Gold News

Ignore the Fed: Sell Stocks, Buy Gold

Will they? Won't they? Who cares...?

MARKETS seem to have stood still, writes Bill Bonner in his Diary of a Rogue Economist.

Like autumn leaves on a tree, they wait for a stiff wind and a cold frost.

This week, the Fed is scheduled to make a weather forecast.

Bloomberg reports that only two of the Fed's 23 "primary dealers" – banks that buy bonds directly from the government – expect a rate hike decision when the Fed speaks.

Of course, anything is possible.

But the Fed's position is clear: It may raise rates, or it may not.

It hardly matters. Either way, it will not – it cannot – stick with a credit-tightening cycle in the face of the inevitable selloff on Wall Street and the recession on Main Street.

The days of former Fed chief "Tall Paul" Volcker are over.

Back when Volcker took over the Fed in 1979, the economy could still survive a hard freeze. The new debt-based money had not yet done its mischief.

In 1980, Volcker's first full year as Fed chief, US national debt was below $1 trillion (now it is more than $19 trillion). If you wanted to buy a house, you had to pay 12% interest on your mortgage. And the stock market had been drifting down for the previous 14 years and trading at valuations not seen since the 1930s.

And with consumer prices rising at a nearly 14% annual rate, Volcker had to do something.

Unlike his ultimate successor Janet Yellen, he did not announce a wimpy program of rate hikes – one-quarter of a percentage point every three months – and then not do it.

Instead, he boosted short-term interest rates from 11% to a peak of 20% in June of 1981.

A frost? Volcker brought on a blizzard.

And the politicians wanted his head for it.

A group of eminent economists demanded he be removed from office. An effigy of him was burned on the Capitol steps.

But Volcker's program stuck. And it worked. Two years later, consumer price inflation was running at just 3% a year. Volcker could lower interest rates. The economy boomed.

Today, no one is concerned about inflation. US stocks are near an all-time high. And mortgage rates are at all-time lows. The prime rate – the benchmark rate for mortgage lending – is at 3.5%, a long way from its high of 21.5% in 1981.

And neither investors, households, banks, the feds, nor corporate America could survive even a mild monetary winter.

Of course, the weather changes without anyone's say-so. And so, ultimately, do markets.

In 1980, for example, share prices were so cheap that you could buy all the stocks on the Dow with one ounce of gold. Today, stock prices are so high, that you would need 14 ounces of gold to buy all the Dow stocks.

We once proposed a simple trading model…

When the Dow is worth less than 5 ounces of gold, buy stocks and sell gold. When the Dow is worth more than 10 ounces of gold, sell stocks and buy gold.

Gold is real money. It is connected to real wealth. The quantity of gold increases, but only about as fast as the quantity of goods and services that it can buy.

Stocks represent real wealth, too. It makes sense, at least to us, that there should be a more-or-less predictable relationship between real money and the companies that produce real wealth.

Just eyeballing the chart below, we see stocks going up and down. But we see a pattern, too.

Had you stuck with our trading model, rigidly, over the last century, you would have had five opportunities to double your money.

You could have turned 10 ounces of gold – worth about $180 in 1917 money – into 320 ounces, worth over $400,000 in today's Dollars.

Assuming the Dollar lost 95% of its buying power, that represents a real gain of about 1,000%.

What should you do now?

The chart is unambiguous: Sell stocks. Buy gold.

And root around in the closet for your mittens.

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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