While it may be poorly understood, a country's demographics are critically important to their fortunes. Most governments, including our own, are built on a series of ponzi schemes, meaning that growth is dependent on having the age structure pyramidically shaped. It's very positive when a small percentage of the population is old while a large percentage of the population is young.
The primary reason for the importance of demographics is what economists refer to as "household creation". Younger people tend to buy houses, buy appliances, buy cars and have children. On the other hand, older folks are savers, sell houses, sell appliances and DON'T have children.
"Household creation" is critical to driving growth via the multiplicative effect of the accumulation of possessions through "household savings" from employment income. While older folks are retired, living off savings and assistance such as medicare and social security, younger people are buying, saving (hopefully) and, in general, contribute to the major forms of assistance to the old, such as social security, medicare, disabiltiy and others.
So, as a country's population "grays", or grows older, it becomes at greater risk for economic problems. For example, Japan, which has, to my knowledge, the "grayest" of demographic structures, began its bust in 1990. And, it has yet to even recover. Europe and the U.S. came next as their demographics were a bit more favorable. In fact, I've long advocated the allowance of "illegal aliens", since they have helped keep the pyramid alive longer than would have been possible without them!!
Countries like India, which have booming populations are quite fine. However, my suspicion is that China, which has taken extreme population control measures, will NOT be fine for very long despite evidence, at the moment, to the contrary. Once these population control measures affect its pyramidal population structure, the pheonomenal growth experienced there will start to ebb and it will be subject to the very forces that are affecting the U.S. and Japan today.
The evidence I've cited is circumstancial, but I maintain it's WAY too coincidental to be false. The fact is, that nearly every country's fortunes are dependent on the relative number of old people to young people. While this may seem counter-intuitive, I assure you that it is indeed, quite true.
I hope you've enjoyed reading this essay as much as I enjoyed writing it. I love your comments, pro or con, and will continue to respond to each and every one of them.
Marko's Take
P.S. Given the wild action today in Gold, I'll be covering it tomorrow.
Monday, December 7, 2009
Sunday, December 6, 2009
Gold Revisited: What To Do Now
On Friday, Gold fell by a whopping $46 per ounce, closing at $1,161! Silver fell by 34 cents, a loss of about 2 percent. I was besieged by calls from friends wondering just what was going on. I'll now tell you what I told them.
The action in Gold and Silver was terrific from a longer-term point of view. Here's why: Gold had risen virtutally non-stop for the last 26 days. So, when a temporary panic, like Friday occurs, the price action scares away holders referred to as "weak hands", or those most prone to panic. In their stead, the acquirers are referred to as being "strong hands", meaning that they are true long-run believers NOT prone to panic.
Ultimately, for a market to continue its march forward, the process of replacing "weak hands" with "strong hands" is quite positive and NECESSARY! It also serves as an opportunity to those who are long-term oriented with a terrific entry point.
The fundamentals for both Gold and Silver continue to improve. The U.S. Mint has stopped producing BOTH Gold and Silver Coins. In addition, there are rumors, which I believe are credible, that both China and India are looking to clean out the remaining bullion offered by the IMF, or International Monetary Fund.
That entity recently offered to sell 400 tonnes of Gold Bullion and most of it has already been eagerly grabbed. If the rest is indeed scooped up by any combination of countries, Gold will be in EXTREME short supply!
The shortage is now so great that those requesting physical delivery of Gold through an exchange called COMEX, are reporting delays of many weeks and even months to receive their promised deliveries. This is unprecendented! In fact, COMEX has declared that it will no longer guarantee delivery of physical bulllion and has opted to deliver bullion in the form of an exchange traded fund called GLD. The sheer ludicrousness of this, is that GLD is nothing but "paper gold" anyway.
As I've pointed out in prior blogs, GLD may very well be a "shell game". I can't prove it because I can't audit it. The bona-fide auditors of GLD are accountants and may not have the slightest idea of what to look for! For example, how on Earth would an accountant be able to spot "counterfeit" bullion which is becoming very common?
So, while Gold and Silver may bounce around a bit before charging higher, I believe we have been handed a "golden opportunity" to enter this market, which I adamantly maintain is in its infancy.
