaked (on a daily close basis) some 3 weeks ago in mid August, the Hui Index has been continuing higher and has risen a circa 5% more since then.

In summary, the action of the miners does not indicate that we have reached an intermediate top in the Gold price. If history is to be our guide we should be back to record highs in Gold in the very near future and this present up leg should have plenty more upside to come.

It’s ironic that the ‘Corrective Bear Callers’ always like to make a mockery of the phrase, ‘This Time It’s Different’. Well if indeed we have just topped out in the Gold Price then this time ‘It would truly have to be different‘ from every other intermediate top in this Bull Cycle to date!

I personally don’t believe it will be different and still have every confidence we’ll be well over $2,000 within the next month or so, And that’s where my money lies,

It seems Bully Boy’s shaking a few more weak longs out of his saddle before the next charge north, And who can blame him, No one likes to run with too much weight on his back!


The Gold Bubble - Rebuttal by Jonathan Kosares

September 13, 2011 1 comment

by Jonathan Kosares | USAGold


Caveat Lector
“Let the Reader Beware”

Members of Wells Fargo’s wealth management team released an article recently entitled, “The Gold Bubble,” where it is claimed, in no uncertain terms, that gold is in a bubble. While I would not normally spend time rebutting an entity that would shock me far more if they actually put out a recommendation to buy gold, the subsequent readership this article has received (it was referenced in the business section of the Denver Post, for example) suggests it might be an entertaining, and perhaps useful exercise, to dissect their claims point by point to see what, if any, validity they carry. I also am of the impression that, as coverage on gold becomes increasingly mainstream, gold owners will also be faced with an increasing sum of articles of this type that seek to challenge their resolve. My hope is that this analysis will provide something of template of skepticism, that not everything you read, no matter how credible the source, is necessarily giving you the complete picture.

In their introduction, Wells Fargo Wealth Management (WFWM) writes,

“As with all bubbles, we know that we run the risk that our view may turn out to be wrong (“early” would be our preferred euphemism) in the short run; however, we believe that we will be proven right in the long run. Some will vehemently call us “crazy” and “naïve” for being unenlightened to gold’s zero gravity investment properties, but that will only help to steel our convictions (we similarly took our licks from critics in the past when we expressed concerns about speculative bubbles in technology stocks and housing).”

I’m immediately suspicious of an argument that seeks to so craftily rebuff and undermine any response before it is even presented. Yet, I find myself willing to risk ridicule, to ‘steel the conviction’ of Wells Fargo, to show that while even the craziest prediction can be proven right given enough time, in this case Wells Fargo isn’t just ‘early’, they’re way too early, and they aren’t ‘crazy’ or ‘naïve’, they’re just plain wrong. In defense of their conclusion, WFWM presents seven arguments. They are as follows:

WFWM - Volatile Price Movements: With very little warning, the bottom can drop out on gold prices very quickly. For example, during six short months in 2008, gold lost more than 30 percent of its value. In the 1980s, in a little more than two years, the price of gold dropped approximately 65 percent. When fear subsides, inflation doesn’t sky-rocket, and everything begins to return to “normal,” demand for gold can fade away quickly. Last week in response to rising volatility in gold prices the Chicago Mercantile Exchange (CME), the world’s largest futures market, raised the margin requirements for trading gold futures contracts by 22 percent. The CME has a history of raising margin requirements on futures contracts when price volatility increases as a way of further protecting investors’ interests.

JK - Gold did lose 30% of its value in six months during the last half of 2008. However, over the exact same six months referred, the DOW lost 47% of its value. Moreover, it only took gold a little over three moths to recover its losses and ultimately surpass its value before the drop. Three years later the Dow has yet to recover its pre-drop levels. The second statement is also true, however it needs to also be noted that gold doubled twice in the year preceding the referenced drop, going from just over $226/oz to $875 at its peak (that’s a 387% increase in one year!). At the writing of this article, even granting this advisory the very top in gold at $1919, gold has increased a manageable 47% in the last year, a mere fraction of what it did in a year’s time in 1980. Put another way, the pace of gold’s performance this August (a 22% gain) would have to increase to 30% monthly, and continue for an entire year to accomplish the same percentage gains seen in 1979. The next claim that gold will fall ‘when fear subsides…’ is nebulous, at best. At a minimum, this supposition should be led with an “if”. Much is assumed by the word “when”. When is “when”? Next year? Five years from now? To say a lot can happen between now and when ‘when’ is a reality would be an understatement.

