Stocks have fallen, the gold price has risen. Will they meet in the middle...?
MANY YEARS back we guessed that the Gold Price and the Dow would converge. We also guessed that they would meet around 3,000, writes Bill Bonner, founder of the Daily Reckoning.
It seemed crazy when we first suggested it. Then, the Gold Price was only around $500 an ounce, while the Dow was over 10,000...and still going up. That put the Dow to gold ratio at about 20 to 1...way down from the peak at 43 to 1 set at the end of the '90s.
We said the ratio would go to 1 – to – 1. One ounce of gold would be equal in value to the 30 Dow stocks....just like it was, very briefly, at the end of the '70s. When would it happen? We didn't know. But it would feel "like Armageddon" when it happened.
Well, now it doesn't seem so crazy. In order to get down to a bear market low, the Dow needs to be cut in half...and more. All we need is another two weeks like the last one.
The Gold Price could easily double from here too. In fact, it won't match its 1980 high – properly adjusted for inflation – until it is back near $3,000. And this time, it should go much higher. Whatever problem gold signaled back in the late '70s is worse today. Much more debt. More willingness on the part of the feds to "monetize" debt. More wobbly economies run by wobbly economists.
The real problem is debt. It's been building up for more than half a century – thanks to encouragement from the same officialdom in whose hands the problem now rests.
The feds think...or thought...they could deal with this slowdown the same way they dealt with every other post-war recession – by adding more and easier credit. That is, by increasing the amount of debt in the system.
They tried direct spending – fiscal stimulus. They tried re-flating the banks. They put the key lending rate at zero. And now Bernanke says he'll leave it there for two more years! They even tried money printing – their QE I and QE II programs.
Nothing has worked. Fewer people have jobs today than when the crisis began. Real incomes are going down. House prices are going down. The US has the lowest percentage of people gainfully employed ever recorded. The rich may be getting richer...but the poor are getting poorer, faster than ever. And real, private sector, per capita GDP is still going down.
Bernanke once joked that if he ever got in such a situation he would know what to do: he would drop money from helicopters.
Time to warm up the helicopters!
But the feds are beginning to realize that it is not enough to offer more cash and credit; they have to do something about the debt. At least, we think they're beginning to realize it. Several top economists have appeared in the papers recently arguing in favor of actual debt liquidation as well as more stimulus. Both Nouriel Roubini and Ken Rogoff have written to support debt restructuring (reduction) initiatives. And even dodos such as Thomas L. Friedman have finally realized that debt is a problem.
"All this debt blew up in 2008..." he writes... "and that led to the second problem: Homeowners, firms, banks and governments are all now "de-leveraging" or trying to – meaning that they are saving more, shopping less, paying off debts and trying to dig out from mortgages that are under water."
Typical. He gets confused. You can't dig out when you're underwater. You drown. But at least he's beginning to understand what is going on. And since he is the last man on earth to understand anything...it is likely that even the feds are catching on.
So what? Well, you'll begin to hear more about debt reduction as well as stimulus measures. They'll get the banks to write down mortgages, for example, in exchange for more cash from the government. This is classic political legerdemain. Debt doesn't go away. Ever. It has to be reckoned with. Moving mortgage losses to the government pushes the government further underwater. That will have to be reckoned with too.
But not today, dear reader. Lenders are still buying US debt. As the Dow goes down, gold and bonds go up. The 10-year note is nearing a record high... This allows gives US authorities a lot of rope. They don't have to cut US spending. They can still bailout whoever they please. They can borrow...borrow...borrow...spend, spend, spend...until Daddy takes the T-bird away!
Then, they can use all that rope to hang themselves.
Time to Buy Gold?...