The Dow Jones Industrial Average, the S&P 500, the Russell 2000 and other major indices have recently featured in headlines claiming that they are now at record highs. While this is certainly true in dollar terms, how much is due to a falling USD, and how much is due to rising company values?
To determine this, you have to step outside the dollar framework and look at prices in gold.
All prices are an expression of preference. If you value 10 gallons of gas for your car more highly than the $35 in your pocket, you will buy the gas for $3.50/gal. On the other hand, if you have other things to do with that $35, or if you are concerned that you may need that cash as "emergency money" in the future, you will pass on filling up the tank and save the money. Perhaps a lower gas price will come along and change your mind, or perhaps you will become more desperate for gas in the future, but for now, you see the $3.50 asking price as too high.
The same applies to gold pricing. Which would you rather have in your portfolio, a few shares of each of the 30 Dow Jones Industrial stocks, or, let's say, 20 ounces of gold? Would you trade your stock portfolio for 5 ounces? Could you find a buyer who would give you 40 ounces for it?
The price at which willing sellers and willing buyers both agree to the trade is the "clearing price" of a good or service. This price evolves all the time, as the needs and desires of buyers and sellers change.
This chart of the Dow Jones Industrials, courtesy of StockCharts.com, shows the concensus of traders in the market each day over the last 15 years:
In August of 1999, they were offering 44.6 ounces of gold for one Dow. Today, about 10.4 ounces. Hardly a new high!
Still, in the last half of 2011, they were only offering about 5.6 ounces… so in the last 18 months, the Dow Industrials have almost doubled their gold value – a very smart investment. And most of that gain has occured in the last 6 months:
It is also worth remembering that the 5.6 ounce low of 2011 was more than 400% higher than the all-time low in Jan of 1980, when traders would only give about 1 ounce of gold for the Dow. From the 1980 low it took six and a half years for the Dow to reach 5.5 ounces in June of 1986, and another six and a half years to go from 5.5 to 10.4 ounces in February of 1993. In the following six and a half years, the Dow more than quadrupled to 44 ounces of gold.
No one knows the future. It is possible that the lows of 2011 will turn out to be the lows for this cycle, and that the overall movement from this point will be higher; perhaps in the next 13 to 20 years, the Dow will once again see 44.6 ounces, and set true new highs above that price. But it is also possible that the 5.5 level, or even the 1 ounce level, will be revisited before the "bottom is in".
If you were clever enough to get into stocks in late 2011 or in 2012, you are sitting on some nice gains. If you buy stocks today, you have momentum on your side, and could well see further gains. But keep in mind that we live in perilous times, and if growth or earnings disappoint, or if the central banks begin to hike rates, those gains could disappear in a flash. Keep position sizes moderate, keep your long term savings in gold, and pay attention to your trailing stops (priced in gold). That way you can let your profits run, and exit with most of your gains intact.
This week most markets continued to make gains, with all assets except silver and coffee advancing. Japanese stocks were especially strong.
Bitcoin rose 33.5% to close at 2.57 g. This more than recovers its drop last week. Expect continued volatility!
Among the government currencies, the JPY was the weakest, gaining 1.3%, while the CAD was strongest, gaining 3.5% to 21.7 mg. The USD was almost as strong, adding 3% to close at 21.8 mg; this is 34.5% above its half-life curve, and continues to present an excellent selling opportunity for those holding USD assets.
Bonds were higher, with short term SHY gaining 3% (tracking the underlying USD), while the long term TLT rose only 1.1% to close at 2.59 g. TLT spent the week hovering near its support level at 2.55 g. We will have to wait a bit longer to see whether TLT bounces off this support and heads higher, towards the 2.8 to 3.0 g region, or falls through support to 2.35 g or lower.
All prices in this discussion (and on the Priced in Gold site in general) are based on the London PM gold fix. On Friday, the fix took place near the lowest price of the day; and gold rallied (AKA the dollar fell) hard thereafter, with the USD closing in New York down 1.5% at 21.48 mg. If this price were used to translate the closes for other assets, they would all be lower by about 1.5%, putting TLT on support at 2.55g (down 0.4%). The only other asset that would move into the loss category was the JPY, which would have shown a 0.2% loss for the week.