In continuing, the authors of this article are doing a serious disservice to their readers by suggesting the practice of raising margin requirements carries some ‘profound significance’ to a market, specifically the gold market. Futures are priced in terms of fixed dollar figures, not percentages. So as the price of an asset increases, the margin, or the amount of money it takes to control a futures contract, while remaining constant in dollar terms, is gradually reduced percentage-wise. In essence, by not raising margin requirements as the underlying asset appreciates, the CME indirectly adds leverage to the market (it takes the same amount of money to control increasingly valuable contracts). By raising margins, the CME simply recalibrates the nominal, or dollar, amount required to control a contract to be more appropriately balanced against the value of the contract, thereby removing this added leverage. This process most frequently and logically occurs when a market makes a sharp, one-directional move. Not because of a general environment of ‘increased volatility’ as is suggested here. For some added context, it had been about a year since CME had hiked rates for gold futures at the time of this notice by WFWM. In that time, the price of gold appreciated 47%, so the referenced hike of 22%, and subsequent 27% hike on August 24th, are exactly equivalent to the underlying rise in the gold price, plus a small cushion.

WFWM - No Income: Most investments have some sort of cash flow potential: stocks have dividends, bonds have coupons, and real estate has rent. This flow creates intrinsic value. However, gold, like many other commodities, does not have any simple, inherent cash flow. In fact, when one factors the incumbent costs of ownership (transportation, storage, insurance, protection, assay fees, etc.), gold, in its physical or derivative form, can actually be considered to have a negative yield.

JK - This has long been the argument against gold ownership by the financial community in favor of alternative asset classes. But to be fair, gold ownership shouldn’t be in competition with the asset classes listed here. What gold ought to compete with in an individual’s portfolio are money market accounts, savings accounts, CD’s and other cash instruments. Most of the analysts calling gold a bubble are missing the key role gold serves, which is as an international currency, and savings vehicle, separate from the eroding effect of government policy. Those who understand the true value of gold ownership know ‘income’ isn’t the true goal.

WFWM - Greater Fool Dependence: Because it has no inherent earnings power and little intrinsic value, investors in gold are hoping that other investors will come along to bid up their holdings in the future. While a common tactic of speculators, the “greater fool” approach is rarely a good long-term investment strategy. In fact, it was this strategy that led us to the recent housing market crisis. During that period, lenders, homeowners and real estate investors assumed that home prices would continue to climb into perpetuity.

JK – If this is an attempt to refute supply/demand economics, it takes more than three sentences. Moreover, by this broadly stated and poorly supported metric, nearly every freely traded investment vehicle on the planet is governed by the same dependence on the “greater fool”. Stocks are certainly no different. In fact, it is the premise of one personAllan Greenspan believing something is worth more or less than another that ultimately makes a ‘free’ market. The only market that would not have the presence of a ‘greater fool’ would be the one that never came down, or traded at a constant value, which in truth, is no market at all. Where this argument is truly flawed however is by failing to acknowledge again the evolving role of gold as a currency within the international monetary system. It is the only currency that cannot be printed and debased, and whose value is not subject to the stability (or instability) of a local government. Though gold is indeed of ‘little intrinsic value’ when viewed solely for its uses as a pure commodity, its bull run has nothing to do with the metrics that drive the value of pure commodities like food, grain and energy. As Alan Greenspan stated recently, “Gold, unlike all other commodities, is a currency. And the major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating.” To put it another way, gold ownership is an expression of a belief that those who blindly retain currency in this environment are perhaps the ‘greatest fools’ of all.

WFWM - Central Bank Activity: Lately, there has been a great deal of attention in the news about central bank purchases of gold. However, it is important to note that, in aggregate, the central banks of developed countries have been net sellers of gold in recent years. That trend may change since the political back-drop of future supply and demand dynamics of central banks is quite difficult to predict.