But, before you DO enter this market in whatever form, keep in mind that volatility will continue to grow as it did during the terminal phase of the internet bubble. This will make this market veritably impossible to trade. And, I suggest that at certain intervals, one takes some profit "off the table". Ideally, this could be accomplished in such a way that you only play with "house money". In other words, I strongly believe that one can quickly recoup all of one's initial investment PRIOR to the ultimate top and, therefore, eliminate entirely the risk of loss.
The reason THAT's important is that it tends to reduce one's level of stress and reduce the liklihood of emotionally driven decisions!
I hope you found this essay informative and useful. I greatly appreciate all of you that continue to read "Marko's Take" and especially those that make comments in order to spark a bona-fide discussion. If nothing else, "free speech" is a vital right we need to ensure.
Marko's Take
The action in Gold and Silver was terrific from a longer-term point of view. Here's why: Gold had risen virtutally non-stop for the last 26 days. So, when a temporary panic, like Friday occurs, the price action scares away holders referred to as "weak hands", or those most prone to panic. In their stead, the acquirers are referred to as being "strong hands", meaning that they are true long-run believers NOT prone to panic.
Ultimately, for a market to continue its march forward, the process of replacing "weak hands" with "strong hands" is quite positive and NECESSARY! It also serves as an opportunity to those who are long-term oriented with a terrific entry point.
The fundamentals for both Gold and Silver continue to improve. The U.S. Mint has stopped producing BOTH Gold and Silver Coins. In addition, there are rumors, which I believe are credible, that both China and India are looking to clean out the remaining bullion offered by the IMF, or International Monetary Fund.
That entity recently offered to sell 400 tonnes of Gold Bullion and most of it has already been eagerly grabbed. If the rest is indeed scooped up by any combination of countries, Gold will be in EXTREME short supply!
The shortage is now so great that those requesting physical delivery of Gold through an exchange called COMEX, are reporting delays of many weeks and even months to receive their promised deliveries. This is unprecendented! In fact, COMEX has declared that it will no longer guarantee delivery of physical bulllion and has opted to deliver bullion in the form of an exchange traded fund called GLD. The sheer ludicrousness of this, is that GLD is nothing but "paper gold" anyway.
As I've pointed out in prior blogs, GLD may very well be a "shell game". I can't prove it because I can't audit it. The bona-fide auditors of GLD are accountants and may not have the slightest idea of what to look for! For example, how on Earth would an accountant be able to spot "counterfeit" bullion which is becoming very common?
So, while Gold and Silver may bounce around a bit before charging higher, I believe we have been handed a "golden opportunity" to enter this market, which I adamantly maintain is in its infancy.
But, before you DO enter this market in whatever form, keep in mind that volatility will continue to grow as it did during the terminal phase of the internet bubble. This will make this market veritably impossible to trade. And, I suggest that at certain intervals, one takes some profit "off the table". Ideally, this could be accomplished in such a way that you only play with "house money". In other words, I strongly believe that one can quickly recoup all of one's initial investment PRIOR to the ultimate top and, therefore, eliminate entirely the risk of loss.
The reason THAT's important is that it tends to reduce one's level of stress and reduce the liklihood of emotionally driven decisions!
I hope you found this essay informative and useful. I greatly appreciate all of you that continue to read "Marko's Take" and especially those that make comments in order to spark a bona-fide discussion. If nothing else, "free speech" is a vital right we need to ensure.
Marko's Take
Saturday, December 5, 2009
Has A True Economic Recovery Actually Begun?
Right off the bat, I can tell you that I don't know. I've been as skeptical as anyone and said so in prior blogs. However, it appears POSSIBLE that we indeed are in the very early stages of some sort of recovery. But, the evidence remains a mixed bag. In addition, it's WAY too early to speculate as to how strong that recovery might become, if it's started at all.
On the positive side, a website called Shadow Stats (http://www.shadowstats.com/), which calculates various government-reported statistics and adjusts them for a variety of misleading alterations, has shown an actual slight "downtick" in the unemployment rate. Now, one month doesn't make a trend, but it IS the first time they show a drop since late 2007.