Stocks were all higher, led by the Nikkei Index, which gained a stunning 8.1%. The Dow Jones Industrials and HUI Gold Bugs Index were the least strong, gaining 4% each. Although this show of strength in gold stocks is welcome, the chart below puts it in context: the gold stock index is still hovering around 6 g. This period of consolidation could break either way, and even if it heads higher, it will have to get above long term resistance at 6.8 to 7 g to be convincing as a breakout.
Commodities were mixed, led by Copper, which gained 5.4% to close at 73.8 mg/lb. Coffee was the weakest commodity, giving back all of last week's gains, falling 4.8%. Silver also declined, giving up 0.7% to close at 0.510 mg/oz. Platinum rose 2.2% to close the week at 32.49 g/oz, 4.5% above parity with gold.
This week the markets shifted back into forward gear, with all assets except Bitcoin and the 20 year Treasury Bond advancing. Coffee and copper were especially strong.
Bitcoin started the week in an uptrend; trading at over 3 g on Monday, it declined through the week to close at 1.93 g, down 31%. Since early April, the BTC has made a series of lower highs and higher lows; over the next few weeks the market should make up its mind about whether Bitcoin is overvalued or undervalued at these levels. Keep in mind that it could drop by 75% and still be in an exponential uptrend. Expect continued volatility!
Among the government currencies, the JPY was strongest, gaining 2% (less than half of last week's loss), while the USD was weakest, gaining only 0.2% to 21.2 mg; this is 30.1% above its half-life curve, and continues to present an excellent selling opportunity for those holding USD assets.
Bonds were mixed, with short term SHY little changed (up 0.1%, even less than the rise in the underlying USD), while the long term TLT lost 1.6% to close at 2.56 g. This leaves TLT right on its support level at 2.55 g. If TLT bounces off this support and heads higher, we could quickly see prices in the 2.8 to 3.0 g region, but if the support fails to hold, prices will probably head to 2.35 g or lower.
Stocks were all higher, led by the S&P 500, which rose 2.2% to close at 34.18 g. Despite the strong rally in the JPY, the Nikkei Index gained only 0.6%. The HUI Gold Bugs Index advanced on Monday and Tuesday to over 6 g, but declined through the rest of the week to close up 0.4% at 5.87 g.
Commodities were higher, led by Coffee, which regained about half of last week's loss to close at 29.7 mg, up 4.9%. Copper also showed strength, gaining 4.2% for the week. Silver was the weakest of the commodities, adding 1.1% to close at 0.513 mg/oz. Platinum rose 1.4% to close the week at 31.78 g/oz, 2.2% above parity with gold.
This week saw a pullback after the prior week's monster rally. Government-issued currencies, stocks and bonds all gave up about half of last week's gains, while Bitcoin continued its recovery. Commodities were mixed, with silver continuing to fall, crude oil continuing to rise. The week's biggest loser was coffee, which gave back much of its gain from last week.
Bitcoin trading was calmer this week, with lower volumes (a daily average of 380 kg vs 535 kg last week). Prices rose in the first part of the week, peaking at 3.3 g on Wednesday, then declined to close the week at 2.8 g, 5.8% higher than last week's close. Among the government currencies, the JPY was weakest, falling 5.6%, while the Canadian dollar was the "strongest", falling only 4.2%. The USD was down 4.5% to 21.1 mg; this is still 29.5% above its half-life curve, and represents an excellent selling opportunity for those holding USD assets.
Stocks were all lower, lead by the Dow Jones Industrials which fell 3.4% to close at 311 g. The Nikkei Index and the HUI Gold Bugs Index each lost 1.6%. Although the HUI closed lower this week than last week, at 5.84g it is still holding above the low of 5.75 g set on April 17th. It is possible we'll see a rally from here to retest resistance at 6.5 to 6.7 g.
Commodities were lower, with the exception of crude oil, which gained 0.9% to 1.97 g/bbl. Coffee was the week's biggest loser, falling 9.7% to close at 28.3 mg/lb. Silver also continued it's fall, losing 3% to close at 0.508 g after spending Wednesday and Thursday at 0.499 g. Platinum dropped 0.9% to close the week 0.8% above parity with gold.