JK – Wait a second…this is a bearish argument for gold? So central banks for the first time in a decade are net buyers of gold, suggesting a broad-based shift in sentiment, and that’s a bearish indicator? And the trend may change because it is difficult to predict the political back-drop of future supply and demand dynamics? Not to be cynical, but would it not be equally difficult to predict the political backdrop of future bail-outs should banks find themselves undercapitalized in the future? That aside, central bank activity is not extraordinarily complex, as this would insinuate. Central banks are responding to the current environment in the same way as individual investors. As a general practice, central banks hold a basket of currencies, so they are buying gold, not necessarily to make a return, but to hedge the inherent risk within their reserves. As long as nation states as a group pursue policies meant to debase their currencies, central banks, and in many cases those same central banks, will continue to be buyers of gold for the same reasons most private investors own it.

WF - Inflation Fighting Properties are Overstated: The chart below challenges the idea that gold is an effective hedge against inflation, as it shows that stocks have experienced a far superior after-inflation-adjusted return over the past 25 years. This longer time-frame view of gold puts into perspective a more realistic time horizon for many investors.

Graph Stocks Beat Gold

JK – I have a chart too, courtesy of Ronald Stoferle and the Erste Group. And mine goes back farther, with a longer time-frame view, 1971 to be exact, and there isn’t even a worthwhile comparison. The problem with the graph above is that it comprises the greatest 20-year bull market in stock history, while also including the most disheartening 20-year bear market in gold. Wells Fargo has chosen an awfully convenient date range to make their argument.

Gold vs. S&P Graph

Warren Buffet’s View on Gold Values: In a recent interview on CNBC, the renowned investor Warren Buffett crystallized the concerns that prudent investors have with gold at current price levels:

Warren Buffet“. . .if you took all of the gold in the world it would roughly make a cube 67 feet on a side and that would be the whole thing. Now for that same cube of gold it would be worth at today’s market prices about $7 trillion. That’s probably about a third of the value of all the stocks in the United States. So you could have a choice of owning a third of all the stocks in the United States or you could have a choice of owning that little block of gold, which can’t do anything but kind of shine there and make you feel like Midas or Croesus or something of the sort.

Now, for $7 trillion, there are roughly a billion of farm-acres of farmland in the United States. They’re valued at about $2 1/2 trillion. It’s about half the continental United States, this farmland. You could have all the farmland in the United States, you could have about seven ExxonMobils, and you could have $1 trillion of walking around money. And if you offered me the choice of looking at some 67-foot cube of gold and looking at it all day, you know, I mean touching it and fondling it occasionally, you know, and then saying, you know, `Do something for me,’ and it says, `I don’t do anything. I just stand here and look pretty.’ And the alternative to that was to have all the farmland of the country, everything, cotton, corn, soybeans, seven ExxonMobils. Just think of that. Add $1 trillion of walking around money. I, you know, maybe call me crazy but I’ll take the farmland and the ExxonMobils.”

JK – This isn’t the first time these comments by Warren Buffett have been utilized in an argument against gold ownership. I think its use in this case is due some context, however. First, this interview wasn’t all that ‘recent’. In fact, it was conducted with Ben Stein on October 19, 2010, when the gold price was $1335.00… not during the very recent run up in the gold prices, as this article suggests. Second, Buffet’s recommendation in lieu of gold?… buy the VTI, or Vanguard total market index ETF. At the time of the above interview, VTI was trading at $62 and change, which is exactly the same price it is trading for today, versus a 35%+ increase the gold price. Last, and most importantly, this is an unrealistic comparison for the everyday investor. Buffett speaks of owning all of the gold in the world, versus what all of that gold could buy. In the vacuum of extremes, perhaps Buffett’s thoughts aren’t incorrect. They make a sort of sense to me. But the reality is that no one could buy all of the farmland in the United States. Nor could one individual own all of the gold. It isn’t a practical comparison. Cases for or against owning an asset need to be made in reality, and the reality is that gold ownership is spread across millions of owners, who all believe it has a value beyond ‘looking pretty’. Because of this universal belief, gold commands a relevance that should not be so cynically dismissed.