There is also the persistent strength in the stock market, which has historically led recoveries by 6 to 12 months. The stock market bottomed 9 months ago.
Another very reliable leading indicator is the money supply, which, thanks to Fed chief Ben Bernanke, has been exploding. Historically, high rates of growth in money supply have led to economic recovery within a period of between 6 to 18 months. All of the emergency stimulus and bailouts, which have caused the growth in money, began within the terminal months of the Bush administration, so they fall within the reliable historical precedent.
In addition, yesterday I became aware of a new program offered by certain banks of mortgage relief - EVEN FOR THE UNEMPLOYED! This was reported in an article by the Sacramento Bee, ironically titled "Mortgage relief program helps relatively few troubled homeowners". An unemployed friend of mine spent two hours talking to Wells Fargo, the holder of his mortgage, and found that this was indeed true. They went over his financial condition meticulously. They couldn't pre-qualify him for any immediate relief, but they are sending him a package requesting certain documents from which they can verify the information and consider the merits of his request.
Now, for the bad news! Retail sales remain DISMAL On "Black Friday", the day after Thanksgiving, one of the two most heavily trafficked shopping days of the year, Sacks reported a 26% DROP in year-over-year sales. Macy's and J.C. Penney also reported greater than estimated slides of about 6%. We don't yet know about Wal-Mart, as it has stopped reporting monthly sales statistics altogether! But, this bad news may be somewhat offset by some good news in online sales, which were UP 11% year-over-year.
According to the FDIC, six more banks were seized on Friday, with combined assets of $13.4 billion. And, as pointed out in recent blogs, the fortunes of states and municipalities continue to deteriorate.
So, the "recovery" theory remains quite speculative as the evidence is a mixed bag. However, I suspect that we will know the answer relatively soon. More evidence will arise after Christmas. Anecdotally, I know that most of my friends have, at most, a "token gift only" intention this holiday season.
Finally, the REALLY bad news is that any recovery is merely more evidence of a precursor to a vastly heightend level of inflation. Without exception, history shows that the "growth effect" of stimulus programs precedes the subsequent "price effect". And, as the "growth effect" tapers off, the "price effect" accelerates.
Therefore, we are sowing the seeds of an even greater crisis which is yet to be experienced.
I hope you found this essay useful, interesting and informative. I appreciate the rapidly growing readership and the questions, which I am delighted to answer.
Marko's Take
On the positive side, a website called Shadow Stats (http://www.shadowstats.com/), which calculates various government-reported statistics and adjusts them for a variety of misleading alterations, has shown an actual slight "downtick" in the unemployment rate. Now, one month doesn't make a trend, but it IS the first time they show a drop since late 2007.
There is also the persistent strength in the stock market, which has historically led recoveries by 6 to 12 months. The stock market bottomed 9 months ago.
Another very reliable leading indicator is the money supply, which, thanks to Fed chief Ben Bernanke, has been exploding. Historically, high rates of growth in money supply have led to economic recovery within a period of between 6 to 18 months. All of the emergency stimulus and bailouts, which have caused the growth in money, began within the terminal months of the Bush administration, so they fall within the reliable historical precedent.
In addition, yesterday I became aware of a new program offered by certain banks of mortgage relief - EVEN FOR THE UNEMPLOYED! This was reported in an article by the Sacramento Bee, ironically titled "Mortgage relief program helps relatively few troubled homeowners". An unemployed friend of mine spent two hours talking to Wells Fargo, the holder of his mortgage, and found that this was indeed true. They went over his financial condition meticulously. They couldn't pre-qualify him for any immediate relief, but they are sending him a package requesting certain documents from which they can verify the information and consider the merits of his request.
Now, for the bad news! Retail sales remain DISMAL On "Black Friday", the day after Thanksgiving, one of the two most heavily trafficked shopping days of the year, Sacks reported a 26% DROP in year-over-year sales. Macy's and J.C. Penney also reported greater than estimated slides of about 6%. We don't yet know about Wal-Mart, as it has stopped reporting monthly sales statistics altogether! But, this bad news may be somewhat offset by some good news in online sales, which were UP 11% year-over-year.
