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Paying Close Attention to a Blunt Measure of Stocks vs Stuff

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Posted by Adrian Ash: BullionVault

on Thursday, 05 July 2012 08:37

Dividing the Dow Jones index of stocks by the Gold Price 80 years after its low...

PLENTY OF PEOPLE pay close attention to the Dow/Gold Ratio. Eighty years after it sank to its Great Depression low, you might want to take a look this week, too.

This blunt measure of stocks versus stuff gets nearly 5 million results on Google, posting some 650 unique stories on the Dow/Gold Ratio. Search volumes for the term "Dow Gold" don't quite match "Kim Kardashian" say, over the last 5 years (nor even "Reggie Bush"). But spiking in late 2008 and mid-2011, they very nearly matched search volumes for "Treasury bonds" – a market priced at twice the value of all the gold in the world. So why the interest?

The Dow/Gold Ratio maps, over time, how the Dow index of US stocks is performing in terms of gold, rather than just in nominal dollars. Dividing the number of points in the Dow Jones Industrial Average by the Dollars in the gold price per ounce is simple enough. The aim is more complex – to show how investing in corporate America – the "world's most successful economy", as Harvard professor Niall Ferguson reminds us – is doing versus a lump of non-yielding, relatively useless metal that does so little, it doesn't even rust.

Dow-Gold-June2012

Investment in Corporate America was doing very badly 80 years ago today, for instance. As the Great Depression really got motoring, the Dow/Gold Ratio marked Independence Day by dipping to its lowest reading since 1900, just after the Dow Jones Industrial Average was first born.

That Friday, 8 July 1932, the Dow closed at just 41 points, while the gold price held firm at $20.67 per ounce, then its official price as mandated by the United States' Gold Standard Dollar. Priced in gold (which was still money back then), the US stock market dipped below 2.0 – and showed a drop of over 90% from its peak of only three-and-a-half years before, hitting what then proved its lowest level of the 20th century.

Yet US Inc. came to do worse still compared to the gold price in January 1980, however, when the Dow/Gold Ratio fell to just 1.0 – down more than 96% from its new record high of New Year 1966. So today's equity investors might take heart from the last 10 months' turnaround. Because sliding from the Tech Stock Bubble's new all-time peak above 40, the Dow/Gold Ratio has risen after hitting a two-decade low beneath 6.5 in September 2011.

Indeed, the Dow Jones index has outpaced the gold price by 25% since last summer. Just think what the outperformance would have been if, say, Apple had been added to the Average instead of, say, Cisco when the Dow was last updated in 2009.

But that's the problem with taking the Dow as a serious guide to anything much. Or so say its detractors, and they have a point. Or five.

While it's not immutable – as gold is – the Dow Jones index still changes little, despite the changing fortunes of America's biggest stocks. The Dow also includes only 30 out of the thousands of listed stocks traded on US exchanges, and 30 hand-picked stocks at that, chosen by a committee with few hard rules. Nor does the index weight those 30 stocks by their size in the market. Instead, it adds up their share prices, and then divides by a "Dow divisor", an arbitrary number (currently 0.132129493 according to the Wall Street Journal) which itself has to be changed any time there's a stock split or switch in the membership. That means that highly-priced stocks have more impact than lower-priced stock in much bigger companies.

So as a guide to corporate America, the DJIA falls short. But are broader indices – weighted by market capitalization – any better?

Not much to choose between the DJIA and the more inclusive, more rigorous S&P 500 index then. Not when they're used to judge equity investing against buying gold. Indeed, the Dow has performed less badly against gold since its all-time top than the broader index has. One ounce of gold now buys 5.1 times as much Dow index has it did in mid-2000, ignoring transaction costs (first into cash and then into stocks). But it buys 6.4 times as much of the S&P 500.

The Dow/Gold Ratio thus captures in a very broad way how badly money invested in productive, go-getting America has fared versus the ultimate lump of do-nothing, get-nothing-but-avoid-absolute-loss stuff. Gold has clearly been the perfect place to bury your savings as the returns to equity capital have been overwhelmed by the risks. That's also made the Dow/Gold Ratio the perfect long-term indicator for über-bearish equity bears.

"I would expect this out-performance [by gold] to continue for the next few years," said Swiss wealth manager and Asia-based author Marc Faber in 2005, five years after the Dow/Gold Ratio began its descent. In the end, he forecast, "Gold holders will be able to buy one Dow Jones with just one ounce of gold." But by early 2009, Faber had revised his opinion – "One day the price of gold will be higher than the Dow Jones," he told a Barron's roundtable that January. That same 1:1 ratio – seen briefly in early 1980 as the Gold Price peaked and US stocks headed towards what proved table-banging chance to buy cheap – also appeals to fellow stock-market doomsayer Bob Janjuah of Nomura (see Nov. 2011, or March or April 2012).

 

"The US Dollar price of an ounce of gold and the Dow will, I believe, converge at or around 1, at some point over the next 2 years or so. I have extremely high conviction on this. What I am not sure on is whether we converge at 7000, or at 14000."

