by Bill Bonner, Tom Dyson, Activist Post:
Gold is not an investment; it’s a place to put your money while you wait for a good investment to come along. It’s not a wealth creator; it’s a wealth preserver.
But where does this ‘exit’ lead? Today, we return to a key question: If we buy gold at today’s prices, aren’t we risking another Death Valley…a45-year period in which we gain nothing?
‘Yes’ is the answer. The risk is there. And if you will need your money in the next couple of years, you might want to think twice.
But we count our wealth in gold. And even if it took a generation-long dip, we wouldn’t rend our garments or tear our hair out. Because our real wealth would remain intact, undiminished. We would have exactly as much gold as we started with.
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And we feel confident that we can depend on our public officials to make sure gold doesn’t stay down for too long. They will eventually inflate away America’s debt; what other choice do they have?
The Dow/Gold ratio went under 5 in 1974. In January 1980, it was 1.29. If we’d had our Dow/Gold Trading Strategy (DGTS) back then, it would have directed us to sell our gold in 1974 and buy stocks. The next eight years would have been rough; stock prices were steady, but inflation greatly reduced real values.
Even so, we should have taken it with good grace. We owned good companies making good money — that was the real value, not the prices quoted in the new, fake dollars. And so it was that we would have gone into the bull market beginning in 1982 with stocks, not gold. And our DGTS model would have kept us in stocks for at least the next 14 years, depending on where we set our stop loss, and multiplied our gold (our real wealth) by at least three times.
But let’s look at what is likely to happen now. The Dow/Gold ratio can change, either by inflation — taking the price of gold in dollars way up. Or by way of deflation — taking the price of stocks way down.
Either way, we will watch the news and cross ourselves.
Yesterday, we saw what might happen in a deflationary scenario. Stocks could go down without much movement in the gold market. Gold at $4,000, for example, would need a 20,000 Dow in order to hit our “5” target. Very plausible.
We seem to be in a period of stagflation. There’s no way to know whether the ‘stag’ or the ‘flation’ part will dominate. But since we looked at the ‘stag’ hypothesis yesterday, today we’ll take the other side of the trade. That is, we’ll look at what might happen if the gold promoters turn out to be right.
A few quarters with rising inflation numbers could propel the price of gold much higher. Most people still don’t own any gold. When Mom and Pop climb aboard, the train is going to become crowded. But not with ‘gold bugs’ and fuddy duddy investors. Instead, the bar car will be packed with amateur speculators.That is the source of our caution: these late comers can can jump off the gold rush train as quickly as they got on.