Another "mostly higher" week, led by a massive rally in all currencies. The only asset classes that fell for the week were silver bullion and gold stocks.
Bitcoin had another volatile week, but in the end recovered strongly from last week's "crash", leading all other asset classes by rising 52.5% to finish at 2,643 mg. It's not over yet, folks: expect more wild price action as newcomers work through the process of price discovery in a thinly traded market. For comparison, the London market trades about 640 tonnes of gold per day. Last week, Mt. Gox trading between bitcoins and USD had a daily average volume of 0.5 tonnes. In fact, the entire world supply of bitcoins currently has a value of about 30 tonnes, less than 5% of the gold traded each day in London.
The HUI gold miners hit a new 12-year low of 5.75 g on Wednesday, but rallied to close the week at 5.94 g, down 2.7%. I would not be surprised to see the 6.5 g level tested as resistance before another move down toward the old low at 4.2 g. As much as I believe that purchases of select mining stocks bought at these levels will do well over the next year or so, I would keep my power dry (in gold) until it is clear that gold stocks are once again in an uptrend. This will probably happen from significantly lower levels, giving more profit potential for lower risk than purchases made today.
The government-issued currencies were all much higher, led by the JPY, which rose 10.9%. The USD gained 9.2% to close at 22.1 mg, after trading as high as 22.5 mg on Tuesday. It is currently 35% above its half-life curve, in record high territory. To me, the USD is looking a lot like Bitcoin did last week. Nothing says it can't continue even higher for a while, but I'd be much more inclined to sell at these levels, and move to cash (gold).
Is this a central/bullion bank market manipulation? Is it due to concerns about Cyprus being forced to sell off its gold reserves? Was it sparked by April 15th tax selling in the US? Is a growth slowdown in China causing a global rush into the "safety" of government issued bonds and currency? Theories and speculations abound, but whatever the reason, I see this as a golden opportunity to trade out of overvalued paper assets and into real money: gold.
Bonds followed the USD higher, with the short term SHY gaining 9.3%, while the immensely popular long term TLT rose 10.1% to close at 2.72 g. TLT blew through resistance at 2.55 g, leaving the path higher clear to about 2.9 g.
Commodities were higher, with the exception of Silver, which fell 5.7% to 0.524 g, giving up all of its gains from last week and then some. Coffee was the week's biggest winner (aside from the ever volatile Bitcoin), gaining 14.4% to close at 31.3 mg/lb. Platinum gained 2.8% to close the week 1.4% above parity with gold.
All asset classes but Bitcoin, coffee, JPY, and mining stocks were higher this week.
Bitcoin ended a wild week down 38.7% at 1693 mg, after trading has high as 5,253 mg and as low as 1,099 mg. Friday had the largest volume ever traded for Bitcoin, over 964 kg. As I forecast last week, this kind of price action is to be expected in such a thin market as new buyers enter in quantity. Over the weekend, BTC has recovered to 2,051 mg. Keep in mind that BTC could fall to 500 mg or so and still be in an exponential uptrend! Expect further volatility.
The HUI gold miners closed on a new 12-year low of 6.1 g, down 6.2%. This failure of the long term support at 6.5-6.8 g is worrying, as there is really no support below but the old low of 4.2 g set in 2000. I would not be surprised to see the old low retested. If you are using trailing stops, follow them closely. Make volatility your friend by selling put options on shares you'd like to own.
The government-issued currencies were mostly higher, led by the EUR which rose 4%. The exception was the JPY, which lost 2.9% to close at 203 µg as details of the government's plan to double the Japanese money supply were absorbed by the market. The USD gained 2.1% to close at 20.3 mg, and rose further in late New York trading to 21.1 mg. This puts it at an all-time high of 28% above its half-life curve. In 2005 and 2008 these levels proved unsustainable, and marked the perfect opportunity to sell dollars (and stocks and bonds) and buy gold, mining stocks and other hard assets with an eye to taking profits in about a year. All the pieces are now in place to make this strategy a winner once again!
