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Guest Post: The Most Important Chart In TheWorld

Tyler Durden's picture




 

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

Fill your bowl to the brim and it will spill.  Keep sharpening your knife and it will blunt.  Chase after money and security and your heart will never unclench.  Care about people’s approval and you will be their prisoner.  Do your work, then step back.  The only path to serenity.
- Tao Te Ching

It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness.
-  Karl Marx

Keep away from people who try to belittle your ambitions. Small people always do that, the really great make you feel great too
-  Mark Twain

The Most Important Chart in the World
Back in my Bernstein days, I never really took a large amount of presentation materials to most of my meetings.  However, there was one chart that I always printed out and brought with me and I called it “The Most Important Chart in the World.”  It still is.  The chart I am referring to is the ratio of the Dow Jones Industrial Average: The Gold Price.  In a nutshell, charting this ratio demonstrates the “real” return on stocks adjusted for inflation or currency debasement.  As we all know, the Zimbabwe stock market essentially went up to infinity during their hyperinflation but did anyone get rich from that?  Of course not, the shares were denominated in a currency that was on its way to worthlessness.  At the moment, with many U.S. stock indices hitting new post-2008 highs there seems to be a general view that stocks as an asset class will do well in an inflationary environment.  As a result, whenever there is actually QE or even the mention of the potential resumption of Fed balance sheet expansion there is a rally in equity prices.  In fact, I think the entire investor class in the U.S. has been lulled into a sense of sleep and complacency at the moment.  There are two things I want to point out to people when they are considering whether to increase exposure to equities broadly or not.

1.  Allocation of Portfolios from the BRICS and Europe:  When you look at how well U.S. Treasuries and German Bunds have done this year, it becomes pretty clear that investors have shifted massive amounts of bond capital away from the formerly high growing areas of the world (that are now in serious collapse) into those nations perceived as “safe havens.”  While Germany doesn’t have its own currency, the U.S. obviously does and given concerns surrounding a Euro breakup and the extreme difficulties in the Chinese and Indian economies, many investors have decided the dollar is the best house in a bad neighborhood, at least temporarily.  This has led to a flight to U.S. equities generally, but also specifically into large cap U.S. centric names with dividends.  This is THE crowded trade of 2012 and three prime examples are Wal-Mart (WMT, +22% YTD), Target (TGT, +26% YTD), and Home Depot (HD, +36% YTD).  If you ask me, this trade is extremely long in the tooth.

2.  Strong Performance Concentrated in a Few Stocks:  I have hit on this theme many times before, but the key point is that if you weren’t in the right names this year there is a good chance you have underperformed the market significantly.  While you can say that this is normally the case, this year has been far more extreme as is evidenced by reports of horrible hedge fund performance this year relative to the benchmarks.  Apple (AAPL), of course, is the prime example.  This giant now sports a market cap of $623 billion and is up 65% YTD.

An Inflation Hedge?
The point I am attempting to make above is that those are the two main reasons for U.S. stock outperformance this year.  More than anything else, it has been about reallocation of global portfolios away from former high flying regions into those regions that are deemed safer.  I believe this has been exacerbated by the fact that the relative performance of the U.S. economy versus the BRICs caught a lot of people off guard.  That being said, I also think that the complacency that exists today is partly a function of investors’ belief that stocks will provide a good hedge against rising inflation and so why sell.  After all, if the Bernank is going to print at the first sign of weakness I should be sitting pretty with my stocks.  However, is this a correct train of thought?

My view, and one that was borne out in the last big inflationary period in the 1970s, is that high inflation is not good for stocks.  Not even in nominal terms.  PE ratios shrink as there is little real investment, confidence is shattered and the outlook becomes cloudy.  Some companies have pricing power but many do not.

Here is the chart of the SPX from 1970-1980.

See that.  Nothing done.  That’s ten years of zero, but with some really nice tradable swings.  The reason I bring all this up now is because we are likely to see a significant upswing in inflation as we head into 4Q.  Gasoline prices have been on a tear as of late and are now showing +9% on a year-over-year basis.  Recall that prices at the pump only adjust with a lag, so this will be impacting people for weeks to come.  The bigger issue though will be food.  Largely as a result of the severe drought in the U.S., corn and wheat prices have jumped 50% in the past two months.  This will affect consumption one way or the other.  The reason I am really concerned with the food situation is that the lag on passing on that is even longer, so we really haven’t seen any of it yet.  Furthermore, consumer product and food companies have already utilized almost every trick in the book up until this point.  Shrinking package sizes, putting less in the same packages, etc.  So I envision a scenario coming where the food inflation will be much more overt and in your face and this will further depress psychology.  Particularly amongst the newest members of the food stamp club, who were formally part of the vanishing middle class.

