For the 1929-32 Bear, Wk 106 (Barron's 14 Sept 31 Issue) saw the stock market well past the point of financial horror. But as we see above, the July 1932 bottom, in time and BEV Points, were still a long way off.

Our Bear is just sitting back enjoying himself as the US Treasury issued another $100 billion in T-Bonds this week. If the Bear worked for me I'd give him a kick in the butt to get him moving. But he's self employed. The longer the Congress keeps spending money the United States will never have, the harder the Bear will make it on everyone.

In past reports I've posted two different charts to provide an indication of market volatility. The first was a comparison of the 1929-32 & the 2007-09 DJIA Volatility's 40 & 200 M/As. From last October to March, it was a dramatic graphic. But by the end of May, this chart lost my interest.

Now in October, this chart has even less going for it, other than its historical interest.

But volatility is important; I had to find something to chart to give us a weekly indication of the DJIA's daily volatility. So I came up with the DJIA's 8-Count, or the number of DJIA 2% days in a running 8 Day Count. The 8-Count is an excellent indicator of increases in market volatility; and as volatility is an excellent indicator for late-term Bull Market action, the daily 8-Count is well worth watching every week.

Unfortunately as we can see above, there are periods lasting years without a single DJIA 2% day occurring. From 2003 to 2007 (4 years), the DJIA had only three, 2% days. The DJIA benefited greatly from the lack of volatility, reaching a new all-time high of 14,164 in October of 2007. But notice in the chart above, when the 8-Count started to rise in July 2007, marked the start of the DJIA's terminal phase of its 5-Year Bull Run.

But the market currently appears to be in one of those periods where DJIA 2% days are rare occurrences. We might go for several months, or even years before we see the 8-Count rise up to a 3 or more. So after some thought, I've decided to use the DJIA Volatility's 5-Day Moving Average, with a BEV Plot for my weekly volatility chart. Even with today's low volatility, this chart has movement. I like that.

Keeping an eye on the market's volatility is important. Since 1900, increases in the DJIA's volatility have been a precursor of trouble coming for a Bull Market. I'm expecting this to hold true for this major Bullish Correction in our current Bear Market. My expectations are that as long as the DJIA Volatility's 5-Day M/A stays below 1%, you Stock Market Bulls out there are going to do fine. But as I've said before, I'm out of the general stock market because things could get nasty real fast. If things do get nasty real fast, Gold and Silver is where I want to be.

This market is moving in Baby Steps. Look at the small daily moves in the chart below.

The DJIA really hasn't seen a correction since day 425, but the Step Sum looks ready to head down again. As long as market volatility and interest rates stay calm, the DJIA could use a good correction if it's to continue moving upwards into 2010.

In my weekly focus area below, there are 3 tables near the bottom of this report listing how the DJIA, Gold and Silver have performed from their lows of the past 12 months in 35 different currencies. Gold and Silver saw their lows last October. The DJIA's saw its lows 5 months later in early March. After examining my report, you may wonder why anyone is still fooling around in the general stock market.

The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum rises. When bearish, it falls.

Think of the "Step Sum" as the sum total of all the up and down price "steps" in a data series over time; an Advance - Decline Line for a data series derived from the data series itself. Logically, bull markets will have more net up days, while bear markets will have more net down days. Understanding the Step Sum is no harder than that.

Frequently we are reminded how well the DJIA is doing with a "weak dollar." But for American Investors, the rising DJIA's valuation is only meaningful if increasing its valuation somehow also increases an investor's purchasing power, after taxes and commissions are paid. Over time, that's not always the case in the stock market!

Above we see the DJIA as published, and in Constant 1990 dollar, as well as CinC, which I used to deflate the published DJIA. The difference between the DJIA (Blue Plot) and the DJIA in Constant 1990 Dollars (Red Plot) is that for each week of data, I've divided the DJIA (Blue Plot) by the CinC Indexed value (Orange Plot).

So, if the DJIA rises as fast as does CinC, or if CinC rises faster than the DJIA, the Constant Dollar DJIA will flat line, or actually decline. We see how this happened in the DJIA's Constant Dollar Red Plot from 1990-95, as the published value of the DJIA actually went up.

For every $1 circulating 20 years ago, the Fed has inflated the money supply so that we now have $3.51 in coins and dollar bills in Circulation. From 1990 to 2007 we see how this inflation has in the main flowed into financial assets.

Using a constant dollar correction to observe the effects of monetary inflation is not perfect. Over the short term (2 or 3 years), it may depict the effects of Monetary Inflation very poorly. And it's a fact, anyone who purchased stocks early last March has seen a huge after-inflation increase in purchasing power from their investments. But over the long-term, investors generally do not benefit from inflationary gains in the stock market. Inflation is a liar and a thief. I suspect most people who have been in the Stock Market since 1990, are not better off in 2009 for all their efforts of the past 20 years. The Constant Dollar DJIA Plot shows this.

This is the inflationary situation for American investors, investors who use US dollars in their daily lives. For foreign investors, the breaking of the Bretton Woods US$ link to gold in August 1971, has resulted in an international monetary system of floating currency rates. Floating exchange rates have significant effect on cross-border investments, as we see in the chart below.