Bonds where higher, with the short term SHY gaining 2.1% (in line with the USD, as usual), while the long term TLT rose 1.4% to close at 2.47 g. TLT spent most of the week below its resistance line, but closed above it on Friday, an indecisive showing. I continue to watch for signs of a new bull market in treasuries, but note that we are approaching long term resistance at 2.55 g, which may limit upside potential.
Commodities were mostly higher, with coffee, off 1.5%, the sole exception. Silver gained 3.7% to close at 0.555 g, offsetting most of its loss from last week, while copper rose 1.8% to 67.5 mg/lb. Platinum gained 1% to close the week 1.4% below parity with gold.
All asset classes but oil, silver, and mining stocks were higher this week.
Bitcoin ended the week up 57.6% at 2,724 mg, after setting another record high almost every day for the last 2 weeks. Interest in the online currency has continued to skyrocket as news spread that the "bail-in" plan that seized up to 80% of large bank deposits in Cyprus has been approved for future use in the US and Canada as well as in the rest of Europe. After this tremendous run-up, a pullback is to be expected. Note that BTC could fall over 80% to 500 mg or so and still be in an exponential uptrend! Expect further volatility.
The government-issued currencies were also higher, led by the EUR which rose 2.3%. The weakest was the JPY, which gained 1.2%. Bold moves to inflate the Japanese money supply were announced at the end of the week; it will be interesting to see how the markets deal with this news. In trading over the weekend, the Yen has already fallen from 209.3 µg to 202.5 µg.
Bonds where also higher, with the short term SHY gaining 1.9% (in line with the USD, as usual), while the long term TLT gained 6.3% to close at 2.44 g. Technically, this puts TLT back above its resistance line; if this holds as support, we may be in the early phases of a new rally in bonds. Keep an eye on this for the coming week.
Stocks were all higher except for the HUI gold miners, which hit a new 12-year low of 6.38 g on Wednesday before recovering to close the week at 6.51 g, down 6.4%. While I would be a buyer of quality gold stocks at these levels, keep in mind that the HUI is still 55% higher than its all-time low of 4.2 g set back in November of 2000. Make volatility your friend by selling put options and buying on the dips.
Commodities were mixed with coffee the biggest gainer, rising 4.1%. Cotton and copper were little changed for the week. Silver fell 4.1% and crude oil declined 2.9%, while platinum dropped 1% to close the week 2.4% below parity with gold.
The USD gained 1.9% to close at 19.8 mg. For the last three days of the week it has been more than 20% above its half-life curve. In 2005 and 2008 this level proved unsustainable, and marked the perfect opportunity to sell dollars (and stocks and bonds) and buy gold, mining stocks and other hard assets with an eye to taking profits in about a year. All the pieces are now in place to make this strategy a winner once again!
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Bitcoin ended the week up 51.8% at 1,392 mg, after setting another record high every day this week. The latest round of panic buying seems to have been triggered by the partial bank account confiscation plan announced in Cyprus. The realization that their money is no longer safe in banks has spooked investors across Europe, but especially in Spain, where downloads of Bitcoin software have skyrocketed. Because Bitcoin has such a small market cap, currently about 15,800 kg, and trades less than 200 kg each day, it doesn't take much money moving in (or out) to swing the price, so we should expect continued volatility in the near future.
The government-issued currencies were all lower, led by the Euro, which fell 1.1% to close at 25 mg. The Japanese Yen was down just 0.1%, while the USD dropped 0.8% to 19.3 mg, and is now 16.6% above its half-life curve.
Stocks were mostly lower, led by the Nikkei Index, which fell 1.9% while the S&P 500 dropped 1% to close the week at 30.12 g. The Gold Bugs Index was the only stock index to rise this week, adding 1.4% to close at 6.96 g. Could the bottom be in for gold stocks? We will see what unfolds next week, but I would be a buyer at these levels, especially given the over-bought condition of the USD.
Commodities were all lower. Cotton fell 6.4% to close at 16.9 mg/lb. Copper declined 2%, and Coffee dropped 1.6% to finish at 26.2 mg/lb. Crude oil also lost ground, falling 0.5%. Silver lost 0.2% while Platinum fell 1.6% to close at 30.57 g, now 1.7% below gold parity.