So to me, stocks broadly will not provide the protection assumed by many at the end of the day.  The only way I could see it happening is if we totally destroy the value of the currency (very possible, but I do not see evidence of that trade being in effect yet).  There is one major component missing to the “dollar becoming worthless” event.  One way it could happen would be an outside force dumping dollars (treasuries) aggressively without regard for price.  The second, and more likely scenario, would be a further expansion of the Fed’s balance sheet (QE) but this time directed at the public at large.  The key thing so far has been that the Fed’s actions have really only benefitted speculators as they have borrowed cheaply and purchased assets (hence the rally in markets).  The real inflation will come once the money is handed out at the street level.  This may be coming and if it does, I don’t suspect the names that have benefited so far this year will be the stocks to be in.  Yield chasing will be shunned and inflation protection investing will be en vogue.  I would start to prepare for this eventuality.

Back to The Most Important Chart in the World
Sorry, got a little sidetracked there.  So, the key thing with the Dow/Gold chart is that it perfectly mimics the various social moods and massive secular trends that exist in the economy over very long periods of time.  It is just as effective in periods of deflation as in inflation in telling you the true story.  Let’s take a closer look and examine what it has looked like from 1920-Present.

Monthly Chart of DOW/Gold 1920-Present

What this chart shows you are secular swings in the economy.  You see how stocks ran up in real terms into the 1929 crash and then plunged versus gold.  You see how they ran up in the next great post- WW2 period into 1968 when they once again plunged versus gold.  Then you can see the great secular bull market in stocks from around 1982 to the bubble peak in 2000.  In both of the prior two periods (one deflationary and one inflationary) the DOW/GOLD ratio got down to about 1:1.  It has been my contention for many years that we will see that same ratio once again.  That would imply another roughly 75% drop in stocks to gold and I expect that this next leg is beginning now.

Dow/Gold Two Year Chart
Of course for active investors and traders, timing is important and you can have massive counter trend rallies within a larger, secular trend.  I believe we have just completed one of those.  As you can see in the chart below, the Dow/Gold ratio has just had a massive 44% rally in past year or so, but it looks as if it may have formed a serious top.  Incredibly, it is one of the biggest counter-trend rallies of the entire secular bear period for stocks since 2000, registering at around 44%.  While very painful for those who didn’t see it coming, it is no coincidence that it happened in an election year.  My sense is this chart is currently in reversal mode and I think the ratio could hit between 4-5 from the current 7.8 over the next 12-18 months.  That is a huge opportunity if I am correct.  As always, decide for yourself.

Dow/Gold Two Year Chart

 

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Thu, 08/23/2012 - 15:42 | 2731470 JeremyWS
JeremyWS's picture

SP chart looks awfully familiar??

Thu, 08/23/2012 - 16:18 | 2731550 Peter Pan
Peter Pan's picture

Either the S & P has to plunge or more likely gold ill surge to meet tht 1 to 1 ratio. Thn again both movements could be in play.

Thu, 08/23/2012 - 16:22 | 2731571 Stoploss
Stoploss's picture

Judging by the wave of gold bashers that have just hit the airwaves making sure everyone knows gold will be caught in the liquidation with everything else.

Ready and waiting..

Thu, 08/23/2012 - 18:15 | 2731874 AldousHuxley
AldousHuxley's picture

most important in the world?

this is ameri-centric view as if capital markets do not exist beyond DOW JONES which is actually full of old inefficient monopolies.

 

once americans wakeup to the reality that in the past 30 years,

  • arabs created metropolitan financial capitals in the middle of the desert
  • asia became modernized dominating many institutions
  • half of millionares in europe are Russians

they are up for a rude awakening of that America is now lagging behind in terms of technological, social, financial progress.

 

watch out republicans HATE progressives to keep the shitty society all for themselves.

 

NOBODY WHO HAS TRAVELED OUTSIDE OF AMERICA  still believes MSM's brainwashing that USA #1.