According to the FDIC, six more banks were seized on Friday, with combined assets of $13.4 billion. And, as pointed out in recent blogs, the fortunes of states and municipalities continue to deteriorate.
So, the "recovery" theory remains quite speculative as the evidence is a mixed bag. However, I suspect that we will know the answer relatively soon. More evidence will arise after Christmas. Anecdotally, I know that most of my friends have, at most, a "token gift only" intention this holiday season.
Finally, the REALLY bad news is that any recovery is merely more evidence of a precursor to a vastly heightend level of inflation. Without exception, history shows that the "growth effect" of stimulus programs precedes the subsequent "price effect". And, as the "growth effect" tapers off, the "price effect" accelerates.
Therefore, we are sowing the seeds of an even greater crisis which is yet to be experienced.
I hope you found this essay useful, interesting and informative. I appreciate the rapidly growing readership and the questions, which I am delighted to answer.
Marko's Take
Friday, December 4, 2009
Gold: The Ultimate Hedge Against The Unthinkable
At no other time in history, as far as I can recall, have more people been at risk for so many things. Among the risks are loss of valuables resulting from crime, loss of one's job, loss of one's house, loss of one's investments and, as a result, loss of one's mind!
Let's face it, things are downright scary and threaten to get much, much worse. I've already written about what I believe will be another banking crisis, Californias's severe problems, the increasing possibility of hyper-inflation and the inevitability of a currency crisis. How on Earth could a person handle all that?
The answer, of course, depends on which risks one is subject to and to what extent. It also depends on one's financial wherewithal, which, in many people's cases, is nil. However, virtually everyone, no matter how rich, is subject to a sudden currency crisis and the accompanying hyper-inflation. There have been many episodes of hyper-inflation in places such as Germany, Argentina, Zimbabwe, Mexico, Poland, Japan, the Soviet Union and many, many others.
Even people who are currently comfortably rich are far from safe. In Zimbabwe, the most recent and severe case of hyper-inflation I'm aware of, a person who had a fortune of 1BILLION Zimbabwe dollars in 2003 and had chosen to hide it "under the mattress", would today be worth the equivalent of LESS THAN ONE CENT!!
As to the risk of losing one's job, one approach which I have advocated to friends for years, is to take an off-setting financial position in a very similar company to the one employing them. Here's an example: let's say you work for Wells Fargo and fear losing your job for economic reasons. The wise thing to do would be to buy some amount in a security that gains, if indeed financial conditions do deteriorate. In so doing, the "loss" suffered by the termination of your employment would be, at least, partially offset by the GAIN in the financial position. Such securities are common and they are easy to trade. In fact, they are stocks known as ETFs, or Exchange Traded Funds.
As you have obviously inferred from the article's title, investing in Gold or high quality precious metal stocks, is, in my opinion, the BEST form of protection. Gold has historically been a TERRIFIC hyper-inflation hedge. It also tends to rise as other crises unfold, such as an outbreak of war. To be fair, it's far from bullett-proof, as there have been periods of creeping inflation where Gold has fallen, such as in the 1990's. But, I'm referring to the EXTREME types of risks we are simultaneously subject to today.
I believe that the sharp parabolic rise in Gold recently is YELLING that some very serious form of inflation and depreciation in the Dollar is very near. Thus, if you can afford it, I would advise at least some exposure to Gold. If you are short on funds, then use Silver, which as discussed previously, is even historically cheaper than the "yellow metal" and sells for 1/60th per ounce. In fact, Silver is in critically short supply and the U.S. Mint has entirely stopped producing one ounce Silver Eagles. I recently read that they are currently trading at a 30% premium on EBAY to their intrinsic value, based on their metallic content.
I hope you've found this article thought provoking and informative. Comments, pro or con, are always appreciated.
Marko's Take
Let's face it, things are downright scary and threaten to get much, much worse. I've already written about what I believe will be another banking crisis, Californias's severe problems, the increasing possibility of hyper-inflation and the inevitability of a currency crisis. How on Earth could a person handle all that?