You Can’t Eat Gold: For all the talk of gold’s antidotal properties vis-à-vis fiat currencies, beyond its few industrial and jewelry uses, it is hard to see that gold has much intrinsic value. Gold doesn’t readily produce cash flow, doesn’t provide shelter, can’t be eaten, nor does it provide efficient clothing. There is certainly some intrinsic value, but, in our view, not $1,800 per ounce worth of intrinsic value. Further, all sound investments provide some element of societal benefit. However, digging gold up out of the ground, refining it, forming it into bars, and then burying it back in the ground again—specifically in elaborate, highly-protected underground vaults—doesn’t seem to provide substantive economic value to society, other than being a short-term speculative store of value.

JK - I think I’ll reflect on the thought above while snacking on a salad of $100 bills beneath the shade of my stock certificates. Mmmmm, so satisfying. Yes, this argument is that silly. And to the thought of providing an economic benefit to society, I’d say simply this: Nothing is of greater economic detriment to society than government policy that uses debt, currency debasement, and leverage to produce the illusion of perpetual economic growth. So if gold, since it is uniquely detached from the eroding effect of these government policies, protects its owners against their repercussions, it is certainly of substantive economic benefit to the individual. For nothing else so efficiently provides the protection and peace of mind otherwise absent in the majority of today’s investment options.


Jonathan Kosares graduated cum laude from the University of Notre Dame, earning a double major in Finance and Computer Applications. He has been an account executive for the firm since 2002.

This newsletter is distributed with the understanding that it has been prepared for informational purposes only and the Publisher or Author is not engaged in rendering legal, accounting, financial or other professional services. The information in this newsletter is not intended to create, and receipt of it does not constitute a lawyer-client relationship, accountant-client relationship, or any other type of relation-ship. If legal or financial advice or other expert assistance is required, the services of a competent professional person should be sought. The Author disclaims all warranties and any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.

Biggest gold price rout of the year

August 26, 2011 1 comment

GoldMoney News Desk

Stock markets rose yesterday and the gold price plunged as investors regained some optimism about the state of the global economy. The German DAX settled 0.84% higher yesterday, with Britain’s FTSE 100 also tacking on a 0.55% gain. In America, the Dow Jones Industrial Average posted a 1.29% increase to settle at 11320.71, while the Russell 2000 index of small-cap stocks recorded a 1.39% gain. Japan’s Nikkei has settled 2% higher today, while Hong Kong’s Hang Seng Index closed up 1.1%.

Price action in the commodity sector was mixed. Copper, Brent crude and Nymex gasoline futures all settled higher – indicative of “risk on” trades being implemented – though precious metals such as silver, platinum and palladium all sold-off. Silver fell by more than $3 an ounce, while the front-month platinum and palladium contracts were down $53 and $21 respectively.

All of this was small fry, however, in comparison with the losses in gold. The August Comex gold contract lost a whopping 5.6% ($104.20) to settle at $1,754.10 per troy ounce. In dollar-terms, this decline is second only to the $143.50 plunge that occurred after the gold price reached an inflation-adjusted peak in January 1980. However, in percentage terms there have been even sharper declines than yesterday’s 5.6% loss in recent years.

Given the incredible gains in the gold price witnessed in recent weeks, such a down move is unsurprising, and is indeed a healthy part of a sustainable bull market. Such moves force speculators and other weak hands out of the market – with more and more committed gold holders using the price dip as an opportunity to buy more physical metal.

Stronger-than-expected US durable goods data for the month of June was partly responsible for the bullish mood on Wall Street and the rout in the gold market. Economists had only expected a 2% increase, when in actual fact the data showed a 4% rise. As Robert Wenzel points out at his blog, the surge in the US money supply in recent months is starting to result in improved economic statistics, as well as rising prices at both the producer and consumer levels.

Margin hikes at the New York Comex and the Shanghai Gold Exchange have also contributed to the downward move in gold prices. The Comex has raised the amount of money needed to trade gold contracts by 27% to $9,450 per 100-ounce contract, following on from the Shanghai Gold Exchange’s decision to raise margin requirements by 26% on Monday. Higher margins mean futures traders must stump up more cash in order to buy and hold gold futures – which tends to encourage selling. Clearing houses will tend to raise margins in response to big price rises, as a means of reducing volatility.

In addition to the above pressures, this week is options expiration week at the Comex. The largest banks operating on this exchange write a lot of the call options on gold futures; thus, they have an incentive to aggressively short gold in the days leading up to and on the day of the expiration of certain calls, so that they expire worthless – meaning that the banks make the maximum profit from selling these options.