Fri, 08/24/2012 - 02:58 | 2732726 Muppet of the U...
Muppet of the Universe's picture

True, but the dollar is still the WRC and the U.S. markets are king.  Above and beyond that, I'm quite sure that people will make the chart come true - A self fulfilling prophesy if you will.  If you would care to notice the Gold Platinum ratio...  Yea.  Ppl make these famous charts come true, and the more they adhere to fulfilling them, the more powerful they become.

www.youtube.com/watch?v=aDATXtewPrg trip on that thought..

www.youtube.com/watch?v=1CYbOeQ-WFM

Fri, 08/24/2012 - 13:56 | 2734493 SeattleBruce
SeattleBruce's picture

"arabs created"

Oh yes, Aldous.  Americans and the rest of the world are 'lagging behind' those clever Arabs in the desert...do you think the wealth in the Middle East has been created in a vacuum?

Fri, 08/24/2012 - 12:39 | 2734218 Precious
Precious's picture

Well that would be fine.  24k fine.

Thu, 08/23/2012 - 15:42 | 2731471 malikai
malikai's picture

DOW at 1:1 for gold would be catastrophic for TPTB.

They will fight that at all costs.

Thu, 08/23/2012 - 15:48 | 2731490 LawsofPhysics
LawsofPhysics's picture

I was kind of hoping for Gold 1:1 with the CDS market, just saying.  if you are going big, go BIG.

Thu, 08/23/2012 - 15:56 | 2731511 Divided States ...
Divided States of America's picture

The markets maybe flat over the 10 years but for an algo and HFT, this is paradise. Of course, they are skimming the profits of those who are still willing to put money into this joke of a market. Hopefully, ppl will start waking up and leave so the bots can start cannibalizing themselves, and thats when Judgement Day begins.

Thu, 08/23/2012 - 16:05 | 2731532 economics9698
economics9698's picture

1920s Coolidge and Harding cut spending, DOW booms, Fed expands money supply 62%.

1950 and 60s, federal spending around 18%, 1960s Fed expands money supply, war.

1990s Clinton cuts federal spending, Fed expands money supply 107%.

Any questions? 

This shit is not rocket science.

 

 

Thu, 08/23/2012 - 16:13 | 2731548 LawsofPhysics
LawsofPhysics's picture

"This shit is not rocket science."

 

If you are talking about the part where the Fed expands the fiat (backed by nothing) money supply while earning interest at the expense of the taxpayer. Then yes, the path to prosperity is very fucking clear.  End the Fed and execute the owners for their treason.

Thu, 08/23/2012 - 18:22 | 2731902 AldousHuxley
AldousHuxley's picture

americans are busy giving tax breaks to those who benefit most from Fed's money printing.....

 

US is becoming hopeless while developing countries offer much better future vision.

 

USA VS RUSSIA

http://www.moneyandshit.com/wp-content/uploads/2011/05/usa_vs_russia.jpg

Thu, 08/23/2012 - 15:59 | 2731518 malikai
malikai's picture

While we're at it why not put all the unfunded liabilities in there too?

Gold at $1,000,000/oz, shall we say?

Thu, 08/23/2012 - 16:45 | 2731635 AGuy
AGuy's picture

"Gold at $1,000,000/oz, shall we say?"

When gold gets anywhere near that valuation, it will zoom right past it on its way to $1T/$5/$10T... per ounce. That's assuming that you can find a seller that will trade you gold for worthless US dollars at those valuations.

Thu, 08/23/2012 - 19:30 | 2732090 DanDaley
DanDaley's picture

Remember that in Weimar Germany, the exchange rate was 4.2 trillion marks / dollar.  Not so farfetched.

Thu, 08/23/2012 - 17:23 | 2731741 crkennedymd
crkennedymd's picture

There should be a +100 option for a sentiment such as that

Fri, 08/24/2012 - 14:01 | 2734524 SeattleBruce
SeattleBruce's picture

Is this just before it gets confiscated by the USG (and other government/quasi-governments)?

Thu, 08/23/2012 - 16:20 | 2731563 sdmjake
sdmjake's picture

Have been holding/stacking/trading for years watching this ratio fall. Not greedy and will settle up at 3:1.

Thu, 08/23/2012 - 18:40 | 2731960 Midas
Midas's picture

I have heard this 1:1 ratio many times and I must admit I am not a believer.  I think it is just a historical coincidence, after all, how many times has it happened, three?  At least the line about gold:silver trading at 15:1 has a basis in geology.  Does anyone have an argument why the 1:1 SHOULD happen again?  I am not hating on gold, I own gold and will own it until they stop flooding with fiat and a ZIRP.  I will however buy stocks when P/E ratios reach typical bottoms of bear markets, maybe 5?  I don't know what the ration of gold/dow will be when that happens, but if it is 3:1 or 4:1 I am not going to worry about it. 

