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Long-term Stock Market Trend Converging with Gold

Commodities / Gold & Silver 2009 Feb 17, 2009 - 07:49 PM GMT

By: Ned_W_Schmidt

Commodities Best Financial Markets Analysis ArticleSuppose we had two horses, and both are required to pull our carriage. Our budget only permitted the purchase of two daily servings of oats. So, we tried an experiment. We substituted some saw dust for half of one of the servings for one of the horses. We gave those extra oats to the other horse. Seeing no visible change in the health of the horse being given the saw dust, we fed it only saw dust. The other horse gets all the oats. This feeding approach continues till one day we arrived in the barn to find the saw dust fed horse dead. Our carriage business was over.


The economy of the U.S. matters to the world because of its size. Someday China will be more important, but that is not the present case. The health of the U.S. economy influences the health of other economy. Canada, for example, is extremely dependent on selling to the U.S. If the U.S. economy becomes sick, the Canadian economy may need the emergency room.

Great Obama Depression is coming because recently approved Congressional Pork Plan takes economic oats from healthy part of economy and gives them to the infirm part. That might sound like wonderful social policy, but it is bad economic policy. Little effort exists in the Pork Plan to stimulate economic momentum. For years, the North American economy had an economic driver in the form of the housing debacle. No new economic driver is created in the Pork Plan, so economic trajectory of least resistance for U.S. economy continues to be down. That situation is exacerbated by U.S. government policies that force healthy economic horses to eat saw dust.

While this week's first graph is based on U.S. data, it represents the situation all around the world. Central banks, and in particular the Federal Reserve, have rushed to monetize every piece of debt on which they could lay their hands. As a consequence, money supplies of the world are growing at rates that can only be ultimately destabilizing. Double digit growth in the U.S. money supply, as well as for other national monies, may sound like a short-term solution to today's economic problems. However, the other implications of such irresponsibility are ignored, and inevitable.

A consequence of the global rush to “print” money has been a near universal bull market for Gold. In currencies all around the world, Gold has been moving to new highs. That is as it should be. When nations “print” money at rates of growth faster than the supply of Gold expands, the price of Gold can only go up. That has been true all through history.

The meaning of this situation needs to be understood. Rising prices for Gold around the world mean that those currencies are depreciating . Practically all currencies are depreciating relative to Gold. The only laggard has been US$Gold. The whole world of currencies is depreciating, including the U.S. dollar. But due to the liquidity provided by U.S. debt during the financial crisis, the U.S. dollar has appeared to rise in value within the overall currency bear market. All currency ships are sinking, the dollar ship is just not sinking as fast. With the coming Obama Depression and need for the Federal Reserve to monetize a goodly portion of the U.S. government's $2.2 trillion deficit, its day in the barrel will come.

Within the broader and longer term positive environment for Gold we need to remember that short-term bursts of emotions might run to extremes. Such might be the current situation. Emotions have been running high. Gold is seriously over bought. While investors need Gold in their portfolio, the current price situation might not be the best for buyers. In other words, you need Gold in your portfolios as protection against economists, politicians, governments and central bankers. Today's price might not be best for satisfying that need. Buy on price weakness, not strength. Blue triangles are “do not buy” signals. We never sell in a structural bull market.

With the longer term outlook for Gold never brighter and in the spirt of change so called for in the U.S. elections, we have made a change. For many years the flagship chart of The Value View Gold Report compared the ten-year return of Gold(+13% per year) to the ten-year return on U.S. stocks(-2% per year). The intellectual victory of the Gold Bugs has been readily evident in that chart. So in the spirit of change our flagship chart is being changed to the one below.

Our new flagship chart is of the twenty year returns on $Gold and U.S. stocks. With the forces of economic darkness now in full control of the U.S. government, we are confident that here again the Gold Bugs will be vindicated . The era of monetary madness and “saw dust” economic policies on the part of governments that we have so long feared appears to have arrived. Again, it seems the Gold Bugs have the intellectual high ground.

Rarely do we look to politicians for honest statements. Perhaps for that reason, recent words of a Chinese official were so refreshing. The following from the Financial Times on Thursday says it all,

“Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York yesterday that China would continue to buy Treasuries in spite of its misgivings about US finances.”

“‘Except for US Treasuries, what can you hold?' he asked. ‘Gold? You don't hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.' Mr Luo . . .added.”

“‘We hate you guys[U.S.]. Once you start issuing $1 trillion-$2 trillion[of debt] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.'” [Emphasis added.]

By Ned W Schmidt CFA, CEBS

Copyright © 2009 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html

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