The answer, of course, depends on which risks one is subject to and to what extent. It also depends on one's financial wherewithal, which, in many people's cases, is nil. However, virtually everyone, no matter how rich, is subject to a sudden currency crisis and the accompanying hyper-inflation. There have been many episodes of hyper-inflation in places such as Germany, Argentina, Zimbabwe, Mexico, Poland, Japan, the Soviet Union and many, many others.
Even people who are currently comfortably rich are far from safe. In Zimbabwe, the most recent and severe case of hyper-inflation I'm aware of, a person who had a fortune of 1BILLION Zimbabwe dollars in 2003 and had chosen to hide it "under the mattress", would today be worth the equivalent of LESS THAN ONE CENT!!
As to the risk of losing one's job, one approach which I have advocated to friends for years, is to take an off-setting financial position in a very similar company to the one employing them. Here's an example: let's say you work for Wells Fargo and fear losing your job for economic reasons. The wise thing to do would be to buy some amount in a security that gains, if indeed financial conditions do deteriorate. In so doing, the "loss" suffered by the termination of your employment would be, at least, partially offset by the GAIN in the financial position. Such securities are common and they are easy to trade. In fact, they are stocks known as ETFs, or Exchange Traded Funds.
As you have obviously inferred from the article's title, investing in Gold or high quality precious metal stocks, is, in my opinion, the BEST form of protection. Gold has historically been a TERRIFIC hyper-inflation hedge. It also tends to rise as other crises unfold, such as an outbreak of war. To be fair, it's far from bullett-proof, as there have been periods of creeping inflation where Gold has fallen, such as in the 1990's. But, I'm referring to the EXTREME types of risks we are simultaneously subject to today.
I believe that the sharp parabolic rise in Gold recently is YELLING that some very serious form of inflation and depreciation in the Dollar is very near. Thus, if you can afford it, I would advise at least some exposure to Gold. If you are short on funds, then use Silver, which as discussed previously, is even historically cheaper than the "yellow metal" and sells for 1/60th per ounce. In fact, Silver is in critically short supply and the U.S. Mint has entirely stopped producing one ounce Silver Eagles. I recently read that they are currently trading at a 30% premium on EBAY to their intrinsic value, based on their metallic content.
I hope you've found this article thought provoking and informative. Comments, pro or con, are always appreciated.
Marko's Take
Thursday, December 3, 2009
What Exactly Is The Federal Reserve?
The Federal Reserve or the "Fed", as it is more commonly known, was established in 1913. It acts as the central banking system for the United States. It is further divided into 12 district banks.
The Fed was created in order to accomplish the following:
- conduct the management of the nation's money supply with the objective of price stabilization
- supervise banking institutions in order to ensure their soundness
- maintain stability of the financial system
- provide financial services to a variety of financial entities, such as banks and the United States
Sounds like they've done one hell of a GREAT JOB!
In fact, prior to the Fed's creation, consumer prices remained virtually stable. Since 1913, the dollar has lost 97%, or so, of its value! Our banks are a complete mess BECAUSE of The Fed and its utter mismangement of interest rates and creation of asset bubbles. Maintain stability of the FINANCIAL SYSTEM? Uh-huh!
What most people DON'T realize, is that the Federal Reserve is very likely privately owned. Now, in fairness, I can't prove this because the Fed is shrouded behind an incredible cloak of secrecy. But, it CAN be proven that its 12 district banks are, as was the case in 1982, when a judge ruled so in "John L. Williams vs United States of America". So, it's logical to conclude that the Fed itself is privately owned.
The owners of the FED are believed to include some powerful entities, such as Goldman Sachs (GS). Isn't it a wee bit coincidental that employees of this firm are constantly given senior government positions, like head of the Treasury, while departing senior government advisors are given lucrative positions at GS?
Finally, its important to point out that the Federal Reserve refuses to be audited. In fact, Fed chief Ben Bernanke has repeatedly warned of "catastrophic consequences" if one were to be conducted. Given their obvious ineptitude, it isn't too tough to speculate as to why. The only conclusions I can draw are that either they are trying to cover up their ineptitude or, more likely, they have been involved in some nefarious activities.