This week FinCEN, the Financial Crimes Enforcement Network, issued "guidance" about how the US "Bank Secrecy Act" applies to "persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies". For a good discussion, take a look at the comments of the Bitcoin Foundation's legal counsel. In short, this is a trial balloon that needs to carefully monitored to see what elements will actually be implemented in law in the future. As a recent Forbes article notes:
“It’s almost a badge of respect when the Treasury starts regulating you,” said James Rickards, author of Currency Wars. “You must be doing something right.”
“Gold is a great way to preserve wealth, but it is hard to move around,” added Rickards. “You do need some kind of alternative and Bitcoin fits the bill. I’m not surprised to see that happening.”
And in related news, Jeff Berwick of The Dollar Vigilante announced the formation of Bitcoin ATM, a plan to provide ATMs for anonymous purchase and sale of bitcoins. Target location for the first machine? Cyprus! Maybe they can get together with Gold to Go to dispense gold ingots as well!
Bitcoin ended the week up 8% at 917 mg, after recording another all-time high of 938 mg on Monday. Things got exciting the next day, as high transaction volumes caused two different versions of the Bitcoin mining software to update the distributed ledger (known as the "block chain") differently. This split, or "fork in the block chain", was deftly handled by the developer group, but it caused a dip in the price which has now been mostly erased. If you are interested in more technical details, you read about them here. This should serve as a reminder that Bitcoin is a young currency, and still vulnerable to failures of technical, social, or political origin. Keep position sizes small enough that you won't be badly hurt if one them turns out to be fatal, but keep in mind that there is still tremendous upside if this experiment in free market money succeeds.
The government-issued currencies were all lower, led by the Japanese Yen, which fell 2.8% to close at 0.203 mg. The Euro was down 1.4%, and the USD dropped 0.9% to 19.5 mg, and is now 17.1% above its half-life curve.
Stocks were slightly lower across the board, led by the Nikkei Index, which fell 0.6% while the S&P 500 and the Gold Bugs Index each lost 0.3%. The Dow Jones Industrials were little changed, down 0.1%.
Commodities were mixed. Cotton rose another 5.6% to close at 18 mg/lb. Crude oil also gained ground, rising 0.8%. This week's big loser was Coffee, which dropped 5.6% to close at 26.6 mg/lb. Silver lost 0.4%. Platinum lost 0.6%, erasing the previous week's gain, to close at 31.06 g, now 0.2% below gold parity.
Many people are rightly concerned that the US Federal debt has been exploding in the last few years. A quick look at the following chart will show why:
This chart doesn't try to show all the debts of the United States, just the publicly acknowledged debt of the federal government. So it doesn't include state and local debt, and it also omits unfunded liabilities (promises to pay in the future for things like medicare and social security). This is the number that grows each year by the size of that year's deficit.
As you can see, it stayed pretty small until the 1940s, when World War II moved spending up to a new level. Even then, it didn't rise dramatically until the 1970s, when the US dropped the last vestiges of the gold standard, and began running the printing presses in earnest to fund social programs at home, and the Cold War abroad.
Despite the collapse of the Soviet Union, social and military spending continued to grow in the 1980s and 1990s, paid for with borrowed money. After the market crash in 2001, new programs to "stimulate" the economy were implemented, shooting debt levels to heights never imagined before. And after the 2008 crash, efforts to "stimulate" were redoubled, piling on debt at an even faster rate.
The last few years of this chart are estimates based on the government's own forecasts of future deficits. If history is any guide, these will probably turn out to be on the low side.
Of course these debts are financed primarily by the Federal Reserve buying the government's bonds with money that it creates out of thin air. This process has many pernicious effects, distorting interest rates, inflating the money supply, distorting perceptions of risk, and causing businesses and consumers to misallocate their resources.
Although we are focused here on the United States, this same process is going on, with various twists, in all the major economies, including Japan, Europe, the UK and China. So these distortions are worldwide in scope, and undermine the value of all of the government issued "fiat" currencies.