 

Put another way, the Dow could hold where it is, or halve in value. The gold price will be many times higher either way on Janjuah's analysis. (We can't find him daring to imagine parity might be lower. In that event, with cash itself surging in value and driving the mother of all deflationary depressions, owning gold at a price of say $1000 would likely appeal to very many more people than trusting Dow 1,000.)

Now, you might think appealing to the Dow/Gold Ratio for an equity forecast pretty lame. Especially if you appeal to the ratio's all-time record bottom as if some iron law of history says that the early 1980s' low must be revisited before the bear market in stocks is done. It didn't even get there during the Great Depression!

What's more, mean reversion would suggest gold is already over-priced and stocks are cheap, with both the Dow/Gold and S&P/Gold Ratios now sitting at just 50% of their half-century averages. So less apocalyptic analysts might pick a less dramatic extreme turning point (as this one did in February 2009). Less aggressive investors might also want to avoid trying to nail the very lowest low, making do with the 6-fold rise in gold's equity value already seen since 2000.

Thing is, there would be another 6-fold rise on the table if the Dow/Gold Ratio did fall to 1.0 – and even if, buying early ahead of the ultimate cataclysm in stocks, you missed the bullet of failed corporations (the New York Stock Exchange contracted by 1-in-14 listed equities during 1929-1933, and by 1-in-28 during 1978-1982), then the unlisted brokerages holding your stocks for you would still be sure to struggle as the equity market sank. Buying gold gets you off-risk for anyone else's financial failure, giving you price-risk alone and free from the danger of absolute loss.

That's what drove the Dollar gold price per ounce to parity with the Dow in 1932 and 1980. If the world's relentless banking crisis pushes it there again, having the guts to make the switch from preservation to equity-risk will be a rare thing indeed.

 

Adrian Ash

BullionVault

 

Gold price chart, no delay   |   Buy gold online at live prices

 

Adrian Ash is head of research at BullionVault – the secure, low-cost gold and silver market for private investors online, where you can buy physical gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

 

(c) BullionVault 2012

 

Please Note: This article is 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.



Stocks & Equities

Marc Faber buying stocks in Portugal, Spain, Italy and France on a contrarian play

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Posted by Arabian Money

on Tuesday, 03 July 2012 08:34

DownloadedFile

Faber on the eurozone crisis:

In my view the markets are rallying because they were grossly oversold. When markets are grossly oversold, especially markets of Portugal, Spain, Italy, France, then any news that is not disastrous news propels stocks higher.

‘I think that combined with seasonal strength in July, the rally has carried on somewhat. But it is another cosmetic fix, a quick fix that does not solve the long-term fundamental problem of over investment in the euro zone. And what it does, basically, it forces Germans to continue to finance people in Spain and Portugal and Greece that are living beyond their means.’

‘If I were the Germans, if I were running Germany, I would have abandoned the eurozone last week…It is a costly decision, but losses are there and somewhere, somehow, the losses have to be taken. The first loss is the banks. In the case of Greece, one should have kicked out Greece three years ago. It would have been much cheaper.’

On whether he’s picking up European equities:

‘Yes. In Portugal, Spain, Italy, and France, the markets are either at the lows of March 2009, or lower. Along with bad companies and the banks, there are also reasonably good companies. Stellar companies, but they have been dragged down. I see value in equities, regardless of whether the eurozone stays or is abandoned.

‘[I’m buying] anything that has a high yield, or what I perceive to have a relatively safe dividend. In other words, I do not expect the dividends to be slashed by 90%…I am not buying banks, but maybe they could rally. I am just not buying them because I think there will be a lot of equity dilution and recapitalization. I’m not that keen on banks.’

....read more about what currencies he is recommending go HERE or view the entire video below



Stocks & Equities

Markets: Troubles & Solutions

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Posted by Larry Edelson - Uncommon Wisdom

on Monday, 02 July 2012 07:28

As to Europe’s financial troubles, don’t get caught up in the talk that Europe’s leaders are fixing the massive problem. They are not.

Talk of Eurobonds is conditional upon member countries balancing their budgets, which is not likely to happen. It’s also conditional upon member countries effectively giving up their sovereignty, which is also not likely to happen.

While Europe might be able to buy some time, the European sovereign-debt crisis will not die off until the entire euro region comes crumbling down and the euro breaks up — either via Greece, Spain and/or Italy withdrawing, or perhaps Germany taking the lead and calling it quits on the euro down the road.

Either way, I see more trouble ahead for Europe — a lot more.

And that brings me directly to the markets: They are not in good shape.

Gold is threatening to break critical support at the $1,544 to $1,546 level. It remains under pressure due to fear and panic by investors who want almost nothing but cold, hard cash these days and who don’t want to take much market risk at all.

If gold breaks that $1,544 level, look for gold to plunge much lower.

Ditto for silver, which is on the verge of cratering through the $26 level. If that happens, take it as a leading indicator that both the European Union and the United Sates are plunging deeper into a depression.

I say “depression” and not recession because that’s what it is. Most of Europe is definitely in a depression, with unemployment rates that exceed those seen during the 1930s Great Depression.