Ron Paul has introduced legislation to audit the FED. This legislation has a very high level of bi-partisan support. However, the slowness of Congress and the unfortunate influence of a handful of congressmen has, so far, precluded the audit. Nonetheless, I believe it ultimately WILL occur.
Thanks for reading. I really appreciate comments, pro or con. And, I hope you found this informative.
Marko's Take
The Fed was created in order to accomplish the following:
- conduct the management of the nation's money supply with the objective of price stabilization
- supervise banking institutions in order to ensure their soundness
- maintain stability of the financial system
- provide financial services to a variety of financial entities, such as banks and the United States
Sounds like they've done one hell of a GREAT JOB!
In fact, prior to the Fed's creation, consumer prices remained virtually stable. Since 1913, the dollar has lost 97%, or so, of its value! Our banks are a complete mess BECAUSE of The Fed and its utter mismangement of interest rates and creation of asset bubbles. Maintain stability of the FINANCIAL SYSTEM? Uh-huh!
What most people DON'T realize, is that the Federal Reserve is very likely privately owned. Now, in fairness, I can't prove this because the Fed is shrouded behind an incredible cloak of secrecy. But, it CAN be proven that its 12 district banks are, as was the case in 1982, when a judge ruled so in "John L. Williams vs United States of America". So, it's logical to conclude that the Fed itself is privately owned.
The owners of the FED are believed to include some powerful entities, such as Goldman Sachs (GS). Isn't it a wee bit coincidental that employees of this firm are constantly given senior government positions, like head of the Treasury, while departing senior government advisors are given lucrative positions at GS?
Finally, its important to point out that the Federal Reserve refuses to be audited. In fact, Fed chief Ben Bernanke has repeatedly warned of "catastrophic consequences" if one were to be conducted. Given their obvious ineptitude, it isn't too tough to speculate as to why. The only conclusions I can draw are that either they are trying to cover up their ineptitude or, more likely, they have been involved in some nefarious activities.
Ron Paul has introduced legislation to audit the FED. This legislation has a very high level of bi-partisan support. However, the slowness of Congress and the unfortunate influence of a handful of congressmen has, so far, precluded the audit. Nonetheless, I believe it ultimately WILL occur.
Thanks for reading. I really appreciate comments, pro or con. And, I hope you found this informative.
Marko's Take
Wednesday, December 2, 2009
Gold $1200: Is It Too Late To Buy?
No! NOT EVEN CLOSE!! But that DOESN'T mean that the price of Gold won't be subject to sharp downward moves from time to time.
Now, I don't pretend to KNOW, with any degree of certainty, what level the "yellow metal" will ultimately reach, but we CAN review history to provide some guideposts.
One involves the ratio produced when the Dow Jones Industrial Average is divided by the price of Gold. Let's call it the DGR (Dow-Gold Ratio). Yesterday's ratio was 8.725 (10,471 divided by 1200). When the Dow is HIGH, while GOLD is LOW on a relative basis, this results in a HIGH ratio. Therefore, it's A LOW ratio that indicates that Gold is relatively expensive to stocks.
The DGR has bottomed at about 2.5 during the Great Depression and in 1900. However, the ratio fell to as low as 1 in 1980! At that time, Gold was in the terminal phase of a genuine mania. My belief is that history is in the process of repeating itself. Therefore, based on yesterday's Dow close of 10,471 a top for Gold could range from as low as $4,000 to $10,471! Of course, the market may decline or rise, so these are moving targets and certainly NOT guaranteed by any means.
Another approach would be to "inflation adjust" the last mania peak of $850 for Gold, which occurred in 1980. Using the calculations provided by the Bureau of Labor and Statistics, this prior peak would be equivalent to about $2,400 today. However, as discussed in prior blogs, the methodology for calculating the rate of inflation has been altered since then.
A man named John Williams, who has a fantastic website (http://www.shadowstats.com/), specializes in computing various statistics like inflation in a manner similar to that used in 1980. If HIS calculation of inflation is employed, the "inflation-adjusted" price of Gold projects a top of more than $7,000.
