Dow Will Equal Gold in 2009

by: Peter Cooper December 04, 2008 | about stocks: GLD / SLV / UDN    

Peter Cooper

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If you have to pick one investment class that will shine in 2009, then choose gold, and probably silver. My prediction is that this will be the year when the Dow Jones to gold ratio goes to one.

That is to say the Dow Jones Index will plunge again, way beyond the 7,000 limit target I suggested long ago for 2008, and head to 4-5,000, while at the same time the price per ounce of the yellow metal will tip the $4-5,000 an ounce level, way above the $2,000 now predicted by Citigroup.

US economic implosion

Obviously only a terrible implosion of the US and global economy could produce such a massive shift in asset values. But I fear that is what is coming in 2009 and the moment to prepare for it is now before it is too late.

Just look at those US auto figures for November, down 37 per cent, and that is the figure across the board. The Japanese and Korean manufacturers also got their sales walloped, albeit Chrysler took the biggest hit of 47 per cent.

No manufacturer on earth has profit margins big enough to absorb that sort of a sales collapse. That it is the largest consumer goods section of the world’s largest economy just sets the whole US economy up for a collapse. The only historical parallel is 1930.

Now the Federal Reserve and US Treasury have been on to this case for some while, pumping money into the US economy - around $8 trillion on the last count, or more than half the annual GDP. That must have some countering effect to this collapse in the real economy.

Bailout trillions

Any observer can see that money produced and spent this fast is not being invested wisely. Trillions to support banks on the brink of collapse can surely only put off the evil day, while running up bigger debts that have to be repaid in devalued dollars - or defaulted on - later.

What we have in motion is a downward spiral of mounting debts and falling production in the US economy. You really have to be hopelessly blind not to see it when you think about it. And spirals continue down until they reach a bottom. We are not there yet.

If the US was a Third World country, the IMF would be called in to run the economy. Debts would go into default, uneconomic companies and projects would be allowed to fail, putting people out of work and interest rates would shoot up.

The US authorities have been acting as though they could spend their way out of this fate. It might work to some extent, but all logic suggests this will not be enough to prevent an economic implosion. For 2009 that looks far too close to the Third World model for comfort.

Buy precious metals

What are investors to do in such circumstances? Personally I would avoid US treasury bonds which look like the next asset bubble about to burst, and go for gold and silver which will be the next bubble to form as the world struggles to dig itself out of this very big hole.

Eventually the world will emerge from this crisis, just as it emerged from the Great Depression of the 30s, but we have not even seen the bottom yet, let alone begun the recovery phase.

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This article has 51 comments:

  •  
    Dec 04 05:32 AM
    Interesting prediction. I think there's still too much exuberance and bullishness about Gold for it to rally in the short-term, let alone be on it's way to 4-5k, but I suppose that could change. I would think if Gold went to 4-5k/oz, the Dow would go much lower.
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  •  
    Dec 04 07:31 AM
    It may not be accurate to say that printing dollars will kill the dollar so much as bury it. The accumulated trade deficit has already put too many dollars in foreign hands for us to redeem with value. We tried pretending our residential real estate was sufficient to the task, but that lie has been exposed. So the problem is not that we will have to default on the growing Federal debt but that growing the Federal debt is HOW we default on the unsustainable trade debt. The dollar is like Wile E. Coyote chasing Road Runner (a great accidental metaphor for imported fuel) off the cliff; the only reason it hasn't fallen is that it hasn't looked down.
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  •  
    Dec 04 08:00 AM
    The dollar remains last safe place to hold reserve wealth as worldiwde assets deflate. Once the deflation stops elsewhere, dollars will be switched back to local currencies, just at the time a bigger supply of $ hits from our absurd deficit.

    I'm not convinced the main outcome is massive increase in gold prices, but other commodities should reflate, a good thing if not over done as that ensures planting and harvesting of crops. I'm sure some very smart people in our Treasury have calculated what might happen. Don't forget the last few months have destroyed $100's of millions of money supply that was erroneously deployed to pump up asset prices (houses and ABS's) just so that investment banks/realtors/mortgag... brokers could collect management fees. The bank writedowns mean the $ are no longer available, and the TARP $250B must still be raised (by debt or equity) in order to repay Uncle Sam. I think of this as a stool, where one leg was knocked out and temporarily replaced with government funds - the banks must remake the lost leg and replace it.