Note on all charts and tables used in Wk106. I'm making the assertion that inflation rates of various international currencies can be observed by examining the exchange rates seen in the Foreign Exchange Markets. Over the short term, days, weeks and months, this may not be true. However, over the longer term this is true. Price discovery, as Warren Buffet said; and I'm paraphrasing: over the short term, the market discovers prices like a slot machine. But over the long term, the market discovers prices like a cash register.

Pre August 1971, all currencies were fixed to the dollar, and exchange rates (number of Yen, Pounds, or Francs per 1 US dollar) did not change (float) with the passage of time. Occasionally, there were currencies that failed to hold on to their dollar fix. But the major objective of the 1945 Bretton Woods Monetary Accords was to fix exchange rates between countries to facilitate international trade. Until 1971, maintaining fixed exchange rates between global currencies was one of the achievements of Bretton Woods. It's an interesting historical note that tables recording the changes in currency rates were not published in Barron's until September of 1975. Before 1975, there was no need to.

The effects of the breaking the dollar's gold link on the DJIA can be seen above. From Barron's 01 Sep 1975 issue to its 15 Oct 2007 issue, the inflation generated by the Federal Reserve caused the DJIA to bloat by a factor of 16.87. The valuation differences in the DJIA, between the other four currencies, are the result of currency fluctuations in the foreign exchange markets. These fluctuations are caused by currency traders taking positions based upon the above nation's inflationary monetary policies.

The Japanese and Swiss investors saw less in capital gains from the American DJIA, than did the British and Canadian investors as a result of their nation's central banks' "Monetary Policies." Sorry to say that I don't have CinC data on currencies other than from the Federal Reserve, but I know I'm correct in saying this.

Let's take a look at the DJIA in US$ and an average of the four foreign currencies above. The chart below uses the same data as the chart above, except I took an average of the four foreign currencies so I could display them in a single plot.

Since 2000, the US's "Monetary Policy" has been very loose in an attempt to re-inflate financial asset values. In US Dollar terms, they have had some success. But the post-2000-weak dollar has not produced much in the way of capital gains in the four currencies above. When one considers the low dividend yields offered by US stocks, with dividends paid in a currency with a higher inflation rate than their own, there is little inducement for many international investors to buy US stocks, or bonds.

I've charted the DJIA in US$ and Euros below.

From 2000 to 2001, it's remarkable seeing the DJIA actually go up in Euro terms, even as the DJIA went down in US dollars - remarkable, but not surprising. Since August 1971 when the US "Policy Makers" decided to let the US dollar float against gold, currency exchange rates say a lot about who makes, and who loses money when investment capital reaches across national borders.

We can see the Euro gained strength, relative to the US dollar, by noting how the DJIA underperformed in Euro Terms after 2003. For Euro investors, there has not been much of a bounce from March to October 2009.

One more chart showing the DJIA priced in Australian Dollars. For Australians, the DJIA bounce from March can only be seen on CNBC.

A Global Monetary System based on inflation is a really bad idea. This is true even for the winners in the cross-boarder inflationary-capital-gains competition. Yes it's better to be a winner than a loser in this game. But even the winners will ultimately lose, as their government's inflationary policies will, with time, make their winnings worth nothing.

Paper money has been around for a long time.

"Paper money eventually returns to its intrinsic value zero." - Voltaire (1694-1778)

The paper money Voltaire refers to above resulted in the French Revolution, and it can be argued that the Weimar, Germany's paper money inflation of the 1920s made possible Hitler's National Socialism in the 1930s.

For a better feel for how the DJIA is doing internationally, I've constructed a table, using weekly closing numbers, showing the DJIA's performance in 35 currencies. The gains are based on the DJIA's lows of last March, to the latest issue of Barron's available to the author at the time of writing: Barron's 19 Oct issue. Some currencies were omitted as I lack data on them.

On an international basis, the US Stock Market has actually been a currency play. Currencies weaker than the dollar have benefited from investing in US Financial Assets. But, as of Barron's Oct 19th issue, only Pakistan & Lebanon are inflating their currencies faster than the US, but not by much. We can also see those currencies that are fixed to the US dollar: rankings 4-11. Currencies stronger than the dollar have underperformed in capital gains from the DJIA's lows of last March.

Note how the IMF's SDR (#16) is not exactly the model of a strong currency. If the "Policy Makers" are planning to make the SDR their replacement for the US dollar as the global reserve currency, it will be managed by the same economists from the same university system that did the US dollar in. The SDR will be as inflationary as the US dollar was. That plus the IMF will completely ignore any domestic US political pressure. The IMF will treat the US Congress exactly as the US Congress treats its tax payers; with contempt.

In Wk100, I created an Advance - Decline Line based upon weekly price changes of Gold and Silver in different currencies. That was six weeks ago. It's time to look at them again. The next two charts display only Gold and Silver's Step Sums and A-D Lines. Don't confuse the plots below for the metal's prices.

Not much has changed in the chart above in the past six weeks, except that Gold's A-D Line is rising again. The same is true for Silver's A-D Line.