As to Silver, using Williams' number, its $50 peak, also reached in 1980, extrapolates to a top of over $400 per ounce. Or, more than 20 times the closing price yesterday!
It's vital that I re-iterate what I said yesterday in my essay regarding the possible reasons for the current strong stock market rally. No one truly knows where any market will ultimately peak or bottom, nor when. That is only known in hindsight and ususally well after the tops or bottoms occur. The most famous investor, Warren Buffett, avoids timing the market as much as possible and has accumulated his enormous wealth through a very simple "buy and hold" approach.
I hope you like this piece, find it informative and invite you to make comments, pro or con.
Marko's Take
Now, I don't pretend to KNOW, with any degree of certainty, what level the "yellow metal" will ultimately reach, but we CAN review history to provide some guideposts.
One involves the ratio produced when the Dow Jones Industrial Average is divided by the price of Gold. Let's call it the DGR (Dow-Gold Ratio). Yesterday's ratio was 8.725 (10,471 divided by 1200). When the Dow is HIGH, while GOLD is LOW on a relative basis, this results in a HIGH ratio. Therefore, it's A LOW ratio that indicates that Gold is relatively expensive to stocks.
The DGR has bottomed at about 2.5 during the Great Depression and in 1900. However, the ratio fell to as low as 1 in 1980! At that time, Gold was in the terminal phase of a genuine mania. My belief is that history is in the process of repeating itself. Therefore, based on yesterday's Dow close of 10,471 a top for Gold could range from as low as $4,000 to $10,471! Of course, the market may decline or rise, so these are moving targets and certainly NOT guaranteed by any means.
Another approach would be to "inflation adjust" the last mania peak of $850 for Gold, which occurred in 1980. Using the calculations provided by the Bureau of Labor and Statistics, this prior peak would be equivalent to about $2,400 today. However, as discussed in prior blogs, the methodology for calculating the rate of inflation has been altered since then.
A man named John Williams, who has a fantastic website (http://www.shadowstats.com/), specializes in computing various statistics like inflation in a manner similar to that used in 1980. If HIS calculation of inflation is employed, the "inflation-adjusted" price of Gold projects a top of more than $7,000.
As to Silver, using Williams' number, its $50 peak, also reached in 1980, extrapolates to a top of over $400 per ounce. Or, more than 20 times the closing price yesterday!
It's vital that I re-iterate what I said yesterday in my essay regarding the possible reasons for the current strong stock market rally. No one truly knows where any market will ultimately peak or bottom, nor when. That is only known in hindsight and ususally well after the tops or bottoms occur. The most famous investor, Warren Buffett, avoids timing the market as much as possible and has accumulated his enormous wealth through a very simple "buy and hold" approach.
I hope you like this piece, find it informative and invite you to make comments, pro or con.
Marko's Take
Tuesday, December 1, 2009
Exactly Why IS The Stock Market Rallying?
To he honest answer is that I don't know! But, I can think of several possibilites. In fact, NO ONE can know with any degree of certainty. The fact is that markets of all sorts do what they want and when they want. The reasons are only clear in hindsight. What I CAN do is review the potential reasons and make an educated guess.
One possibility is that the economy is indeed recovering. That's less ridiculous than it might seem at first. Given the level of stimulus, coupled with the high level of growth in the money supply, the economy typically would respond with an initial recovery. The unfortunate side effect of all the economic juicing is that eventually, prices start to rise at an accelerated rate. A good analogy would be a drug addict. At first the drug gives one a "high" but is followed by the inevitable withdrawal symptoms. The drug addict then builds a tolerance and needs MORE of the drug. Subsequently, the crashes become more painful.
Another reason for this rally may be inflation expectations. In Zimbabwe, which is just starting to recover from one of the most severe bouts of hyperinflation I've ever heard of, their stock market shot up exponentially. Zimbabwe's inflation rate was so high that it reduced the value of ITS dollar to 6 QUADRILLIONTHS of its value in 2003! However, in the U.S., in the late 1960's through 1982, a period of high inflation, stocks fell by an astonishing 90% from peak to trough, if the cumulative inflation was taken into account. That loss was virtually identical to that experienced during the Great Depression.