    There is a small chance things can work out without disaster happening, but now would seem a good time to buy as much of the commodity ETF's as you can as a hedge against rising prices in the stores, and gold as an investment. It's pretty obvious, as stated above, that defaulting on our debt through inflation is the only logical outcome, and we need to convince ourselves to contribute to debt reduction by halting Social Security COLA(remember those from the 80's?) for a while, or reducing like President Reagan wanted.
    Reply | Link to Comment
  •  
    Dec 04 08:03 AM
    I meant $100's of billions of money supply.
    Reply | Link to Comment
  •  
    Dec 04 08:11 AM
    Doesn't Peter's picture remind you of anyone? Bill Murray maybe. IMHO

    Anyway, The Saudi plans call for the construction of 1 million new homes over the next few years. Where will the money come from if the Deflationary collapse predicted comes to pass? I'm making the assumption that the dollar collapses as well, am I wrong?
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  •  
    Dec 04 08:38 AM
    Where are the Amero Funds?
    Reply | Link to Comment
  •  
    Dec 04 08:39 AM
    The 1930s depreation was salvaged by income tax being imposed, does anyone read up on our history?
    Reply | Link to Comment
  •  
    Dec 04 09:07 AM
    ..."collapse"... in currency is a relative term...if other countries didn't print more money then an increase in dollars might reasonably cause a decline in their relative value...however, since it now appears that other countries are in fact running their currency printing presses even faster than the U.S., one might reasonably argue for a dollar rally...poor old Pete has all his money in gold and Dubai real estate -- i hate to think what's happened to his balance sheet over the past year.
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  •  
    Dec 04 09:11 AM
    I'm also very bearish about these developments in your article. Its a good story.
    There is another factor is see happening along the way. That is; rising interest rates.
    When the legs of banks are repaired, and leverage and regulations are renewed and in place within a few years from now. You are going to see the dollar economy on the brink of collapse. Deleveraging will continue at a slower pace for a minimum of 5 years in my opinion. It could even extend for a decade from now before the fundamentals are healthy again.
    And at the center stage of that recovery, when the financials are stabilized, we'll see a huge shift in consumer spendings to consumer savings. Rising interest rates to double digit levels. A mass attraction of credit (foreign and domestic) to build up new wealth and power for America.
    But the struggle will be large and deep for America. Because this recovery has got resistance from emerging countries (BRIC) and other money attracting economies. The coming decade will not be all too bullish for equities (although bullish to a large degree). The most significant profits can be found in commodities sectors. This relatively small sector is going to be the most crazy investment area you've ever experienced. The bubble level will be expected, although the demand around the world, will defend the exploding prices, as long as ETF parties are not overly manipulating the markets, like they do in copper, gold and silver for instance.

    brgds,
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  •  
    Dec 04 09:14 AM
    Bold prediction.

    History shows these runs take longer than a year, but we are in a unique time for sure.

    Also...too much exuberance for a rally? Isnt that when rallies occur?

    Lastly...the dollar as a safe haven? I literally laughed when I read that.

    I have an idea. Anyone who wants to bet me the dollar is a safe haven:

    1. Email me so we can exchange info, and the amount you wish to bet (you can get my email from my blog)

    2....put your money in dollars...I will put mine in gold and silver.

    3. Lets compare notes in three years.
    Reply | Link to Comment
  •  
    Dec 04 09:25 AM
    Where can we get some Amero? Does anyone know? I would like to buy some.
    Reply | Link to Comment
  •  
    Dec 04 09:26 AM
    The only real qualms I have on the predictions made is the time frame involved. Everything within the next 12 months? I just can't see it. 3 years no problem. IMO
    Reply | Link to Comment
  •  
    Dec 04 09:42 AM
    There are lots of things some people can't see...everything happens at a much accelerated pace. The 1970s pace of 18 months for a typical recession to play itself out is now 6-9 months...There's no doubt gold and silver will eventually resume their bull move....next June for $1200 gold and $20 silver is about rght..
    Gold will shoot thru $1000 just about the time the typical investor realized their T-bill money is a honey trap losing 5% a year...Fringe players have been talking about "fiat" money for decades...that's another concept that will not be fringe anymore..it will be on everyone's lips.
    As for the Dow..it will move WITH..not against gold and silver...but it's % gain and future will not protect against the pernicious inflation we'll see..TRILLIONS ARE COMING HOME TO ROOST..and befor they're done there will be plenty more where that came from.
    Reply | Link to Comment
  •  
    Dec 04 10:06 AM
    I am inclined to agree with the author on general principles, but I wonder whether any large sustained decline in the market won't be countered by the Plunge Protection Team (PPT).

    If blue chips tank hard and for good, it will ruin every insurance company and pension fund in existence. If there is any way to avoid this the PPT will gamble and prop up stocks hoping that they can avoid a financial disaster. What index level(s) they choose to defend and whether they succeed or not will be the issue.