I am old enough to remember 25 cent gasoline and shopping in a dime store. Now we paying $4.00 for gas, while our kids shop in the Dollar Store. You can see this decline of value by charting the amount of gold it takes to buy one dollar. Originally worth about 1500 mg (1/20 of an ounce), it has now fallen to about 20 mg – one seventy-fifth of its value in 1900.
Zooming in on the period from 2001 to the present, which also happens to be the period of fastest growth in government debt, we find that the dollar has been declining in a logarithmic fashion, just the way radioactive elements decay. The time it takes for a substance to lose half of it's radioactivity is called its "half-life", and varies depending on the particular material, with some taking thousands of years to lose half their power, and others decaying in tiny fractions of a second.
If you listen to this decay process on a geiger counter, you hear a random clicking, sometimes with bursts of many clicks close together, other times very few clicks, as nuclei disintegrate and give off radiation. But plotted over time, the rate of decay sticks very close to a smooth curve.
The US Dollar also follows just such a curve. Every four years, the purchasing power of the dollar falls in half. From 125 mg in 2001, to about 65 mg in 2005. From 50 mg in 2007 to 25 mg in 2011, and so on. Like random particle decay, it is sometimes above the pure mathematical curve, and sometimes below, but never far away.
If we project this pattern into the future, we see that its value never reaches zero, it simply keeps cutting in half over and over. First to half, then to a quarter, then to an eighth, and so on.
This is the flip-side of the "miracle" of compounding, where your money doubles after some period, over and over again. Compounding is wonderful for the lender, as long as he actually gets repaid in money that has as much buying power as the money he lent in the first place.
But there's the rub – if it takes 7 years to double your investment by compounding, but the money is halving it's value every four years, as an investor you have a problem!
On the other hand, if you are the borrower, everything is turned upside down. Generating enough cash-flow to pay compound returns to your lenders isn't easy. Borrowing even more to keep things afloat and cover your interest payments just digs you in deeper. But being able to pay the loans back with depreciated dollars is a great help to the borrower.
Returning to the subject of the US Federal debt, the government is faced with the task of paying back an exponentially compounding pile of debt, but it can do so with dollars that are rapidly decaying in value. So, which side is winning the "tug of war"?
By simply repricing the debt in gold, we can see the answer:
Clearly, for more than a decade, the dollars in which the debt is denominated have been losing value much faster than the debt itself is growing. The massive and growing deficits and endless bailouts, stimulus programs, and rounds of quantitative easing are causing the "bid" for dollars to be lowered faster than those programs add new debt. In fact, currency debasement is crushing the debt explosion, causing it to halve every 5-6 years.
Whether this is due to careful financial and monetary engineering, or just dumb luck, I can't say. But let's follow down the consequences if this pattern continues.
The current federal debt is about 295 kt of gold. The government claims to have 8.13 kt in its reserves. At current rates, those gold reserves will be sufficient to fully collateralize the debt in 5.2 half-lives, or 25 to 30 years. Even that may not be necessary; a return to the debt levels of 1900 (31 kt) will take only 15 to 20 years.
So the good news is that there is a realistic hope of putting government finances back onto a solid footing in the not too distant future, potentially allowing a transition to a redeemable currency without total default on existing obligations. (Of course paying back debts with a debased currency is a sneaky kind of default, but a legal one that people don't seem to complain too much about, for some reason.)
The bad news is what the world will look like for those who keep their books in dollars: in 20 years, dollar prices will be roughly 32 times what they are today. So an ounce of gold might set you back $51,000, gasoline could cost about $128 per gallon, and mailing a first class letter will probably require a $15 stamp (if the US Postal Service is still in existence). Ivy league college tuition will be a million dollars or more per year. It is very unlikely that wages will keep pace, meaning the standard of living for most people will be dramatically lower than it is today.
Owning gold and silver won't make you rich in this scenario. A year of college will probably still require about kilogram of gold, and a silver quarter should be enough to buy a gallon of gas (even with some stiff carbon taxes). But it will preserve the purchasing power of your savings, and leave you in a position to take advantage of the price distortions created by the latest round of lame government regulations. And that might make you rich!
This article was first published in the March 2013 issue of the Journal of the Gold Standard Institute.