A third possibility is that we are in a temporary rally within a longer-term overall downtrend. This is a very common occurrence, especially after the severity of the accelerating panic that engulfed the market between the emergency takeover of Bear, Stearns in 2008 and the March lows of 2009. The market behaves like a pendulum. It frequently overshoots in one direction only to be followed by a sudden sharp about-face.
Finally, the idea that the market is manipulated by agents or proxies of the government is gaining acceptance. It has also been, to some extent, even admitted to, but only very recently. Until we get an audit of the Federal Reserve, we won't know with any certainty as to what extent this may or may not have occurred. It's clear the Federal Reserve DOES manipulate some markets such as interest rates and, therefore, the price of bonds.
They also manipulate the U.S. Dollar. But we don't know how far that manipulation extends, nor its overall effect on the stock market. If this indeed is true, it will ultimately fail because it can only work temporarily. We can be certain that whatever power the Federal Reseerve exerts, it must be limited. Otherwise, the market would have never crashed in the first place!
So, here's "Marko's Take" on all this! My own personal belief is that we are indeed in a temporary rally that will ultimately prove to be of limited duration and NOT make new highs for a long time. And it may be somewhat overdone with help from our friends and their proxies at the Federal Reserve. Even if I AM correct, I don't have any firm conviction as to how long it will last, nor how high it will ultimately go.
I'm always delighted by your comments, pro or con. If you like what you've seen, it would thrill me to have you email this piece, or any other of my pieces, to a friend or two.
Marko's Take
One possibility is that the economy is indeed recovering. That's less ridiculous than it might seem at first. Given the level of stimulus, coupled with the high level of growth in the money supply, the economy typically would respond with an initial recovery. The unfortunate side effect of all the economic juicing is that eventually, prices start to rise at an accelerated rate. A good analogy would be a drug addict. At first the drug gives one a "high" but is followed by the inevitable withdrawal symptoms. The drug addict then builds a tolerance and needs MORE of the drug. Subsequently, the crashes become more painful.
Another reason for this rally may be inflation expectations. In Zimbabwe, which is just starting to recover from one of the most severe bouts of hyperinflation I've ever heard of, their stock market shot up exponentially. Zimbabwe's inflation rate was so high that it reduced the value of ITS dollar to 6 QUADRILLIONTHS of its value in 2003! However, in the U.S., in the late 1960's through 1982, a period of high inflation, stocks fell by an astonishing 90% from peak to trough, if the cumulative inflation was taken into account. That loss was virtually identical to that experienced during the Great Depression.
A third possibility is that we are in a temporary rally within a longer-term overall downtrend. This is a very common occurrence, especially after the severity of the accelerating panic that engulfed the market between the emergency takeover of Bear, Stearns in 2008 and the March lows of 2009. The market behaves like a pendulum. It frequently overshoots in one direction only to be followed by a sudden sharp about-face.
Finally, the idea that the market is manipulated by agents or proxies of the government is gaining acceptance. It has also been, to some extent, even admitted to, but only very recently. Until we get an audit of the Federal Reserve, we won't know with any certainty as to what extent this may or may not have occurred. It's clear the Federal Reserve DOES manipulate some markets such as interest rates and, therefore, the price of bonds.
They also manipulate the U.S. Dollar. But we don't know how far that manipulation extends, nor its overall effect on the stock market. If this indeed is true, it will ultimately fail because it can only work temporarily. We can be certain that whatever power the Federal Reseerve exerts, it must be limited. Otherwise, the market would have never crashed in the first place!
So, here's "Marko's Take" on all this! My own personal belief is that we are indeed in a temporary rally that will ultimately prove to be of limited duration and NOT make new highs for a long time. And it may be somewhat overdone with help from our friends and their proxies at the Federal Reserve. Even if I AM correct, I don't have any firm conviction as to how long it will last, nor how high it will ultimately go.
I'm always delighted by your comments, pro or con. If you like what you've seen, it would thrill me to have you email this piece, or any other of my pieces, to a friend or two.
Marko's Take
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