    If they fail, things will get very ugly. If they succeed, they will add fuel to the bonfire of inflation the FED is building now. Either way it won't be pretty.
    Reply | Link to Comment
  •  
    Dec 04 10:08 AM
    The theory is interesting. I doubt it will happen.. I agree the big US companies are in for a very hard time, if they are built upon an ocean of debt.
    Reply | Link to Comment
  •  
    Dec 04 10:09 AM
    Bigwavedave: reading history tells me that the income tax was "imposed" in 1913. This is the same year the Federal Reserve was created and U.S. Senators were elected by popular vote( instead of being chosen by the state legislatures). All three of these events have had bad consequences for the country
    Reply | Link to Comment
  •  
    Dec 04 10:32 AM
    Let us look at all commodities.Gold is the least consumable commodity as human beings can do without gold in perilous times.Worst that can happen with gold is that it's value dwindles and is not utilizable in bad times.On the contrary, US $ can be utilizable even in bad times for exchange and/or purchase of daily utilities.Who can use gold for buying groceries ?
    There is nothing wrong with dollar except the fact that our economy is not properly handled. US must step up its own production of daily needs rather than import and put dollars in the hands of other countries thereby puting more dollars in the hands of it's own citizens.Oursourcing of jobs is a bad idea and the same jobs can be offered to US citizens.Also recently oil price is now reasonable for US economy.The big three automakers must run their companies more economically thus paving the way to less and less imports. Further,we must acknowledge the fact that US is a much much better country in respect of natural resources.
    Reply | Link to Comment
  •  
    Dec 04 10:56 AM
    Dow equal to Gold almost happened on January 21, 1980 -- followed by a 20% drop in gold within two days, and a 50% drop in gold prices within 2 months. So, gold "might" be equal to the Dow at some point in the near future, but it would not be a sustained event.

    Anybody else seen all "Buy Gold Now!" infomercials on TV and the radio lately? I'm not going to start investing in an asset class that is currently at it's peak.
    Reply | Link to Comment
  •  
    Dec 04 11:10 AM
    You are predicting that stocks will fall over 91% in less than a year. Such an event has never occurred, which is not to say that it cannot but you definitely need to offer a better case. I don't doubt that the time will come again when an ounce of gold will buy a unit of the DJIA, but I think the dollar prices of both will be much higher than 4,000 and it will be quite a bit longer before we get there. Until it's clear that inflationary forces are spiraling out of control, the requisite panic to get out of dollars won't get under way. So even if stocks fall a lot in dollar terms, they won't fall enough in real terms to make your prediction a reality. This scenario is much more likely to play out on the other side of the bottom when tens or even hundreds of trillions of stimulus and bailout dollars all need to find homes at once and all the Treasury speculators rush for the exits. Some of those dollars will end up in the stock markets, pushing the DJIA into probably the 15,000-20,000 range. But most of it will pour into gold, sending the dollar to new lows in the 1/10,000 ounce range. Under such circumstances, it would not be surprising to see parity on several occasions. This will not be an overnight process, however. If I had to guess, I would say it might be 2011 before we get there.
    Reply | Link to Comment
  •  
    Dec 04 11:36 AM
    beans and rice beans and rice!
    Reply | Link to Comment
  •  
    Dec 04 11:43 AM
    was big brother throwing trillions of dollars at the dow in 1980?


    On Dec 04 10:56 AM Byron_G wrote:

    > Dow equal to Gold almost happened on January 21, 1980 -- followed
    > by a 20% drop in gold within two days, and a 50% drop in gold prices
    > within 2 months. So, gold "might" be equal to the Dow at some point
    > in the near future, but it would not be a sustained event.
    >
    > Anybody else seen all "Buy Gold Now!" infomercials on TV and the
    > radio lately? I'm not going to start investing in an asset class
    > that is currently at it's peak.
    Reply | Link to Comment
  •  
    Dec 04 12:28 PM

    Stock market will crash during summer 2009.All you have to do is to bet against dollar, before the summer of 2009.
    Reply | Link to Comment
  •  
    Dec 04 12:33 PM
    Byron, I see plenty of "sell your gold commercials". The only buy gold commercials I see are gimmicks where they charge you double the price of the metal.
    Reply | Link to Comment
  •  
    Dec 04 04:00 PM
    Interesting ( and novel ) theory...care to elaborate?


    On Dec 04 08:39 AM Bigwavedave wrote:

    > The 1930s depreation was salvaged by income tax being imposed, does
    > anyone read up on our history?
    Reply | Link to Comment
  •  
    Dec 04 04:06 PM
    Forbes thinks gold has bottomed, That should send shivers down the sides of all Gold bugs.