The Step Sum in both charts is actually the US dollar's contribution in the 5-Currency Advance - Decline Line. As with any Step Sum, it can only move up or down by a single step from one period to the next. While the 5 Currency A-D Line can move up or down by +5 to -5, as well as any value in between, from one period to the next. That's why the A-D Lines in these charts move much more than the Step Sums.

Since 2003, Silver's A-D Line has soared, even if the price of Silver has not done as well as its A-D Line suggests it should have. On a weekly basis, Silver, on average has closed up for the week 60.74% of the time in these 5 currencies since September of 2003. But looking at Silver's Step Sum, which is only Silver's US dollar's contribution to Silver's 5 Currency A-D Line, it appears that Silver has closed up for the week less frequently in US dollar terms. So I checked it out. Since Sept 2003, Silver, priced in US dollars, has closed up for the week 62.30% of the time.

I believe the price of Silver is kept down by the "Policy Makers." For the Federal Reserve, US Treasury, and government everywhere, there is nothing worse than seeing Gold and Silver rise up in terms of their currencies. Silver's 5-Currency A-D Line strongly suggests that tremendous upward pressure is building underneath Silver.

The chart above shows how many ounces of Silver one ounce of Gold could purchase during the past 40 years. Gold, in January 1980, could purchase only 16 ounces of Silver at the top of the last Gold Bull Market. Eleven years later, during a precious metal Bear Market, an ounce of Gold could purchase over 100 ounces of Silver. In February of 1991, Silver could be bought for $3.50 an ounce; it was very cheap in both Gold and dollar terms. But in 1991, a bull market was starting to gather momentum in Financial Assets. So, 18 years ago, investing in the US Stock Market was the way to make money.

But that was then, and this is now. The chart above tells me that the way to play the Bull Market in Gold is to buy Silver!

Few people know this, but Gold and Silver thrive on higher interest rate trends. Gold and Silver suffer when interest rates trend downward.

So, Gold rising to new all-time highs, as interest rates fell for the past nine years is an anomaly. But then how normal are low US Treasury Bond Yields when weekly the US Federal Government sells a $100 billion into the bond market? In October 2009, the Precious Metals and US Bond Markets are both anomalously out of whack!

Well, the Bear has his own way of sorting things out, and forcing markets back into "whack." It's called pain! When he does, I expect all US based interest rates, short & long term, for US Corporate, Municipal, and Federal Bonds will soar to new all-time highs. The US Bond Market will collapse. When this happens, we will see wealth stampeding out of financial assets. Wealth will run towards Gold and Silver.

Many people think the death of the US dollar a crazy idea. Maybe Voltaire is wrong, and they're right.

But for centuries, seeing a currency's circulation increase exponentially has always led to that monetary system's collapse. The chart above shows the US dollar's circulation growing exponentially. I think Voltaire knew what he was talking about.

The next two charts are based upon 35 Currencies. The US$ price of Gold and Silver are in Blue, their 35-Currency A-D Line in Red.

Since 2001, both Gold and Silver's 5- & 35-Currency A-D Lines have only gone up. From their highs of March 2008, to their lows in October 2008, Gold dropped 30% and Silver 55%. But notice how Gold and Silver's A-D lines, in 35 Currencies, didn't even pause during this 6 month price correction in the metals. This is another market anomaly. Looking at the 5 charts above, it's hard to find a reason to be Bearish on Gold or Silver.

But these charts can't tell us if Gold and Silver are going up in all currencies. Are there any currencies where the prices of these precious metals have gone down? Using the lows of last September as a basis in the tables below, we see that there are only two currencies where the price of Gold is now lower than a year ago.

Note: The Lows for the DJIA occurred in March 2009, while the lows for Gold and Silver were from last October. All tables in Wk106 base their percentages on their lows of the last year. So the table for the DJIA is not comparable with the tables for Gold and Silver, as their lows are separated by six months.

In South Africa and Australia, their current price of Gold may be down from last September, but by less than 3%. But the losses are very real for Australian and South African gold miners, and both countries are major produces of gold. The table above suggests that the supply of gold coming into the markets may be reduced, as demand for gold is increasing.

Silver has outperformed Gold in the past year by a good measure. We see Silver up by at least 25% in all currencies.

The past 12 Months have been good for Silver Investors. So it might be logical to expect Gold to outperform Silver in the next year. But when we see Silver's A-D Lines, its Step Sums, and how the Silver to Gold Ratio have contracted in previous Gold Bull Markets, Silver is the place to be.

For investors with only a few thousand dollars to invest, what's the logic in purchasing a few ounces of gold when each ounce of gold can purchase over 3.5 pounds of silver? For retail investors, as long as Gold is going up, and you don't have 20 or more pounds of Silver, it really is the place to be.

Dow Jones -40% Declines From 1885 to 2008 is the article that inspired this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my "BEV Chart."

Dow Jones Industrials Average Market Volatility is the source for my volatility studies.

The Lundeen Bear Box and Step Sum is the source for my Lundeen Bear Box and Step Sum Chart

Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.