Fri, 08/24/2012 - 09:22 | 2733417 Think for yourself
Think for yourself's picture

simple overshoot, industrial/electronic uses of silver and depletion of above-ground reserves? Meanwhile, gold just gets stacked up...

Fri, 08/24/2012 - 01:37 | 2732769 Muppet of the U...
Muppet of the Universe's picture

I saw your profile pic and gave you a thumbs up without reading.  and im going to keep it that way, and stare a little while longer.

Thu, 08/23/2012 - 16:08 | 2731519 akak
akak's picture

 

DOW at 1:1 for gold would be catastrophic for TPTB.

They will fight that at all costs.

TPTB make their plans, and God laughs.

Thu, 08/23/2012 - 18:16 | 2731877 Pubcoceo
Pubcoceo's picture

it will happen but where will it happen 6000? 3000? most people dont realize gold can even be more important as a store purchasing power in a deflationary depression, but 1:1 will happen, i think sooner rather than later...

 

Thu, 08/23/2012 - 18:42 | 2731966 No More Bubbles
No More Bubbles's picture

They'll be 1 to 1 when they both his 2000.....

Thu, 08/23/2012 - 15:44 | 2731476 Precious
Precious's picture

Looks pretty bearish for gold.

Thu, 08/23/2012 - 15:48 | 2731489 serog
serog's picture

I'll buy yours.

Thu, 08/23/2012 - 16:08 | 2731521 Precious
Precious's picture

Buy at the exact bottom.  Ambitious.

Thu, 08/23/2012 - 16:29 | 2731593 serog
serog's picture

The exact bottom was centuries ago.  So yeah, that would be ambitious.  My game is consistent allocation and could give 2 shits about today's, yesterday's or tomorrow's price.

Thu, 08/23/2012 - 18:31 | 2731919 Hard Assets
Hard Assets's picture

My dear old grandmother stashed away $100 bills for an eternity during the '50's and '60's with the very ambitious plan of giving each of her 13 grandchildren a $100 bill when they got married. She did, she was very noble, very caring, a heart of gold.

Only one problem with her plan. If she had put 2 1/2 oz. of coin in the box instead of a $100 bill, imagine the difference ! I'm thinking $100 of currency A or 2 1/2 oz. (x $42 ~ $100) of currency B.

My son, who is in the "gold is a rock" club (worser than "you can't eat it" club) got a demonstration one day. I put $42 in an envelope and a shiny new Eagle into a shoebox. I said my grandmother gave it to me as inheritance but one stipulation. I had to pick one 'gift' for myself and give one to charity. I opened the shoebox and showed him the 'gifts'.

I asked him, "Which gift should I pick"

He said, "So what?"

I said, "So what? You put $1,700 in an envelope and a 1oz. coin and open it in 60 or 70 years and see what you have !"

He said, "So what, big deal ! I will put my money into the stock market and over the LONG haul I will be better ahead than your commodity inflation baloney."

I said, " Gold will be around in 60 or 70 years, the stock market won't !!"

He said, "Yeah ok, Dad"

I went and mixed another drink.  

 

Thu, 08/23/2012 - 18:53 | 2731997 Hard Assets
Hard Assets's picture

Another quick story that I had with the 24 year old young lad about 3 years ago.

I have read a couple books about the demographic budge rolling thru the planet several years back so I could see this slow-motion train wreck coming. We were yacking about this blob rolling thru and when the "Baby Boomer" era entered retirement, s*it was going to fly. I gave him the 'top ten' reasons while he sat in his chair flabbergasted.

He said, "Well how the hell did this happen?"

I said, "How the hell did what happen?"

He said, "This 'baby boomer' thingy?"

I said, " Well Chris, we had WWII from '39 until '45. Every soldier, man or near man was shooting bullets at enemies. Every woman was at home making bullets in a factory or working their asses off doing a 'man's job' at home. Horny women at home, horny men shooting villians and then it suddenly fucking ends. "

I paused, then carried on, "Then what you have is every horny man re-uniting with every horny woman on the entire planet and everyone shagged their asses off for a few years !"

He said, "No kidding !"

I mixed another drink.

Fri, 08/24/2012 - 05:50 | 2732944 falak pema
falak pema's picture

with all the drink mixing I would venture your hard assets were going very liquid! 

Thu, 08/23/2012 - 19:17 | 2732057 smiler03
smiler03's picture

Smart Kid, you should be proud. Asteroid mining will make gold as common as iron in 70 years.

