Jay Taylor On Gold
Gold Is Behaving Properly in This Deflationary Environment
Ian has always maintained that gold would be about the only thing you’d want to own when the Kondratieff Winter begins biting us hard. Not even silver, according to Ian, would likely perform well in a true deflationary environment. Well regarded institutional analyst Bob Hoye, who we’ve also interviewed in these pages in the past, also holds to the notion that gold will perform well in a deflationary environment, vis-à-vis virtually everything, including silver. This is true, both men agree, because gold is the ultimate money. It is what people opt to purchase when confidence is lost in the financial system. And this time, paper money is the biggest fraud ever in history, because this time—unlike the 1930s—there is absolutely nothing backing the paper. Instead of an asset-backed currency (gold or silver), our current money is backed only by debt. And so, as debt can no longer be repaid, money, vis-à-vis gold, is losing value at a very rapid pace.
In fact, even as the dollar has gotten stronger in relation to other currencies, gold has continued to rise in relation to the dollar. This is evidence in my view that we are in a very horrible deflationary panic that the authorities now seem unable to put an end to at least so far.
Where will it all end? How high will gold go? How low will commodities go? How low will stocks go? It is impossible to answer those questions, but Ian did provide for me a chart of the Dow that makes the case for the Dow ultimately falling to 1000. I’m not a technical analyst, but the target price for the Dow shown below makes a certain amount of sense. Given the resistance level for the Dow at 1000 from 1996 to 1982, it would seem 1000 would provide a very strong floor. Unfortunately, there is little between the all-time high of over 14000 to 1000. And so, strictly from a
chartist point of view, I think the target price of 1000 makes sense.
What about gold? What price can gold climb to? We have observed that over the 100+ years, the Dow has, at its bottom, hit a Dow-to-gold ratio of 1.0:1.0. The last time that happened was around 2000, when the Dow and gold were even, at about 850.
Which way will it go this time? Ian thinks that, because of the enormous amount of debt, including derivatives, which enable the outrageous levels of leverage to be come greater relative to GDP than at any time in the past, gold will rise to a level of 4 times the Dow. So if the Dow shrinks to 1000, gold should settle out at about $4,000/oz.
I don’t know if Ian will be as right about the Dow/gold ratio as he has been so far in his K-Winter prediction, but even if he isn’t and the ratio reverts to a 1.0:1.0 ratio, gold still figures to gain about 9 times more, relative to the Dow, from here.
The chart on your left shows how far gold
has already risen in value compared to the
Dow since the equity market peaked in
terms of gold, back in July 1999 when the chart with word wrap
ratio of the Dow to the price of gold
peaked at 43.85:1.0. This chart is a little
out of date so let me note that as this was
being written, the price of gold was
$881.10 and the Dow was at 8196.41. That
works out to a Dow/gold ratio of 9.3:1.0.
In other words, even if Ian’s forecast of a
0.25:1.0 Dow-to-gold ratio turns out not to
be true, and we go to a 1:1 ratio, gold still
figures to gain nine-fold over the current
Dow! What a trade it has been, and given
all the mayhem in the credit and equity
markets, we see no reason to unwind this
long-term trade now.
October 11, 2008
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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