Here in the United States, we just don’t know it yet. But all the available evidence that I study tells me that the U.S. economy, when measured in terms of honest money, gold, is already in a depression.

Bottom line: Most asset markets will remain under pressure from ...

First, fear and panic that Western economies are melting down, leading to “risk-off” trades and a flight of capital into cold, hard cash.

Second, fear and panic that Western leadership is also heading down the wrong path, mandating and taxing things that really belong in the private sector, and in which the government should not be involved.

Third, fear and panic that there’s almost nowhere to hide your wealth these days, unless you can find another planet to put your money.

And more. I don’t like it one bit at all. But that’s the reality we face now, and will be facing for years to come.

When will it all end? When will there be a better day?

Not for a while. And not until the U.S. wakes up and smells the coffee and realizes it will not be immune to a sovereign-debt crisis and that our leaders are also embarking down the wrong path, trying to socially engineer a solution through tax-and-spend measures, through class warfare, and more.

There is a light at the end of the tunnel; however, it’s a few years off. In the meantime, I maintain my views ...

1. Keep most of your liquid funds in cash, ready to be deployed on a moment’s notice, but as safe as can be right now. The best way: A short-term Treasury-only fund in the U.S., or equivalent.

2. Hold on to all long-term gold holdings. You do not want to let go of those. Short term, gold is heading lower. Long term, it’s heading to well over $5,000 an ounce.

3. Consider prudent speculative positions to grow your wealth. Like those I have recommended in myReal Wealth Report, which are doing great right now as silver falls, as the euro struggles, and more.

Most importantly, question everything Washington tells you. Only by doing that will you ever come away with an objective view of what’s really going on in our country. Ditto for Europe and its leaders.

Stay tuned and best wishes,

Larry

stock-market

P.S. My Real Wealth Report subscribers are gearing up for our next online Market Update and Strategy Briefing, which takes place tomorrow, Tuesday, July 3. In this special online presentation, we’ll be looking closely at the markets, what’s coming next and the strategies that make sense right here and now. But you have to be a member to be able to view this exclusive briefing — so //www.gliq.com/cgi-bin/click?weiss_uwd+0109201-1+UWD1092+vgbb@shaw.ca+%20%20%20%20%20%20%20%20++3+4422655++E-Acquisition%20Lead">click here to start your risk-free Real Wealth Report trial today!



Stocks & Equities

Jim Rogers: Market Surge from Eurozone Debt Crisis Deal Won't Last

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Posted by DAVID ZEILER, Associate Editor, Money Morning

on Friday, 29 June 2012 12:53

Stock markets around the world soared Friday in reaction to the morning's Eurozone debt crisis deal, but noted investor Jim Rogers wasn't impressed.

"This is no more than just another temporary stopgap to make the market feel good for a few hours, days or even weeks," Rogers, Chairman of Rogers Holdings, told CNBC. "Then everybody's going to wake up and say, "This doesn't solve the problem.'"

Meeting in Brussels, European leaders announced a plan early Friday that would provide struggling banks with money directly from the bloc's bailout fund. 

The leaders also said bailout funds could be used to stabilize European bond markets. But they did not tie such use to additional austerity measures, which have angered citizens in debt-troubled nations like Greece and Spain.

The summit is just the latest in a series of high-level attempts to resolve the 2-year-old Eurozone debt crisis, which has required bailouts of Greece, Portugal, Ireland, and most recently the Spanish banking system. 

Markets around the world surged on the announcement, with some European indexes rising as much as 4%. In the United States, the Dow Jones Industrial Average shot up 200 points at the open. 

Don't get used to it, Rogers said.

(Take a look at some of these 5 to 6% moves taking place in Europe)

 

Picture 4

 

...read much more HERE



Stocks & Equities

If we see some contagion in EMs, the next leg down could be swift and deep!

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Posted by Jack Crooks - Black Swan Capital

on Wednesday, 27 June 2012 08:25

Quote 

“Today, we pay tribute to the pagan god of token environmentalism by spending countless hours recycling paper.” –Bjorn Lomborg, Adjunct Professor at the Copenhagen Business School, writing in July/August 2012 Foreign Affairs, “Environmental Alarmism, Then and Now.” 

Headlines & Of Interest 

10 Reasons Countries Fall Apart (Foreign Policy) 

Egypt: O brother, where art thou? (Asia Times; Pepe Escobar) 

Commentary 

We get a sense global liquidity is draining back to the center from the periphery. We know we are not alone in this view, as many have warned about the European banking system’s deleveraging globally i.e. reducing loan exposure. Add in the tepid global growth environment with all three wagon pullers—US, Europe, Asia—now struggling, and we have the recipe for a systemic event. Though the Eurozone is ground zero for triggering such risk, especially now that Chancellor Merkel (rightly so) ruled out debt sharing, it is quite possible the catalyst could be an emerging market economy first, and Eurozone second. Any EM event will likely trigger even faster global deleveraging from the private sector, including those investors who continue to be sold the fantasy that EMs have decoupled. 

Action 

Technically, we think a longer term top is in place; made back in 2007. If we see some contagion in EMs, the next leg down could be swift and deep! 

Picture 2



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