 

And I am just joking ;O)

Thu, 08/23/2012 - 20:31 | 2732211 TheFourthStooge-ing
TheFourthStooge-ing's picture

Hard Assets related a story of his young son:

He said, "So what, big deal ! I will put my money into the stock market and over the LONG haul I will be better ahead than your commodity inflation baloney."

He must be around 18. When you're 18, you know everything.

The smart ones, by around age 25, start to realize how little they actually know. The dim bulbs rarely progress to that stage.

Thu, 08/23/2012 - 15:45 | 2731481 TheSilverJournal
TheSilverJournal's picture

DOW might hit 1:1 for silver with this coming currency debacle and full blown rush into PMs.

Thu, 08/23/2012 - 15:47 | 2731488 apberusdisvet
apberusdisvet's picture

Dow:gold

 

If they all print:   40,000:40,000

 

If they don't:    4000:4000

Thu, 08/23/2012 - 15:58 | 2731515 eatapeach
eatapeach's picture

A-men

Thu, 08/23/2012 - 18:35 | 2731943 Hard Assets
Hard Assets's picture

Devil's advocate (easy fellows!)

Whats the chance of 1,000:1,000 ?

....a la severe deflation?

Thu, 08/23/2012 - 23:42 | 2732630 ayanni
ayanni's picture

gotta rec that - it's the one i keep thinking is the least possible (severe deflation - not the ratio specifically). 

not a chance.  right?

 

Fri, 08/24/2012 - 08:38 | 2733225 TheSilverJournal
TheSilverJournal's picture

No fiat currency has EVER gained value after the host country goes bankrupt.

Thu, 08/23/2012 - 18:39 | 2731955 Roandavid
Roandavid's picture

From your fingers to God's ear.

Either way is OK by me.

Thu, 08/23/2012 - 15:49 | 2731493 ATG
ATG's picture

Marc Faber: Global Recession 100% Odds; Germany Likely Heading Into Recession Soon...

Thu, 08/23/2012 - 15:52 | 2731495 Monedas
Monedas's picture

Carta Blanca .... Latin for a new roll of TP !         Monedas     1929        Soul is the brevity of wit !   (No, I'm not slamming Niggers .... I'm slamming touchy feely Liberals who like to rescue dogs !)

Thu, 08/23/2012 - 15:49 | 2731496 InconvenientCou...
InconvenientCounterParty's picture

The DJIA itself is limited statistically. S&P 500 would be better for this metric.

Thu, 08/23/2012 - 15:53 | 2731503 q99x2
q99x2's picture

75%. Hell I'm saving mine to bribe my way out of the country during the time the DHS start firing their 1.4 billion rounds at us.

Can't bribe a drone but you can pay for a safe place to hide.

I'm not FEMA camp material.

Thu, 08/23/2012 - 15:56 | 2731507 LawsofPhysics
LawsofPhysics's picture

Just a point of analysis.  I see at least one glaring contradiction.  The authors says the following "My view, and one that was borne out in the last big inflationary period in the 1970s, is that high inflation is not good for stocks.  Not even in nominal terms.  PE ratios shrink as there is little real investment, confidence is shattered and the outlook becomes cloudy"

Then the author points out that stocks have gone nowhere during the last ten years, a period during which we have had low inflation.

I think the author misses the point that we had an oil issue and wage inflation in the 70's (the latter is not necessarily bad)  however, we had hig interest rate and real inflation during the 80's, when the stock market took off.

Seems like the author desparately wants to be correct either way - FAIL.

Thu, 08/23/2012 - 16:13 | 2731546 Beam Me Up Scotty
Beam Me Up Scotty's picture

Low inflation due to MOPE.  They don't compute it the way the did in the early 80's.  Today they pencil whip the shit out of it.  While inflation today may not be quit as high as it was back then, it certainly is higher than the 2% or so that they are telling us it is.

Thu, 08/23/2012 - 16:23 | 2731566 akak
akak's picture

I concur.

With the US dollar having lost approximately 40% of its value just since 2000, I would hardly call that "low inflation".  And if anyone here wants to trot out those laughably low CPI bullshit figures from the BLS to make that claim, expect to have your lying head handed to you on a plate.

Thu, 08/23/2012 - 16:54 | 2731660 donsluck
donsluck's picture

I trashed you accidently, sorry. Anyways, at 3.5% inflation, the dollar loses 40% of it's value in 12 years. Still not "high" inflation per the Fed, but to you and me...

