Gold, the dollar and the Dow

Gold supporters seem to be waiting for a reprise of the heady days of 1980. I think this is another case where you need to decide whether you are a speculator or a long-term investor.


Here's a relatively recent graph of the price of gold, adjusted for inflation (admittedly, inflation can be defined in many ways):

On this chart, it looks as though gold's median price would be around $600/oz, so currently it's above trend and presumably the elevated value factors-in some economic concern.

Now, here's a chart correlating the Dow and gold:It seems harder to spot an average here, since each peak is much higher than the one before. But taking the Dow as it is now (12,606.30) and the current price of gold ($894.90), the present ratio of 14.08 ounces would be in the middle range of the variation since the mid-1920s.

So a purchase of gold now looks like a speculation, rather than a bargain.

Waves and tides

A most apposite article by the Contrarian Investor, in which he considers how all this economic information leaves us confused as to the future direction of the economy. It's like getting millimetre-accurate radar images of all the waves in the harbour, without knowing about the effect of the moon on the tides. Not that the information itself is accurate, anyway.

Stuffed

Michael Panzner hands on a piece from Naked Capitalism: expert, inside opinion is that the banks are so gorged with bad debt that America will mimic the "melancholy, long withdrawing roar" of Japan's ebb tide.

Something's gotta give

Interest on official debt in the USA runs at $430 billion for 2007, and rising steeply, according to the Treasury's own figures (htp Michael Panzner, quoting Mish's Global Economic Trend Analysis); total government debt is now c. $9.2 trillion.

It's more serious than that, of course: James Turk quotes the Comptroller General, David M Walker's estimate that total liabilities, including commitments to future social security benefits, are around $53 trillion. The government's annual revenues are only around 5% of this figure, so the credit card looks like it's pretty much fully-loaded.

However it happens, it seems something must give way under the strain. Frank Barbera reckons the Dow has plenty further to fall (and possible interim correction or not, he thinks gold looks good). Prieur du Plessis concurs, quoting Nouriel Roubini's comment that "... a lousy stock market in 2007 will look good compared to an awful stock market in 2008."

Bob Bronson thinks the downturn will be long as well as hard. He in turn quotes the chairman of the National Bureau of Economic Research: this one “could be deeper and longer than the recessions of the past.”

Boris Sobolev also looks to gold, but prefers the smaller companies because of all the money that's piled into the majors.

In case we in the UK should be tempted by schadenfreude, Ashraf Laidi predicts that sterling will accompany the US dollar's fall against other currencies. From what I read in connection with the USA, a weakening currency may provide a temporary boost to exports, but also inflate the cost of imports; so I don't suppose that our following the dollar will do us much long-term good, either.

Of course, it's possible to dismiss all this as group-think wall-of-worry stuff, but maybe that would be double-bluffing ourselves. Sometimes, things are exactly what they seem. Banks have consistently turned a profit for centuries, on the inexorability of debt.

Oil splat

"Oil crunch" doesn't sound right, although it might be appropriate to shale oil: Jeffrey Brown outlines what looks like a compelling thesis on growing domestic energy consumption by major oil exporters. He thinks that the top five producers will be using all their own supplies by around 2030, and concludes that the USA must rapidly reshape its transportation system:

In simplest terms, we are concerned that the very lifeblood of the world industrial economy—net oil export capacity—is draining away in front of our very eyes, and we believe that it is imperative that major oil importing countries like the United States launch an emergency Electrification of Transportation program--electric light rail and streetcars--combined with a crash wind power program.

That is just the tip of the iceberg, surely: residential and office heating/lighting, mechanised farming, supermarket shopping, centralised medical facilities - so much will have to be reviewed and planned.

Twang money, encore

The Contrarian Investor is also struck by the elasticity of fiat money, and how this vitiates attempts to make fair comparisons and store wealth. Gold for the long term, he thinks.

In the short term, we have this contest between credit contraction and currency expansion. I'm getting the feeling it'll be the first followed by the second, which is what Michael Panzner predicts in "Financial Armageddon".

Grab your pension now, inflation-proof it?

Tony Allison looks at the threats to your prosperity in retirement. A bird in the hand?