None of this should detract from the long-term fundamentals that are underpinning steady rises in precious metal prices. As the old saying goes, bull markets take the stairs up and the elevator down. Or, as the American investor James Dines notes: “the very function of declines in a major bull market is to keep investors out – until the top. The very function of rallies in a major bear market is to keep investors in – until the bottom.”

Categories: News Tags: , , ,

Why $20,000 Gold doesn’t excite me

August 24, 2011 3 comments


It scares me!

Gold punched through $1,900 today. If the current financial system can withstand the stress and remained intact till the day gold trades at $20,000 an ounce, what will life be like then?

If we’re holding gold at that time, we may be doing fine but we are not likely to be 10 times richer. That’s because nothing much has happened to our gold. Rather, paper currencies would have lost so much purchasing power that it would take 10 times more of the same to buy what we could buy today. A Big Mac will most likely cost around $43 in the US. In Malaysia, NZ and Britain, it’ll like be  around RM76NZ$54 and £25 respectively (estimates based on Big Mac Index). When a basic meal costs that much, life can be very tough for savers who continued holding on to their paper currencies or other paper assets.

Many of my friends and relatives, from retired professionals to missionaries have been ill advised to rely on supposedly safe or high yielding investments like mutual funds, government managed pension schemes, term deposits or hot stocks to generate passive income or preserve the value of their retirement funds. Despite being presented with information from this website and elsewhere, there’s little affinity shown towards gold or silver. This scares me and for their sake, I hope gold does not get anywhere close to $20,000 before they get on board.

What’s even scarier is the fact that an enormously huge segment of society do not have the means to get on board, even if they wanted to. We’re looking at the 1.4 billion people living on less than NZ$2.25 a day. That’s less than 0.05 ounces of silver! They worry not about the Fed nor the Cartel but about how to provide food, clothing, housing and healthcare with that amount each day. It’s about survival, not savings. Pause for a moment to imagine their plight when gold hits $20,000.  Spare them a thought today, and check out their appeal for assistance.

Why $20,000 gold?

In this recently released documentary, Mike Maloney presents the case for $20,000 gold by stepping back and looking at the big picture. He takes us back, very far back, and paints us a very big picture. This excellent educational video is a must watch, especially if you’re new to the Political Metals space. It’ll be your 90 minutes well spent.

But if you can’t spare the time, I’ve highlighted some of his key points with some new charts below for a quick read.


Dow/Gold Ratio Chart: Where are we in the Wealth Cycle? 

Using the Dow Jones Industrial Average (Dow) as a measure of performance of the equities market in general, the ratio of the Dow to the price of gold indicates the performance of equities market relative to gold. Currently each point of the Dow is worth about 6oz of gold. During the process of correction after the biggest stock market bubble in history, the ratio is expected to head towards the historical mean (4oz) and overshoot it before finding its fair value again.

The bigger the bubble (deviation from mean), the larger the overshoot. During the present cycle, Mike expects the overshoot to touch 0.5:1 (1 oz of gold worth 2 points of Dow). In its extreme, the Dow would have to collapse from 11,000 to 950 if the price of gold remains at current level of $1,900. Conversely, gold will increase to $22,000 if the Dow remains at current levels.

Relative performance of Dow Vs Gold & Silver since Jan 2000
(Worst reference point, at peak of stock market bubble)

Relative performance of Dow Vs Gold & Silver since March 2009
(Best reference point, at the start of QE1)


Currency Supply Chart: Where are we in the Inflation/Deflation Cycle?

For simplicity, “money” & “currency” are used interchangeably here. Watch the video to see the difference.

Monetary inflation is the increase in money supply resulting in price inflation (rising prices of goods & services), with a time lag between the former and the latter. The reverse applies to monetary deflation and price deflation. Studying the trend in money supply or the total amount of currency in circulation (CinC) over a period of time gives us an idea of where we are and where we’re heading in terms of inflation and deflation.

Money is created in two stages. The initial Base Money is created by the Fed (or other central banks). More new money is then created (up to 9 times the initial Base Money) within the private banking system through credit. It is loaned into existence. Watch the video to learn more about the money creation process.