    Everything has dropped by 50% or more, is it physical Gold's turn? The Blood in the streets idea still has Gold to contend with for a final capitulation. IMHO
    Reply | Link to Comment
  •  
    Dec 04 04:20 PM
    In the past 8 years while dow was going up, gold was going up, while dow was going down, gold was going up, when dow went up again, gold still went up and now gold is still holding stronger than any other single asset class. When the dow starts going up again, in june, gold will go up with it and when dow drops again in 2011, gold will reach its peak.
    Reply | Link to Comment
  •  
    Dec 04 05:54 PM
    There was a rich merchant in China about 3,000 years ago. The rich merchant became the most rich in China as follows:

    1. A big war broke out.
    2. People in fear bought gold relentlessly. Gold price skyrocketed. Rice price plummeted.
    3. The merchant bought rice at super-low prices.
    4. As war drags on and on, people needed rice more and more to feed themselves, and demand for rice skyrocketed, and demand for gold plummeted.
    5. The merchat sold his rice to the market for triple digit prices and bought back the gold for super-low prices.
    6. The merchant instantly became the richest man in ancient China 3,000 years ago.

    Of course, this kind of dramatic and monopolized transaction would not happen in the modern world. However, if you compare US stock market to rice, you will see why this 3,000-year old story still applies today. As time goes on, people's thirst for higher return will come back. People's thirst for return cannot be satisfied with the bank-offered CD rate or treasury rate of less than 3% - 4%. It could be end of 2009, 2010 or 2011, no one knows. However, I'm confident that within the next 5 years, one of the greatest thirst for return will come back to the stock market, and people who bought gold and previous metals now will regret so much for plummeted prices of them and lost return from the stock market.
    Reply | Link to Comment
  •  
    Dec 04 06:01 PM
    Oh Peter, Peter, Peter. Don't you start SAYING THESE TRUTHS because it makes the USD$ lovers crazy. They are the "all's well in the world" fanatics. Only we realists, like most of the enlightened posters here, know that it is INEVITIABLE that the 1 to 1 Dow/Gold ratio will happen VERY SOON...within 18-24 MONTHS, I would think.

    I'm sitting back waiting to see how Obama's guru--VOLKER-- pushes inflation off the cliff with interest rates to 15, 18, 23 percent! Then, things will get dicey.

    Of course, in the mean time I am BUYING PHYSICAL GOLD and SILVER!!!

    Thanks so much Peter, loved this reality check!
    Reply | Link to Comment
  •  
    Dec 04 06:09 PM
    tshk1221

    What is your logic for gold NOT to increase in value as the Dow increases?

    If you care to look, you will see the DECOUPLING of gold from the dollar, and oil. Granted, it is somewhat insignificant at present, but it IS starting to occur. When that DECOUPLING occurs in earnest, LOOK OUT! The 1 to 1 ratio will be "around the corner". Whether the dow is at 10,000, 20,000, or 4,000 it WILL happen! In the instant senario gold will benefit from the DOW's rise...as it will from the DOW's fall.
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  •  
    Dec 04 06:36 PM
    Now it takes 15 barrels of oil to buy one ounce of gold. Earlier this year it took only 7 barrels. Gold is expensive. Everybody is saying gold will go through the roof during a financial crises. So why hasn't it already? It's gone down more then $200 an ounce so far.
    Reply | Link to Comment
  •  
    Dec 04 07:00 PM
    Please help.

    What I fail to understand is how a potential inflation (that many say it's inevitable) would affect the housing market.

    In theory, if hard assets go up in terms of dollars, it will be easier to pay off a mortgage in devalued dollars.

    Example: if you owe 300,000 today for a house worth 600,000, you may still owe 290,000 for a house worth 800,000 in one year.
    In absolute terms, maybe your house is worth less in terms of gold, but who cares - you're paying back dollars.

    Would the same logic apply for a stronger currency, supported by commodities, such as the Canadian dollar?

    Any comments appreciated - thanks.
    Reply | Link to Comment
  •  
    Dec 04 07:35 PM
    The problem with all "US economic implosion" theories, is that the markets are really not bearing that out. Most world markets have crashed much faster and further than the S&P 500 and Russell 2000. The other bogeyman, hyperinflation, won't happen for a simple reason: most Americans are ready and able to pay higher taxes without much fuss. Compare and contrast to other countries where hyperinflation occurred... direct taxation was impractical or impossible, for various reasons, cultural, political, lack of a functioning tax collection agency, etc, so in those cases printing new money was by far the best option to maintain government spending levels. On the other hand when you have a Democratic government, expiring tax cuts, and a compliant population, not to mention, the IRS, there will really be no need to print that much money at all.
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