The chart above  represents the amount of CinC that’s exclusively created by the private banking system. The highlighted area indicates that this component of the overall money supply has dropped by $1.7T since the 2008 crisis. This is the Debt Collapse or Credit Contraction. Less lending by banks results in less money chasing goods and services, leading to price & asset deflation. It is evident from the chart that a contraction of this magnitude has never happened since 1960. The last time it happened was just before the Great Depression of the 1930s.

M1: Increase in Base MoneyIn response to this credit contraction, and in an attempt to prevent another Great Depression, the Fed has been rapidly increasing the Base Money supply by creating new money. The recent rate of increase is unprecedented. The first trillion dollars was created over a period of about 90 years. The next $1.4T came into existence over the last 2 years!

This rapid increase in Base Money (red chart) was an attempt to offset the decrease in the credit money (blue chart). When we add these two components of money supply together, we obtain the total CinC (Base Money plus Credit Money) as shown in the chart below.

Notice the contraction at the top of the chart, albeit a smaller one. It is evident that despite the frantic pace of money printing by the Fed, it has not succeeded in offsetting the reduction in money supply due to credit contraction.

The Fed has little choice but to continue creating money.  With such a large perturbation in total currency supply and due to the complexity and size of the monetary system, it is not possible for the Fed or anyone else to create just sufficient money at just the right rate such that the total CinC won’t overshoot its long term trend. The principle that the larger the deviation from the mean, the larger will be the overshoot during the correction applies here as in the stock market above. The fact that there’s an undetermined time lag, between monetary inflation and price inflation further adds to the likelihood that the next round of money printing will result in a massive overshoot. Coupled with other factors, hyperinflation could be just round the corner.

Deflation or Inflation?

In his book, Rich Dad’s Advisors: Guide to Investing In Gold and Silver: Protect Your Financial Future, and again in his presentation, Mike predicted the following sequence of events:-

  1. Threat of deflation - At the onset of the 2008 crisis (Past)
  2. Money printing - TARP, QE1, QE2 (Past & more to come)
  3. Big inflation - Here and now (anyone disagree?)
  4. Real deflation - Asset deflation in real estate & stock market (The severe but short deflation  is ahead)
  5. Hyperinflation - Just round the corner?

How does gold perform under inflation and deflation environment? Check out the study by Oxford Economics: “Impact of inflation and deflation on the case for gold”.

Related Resources:


Aftermath of the S&P Downgrade

August 9, 2011 1 comment


The Morning After in Pictures


Gold Gap Up (a break between prices on a chart that occurs when the price makes a sharp move up with no trading occurring in between) on first trading day after S&P downgraded the US credit rating. This is a very rare event. It closed at another all time high of $1719.80, up 3.3%. Another very rare event (any close above 2% is very very rare).Similar price action is seen in all major currencies - a classic picture of the flight to safety - from fiat currencies to hard currency.


Dow plunged 634 points (5.55%) to close at 10,809.85. That’s a loss of 15% from its July high. It was the worst day for the market since the financial crisis in the fall of 2008. So, where did the money go?Ironically, it went into US Treasury bills! Investor fears were so extreme and the sums of transferred money so vast that the yields on the short-term Treasuries were negative, meaning investors were paying the US government to hold their money. A tiny portion would have gone into gold.


Gold/Dow Ratio. Combining the 2 charts above, we have a Gold/Dow ratio displaying a spectacular gap up closing at an all time high of 0.1591. It now takes that number of units of Dow to purchase one ounce of gold, which appreciated by over 35% against the Dow over 5 weeks. Put another way, and stepping back to August 2008, the Dow/Gold Ratio chart below shows how much you’d have “lost” if you’d parked your savings in stocks instead of gold. It now takes only 6.29oz of gold to purchase one unit of Dow, compared to 13.3oz 3 years ago, a drop of 53%.

Dow/Gold Ratio

The Dow has lost 58% against Gold over three years


Dow/Silver Ratio

The Dow has lost 74% against Gold over three years

Silver has not been running as fast as gold recently. This flight to safety money usually starts to chase gold, with silver catching up later. Gold/Silver Ratio currently stands at around 44, and that offers a great opportunity to stack up on silver.

Gold/Silver Ratio

Gold/Silver Ratio is expected to head South



Get every new post delivered to your Inbox.

Join 210 other followers