Thu, 08/23/2012 - 19:20 | 2732060 smiler03
smiler03's picture

For the record..... If you hit the up or down arrow, you are allowed to change your mind and reverse the vote.  Click on the other arrow, it's not rocket science, well not for most of us NASA geeks.

Thu, 08/23/2012 - 21:04 | 2732300 Midas
Midas's picture

You're right.  That works.  I left it down just for fun...

Thu, 08/23/2012 - 16:36 | 2731621 LawsofPhysics
LawsofPhysics's picture

Yes, I agree.  But there is still the issue of wage inflation versus asset inflation and commodity inflation.

Energy and resources are the real underlying issue and power and control of them is what the Fed is trying to maintain.

Thu, 08/23/2012 - 15:54 | 2731509 urbanelf
urbanelf's picture

When people post these Dow/Gold charts they really should post the log(Dow/Gold), otherwise the shape of the chart is kinda useless.

Thu, 08/23/2012 - 16:20 | 2731562 urbanelf
urbanelf's picture

Oh, sorry, Mr. and Mrs. Downvoter.  Keep your stupid non-linear chart.

Thu, 08/23/2012 - 15:56 | 2731512 SumSUN
SumSUN's picture

Dow/Gold 0.1/1 ?

Thu, 08/23/2012 - 16:02 | 2731525 reader2010
reader2010's picture

WHEN EVERYONE IS SAYING TO BUY AT DOW/GOLD RATIO OF 1:1,  IN REALITY NOBODY IS THINKING. 

Thu, 08/23/2012 - 16:03 | 2731529 bagehot99
bagehot99's picture

How do you trade this information? Short everything? Ultra-short ETFs? It seems like John Paulson's Hedge Fund was pursuing this strategy, and misunderestimated the willingness of Teh Ben Bernank to just keep printing.

Thu, 08/23/2012 - 16:57 | 2731669 Terminus C
Terminus C's picture

I think if you are still playing the paper markets at this point you have been missing the over all message of this site for the past three years.

Thu, 08/23/2012 - 19:23 | 2732075 smiler03
smiler03's picture

."How do you trade this information?"

 

Let Graham Summers be your guide. It'll be the best money you never spent.

Thu, 08/23/2012 - 16:07 | 2731537 New World Chaos
New World Chaos's picture

Somewhere (can't find it) I remember seeing a version of this chart which went almost 100 years farther back, extrapolating what the Dow would have been.  The chart was surprisingly flat relative to what happened after we let the Fed come in with promises of "price stability". 

Thu, 08/23/2012 - 16:09 | 2731540 uno
uno's picture

the fed prices the dow in ipads

Thu, 08/23/2012 - 18:20 | 2731898 Pubcoceo
Pubcoceo's picture

it will still go to 1:1 dow 3000/ipad $3000

 

Thu, 08/23/2012 - 16:17 | 2731552 hugovanderbubble
hugovanderbubble's picture

great work Krieger

Thu, 08/23/2012 - 16:24 | 2731579 Lucius Corneliu...
Lucius Cornelius Sulla's picture

Let's start calling it "The Most Important Chart In The World" ... this week.

Thu, 08/23/2012 - 16:26 | 2731587 ParkAveFlasher
ParkAveFlasher's picture

Wow.  So, first there's gold, and then there's western society's increasingly enormous attempts to circumvent/replace/undermine/hypothecate its value with any kind of scrip.  Which inevitably fails. 

Thu, 08/23/2012 - 16:30 | 2731601 edifice
edifice's picture

Dow/Gold ratio in 2017-or-so: 0.5.

Thu, 08/23/2012 - 16:32 | 2731606 davinci7_gis
davinci7_gis's picture

I'll play the devils advocate even though I hope gold gets to at least $5K per oz. within a year!

What if a new currency was released to the world at a time of global panic and financial crisis that was purely digital which was not based upon any one country's money but based upon a basket of currencies much like the current  specific drawing right unit (SDR) that the IMF uses?

What would gold be worth then...if let's say, the price of gold in US dollars was $5,000 per 1 oz....

But, it takes $500 to buy 1 unit of this international, digital currency which subsequently cannot be purchased with gold (the digital currency can only be purchased with another currency)?  

And, to top it all off, lets say that this new global currency became the defacto unit for the purchase of oil?

 

 

Thu, 08/23/2012 - 16:39 | 2731627 LawsofPhysics
LawsofPhysics's picture

Another fiat that you can't even touch?  Not only would physical gold explode, but so would physical paper currency as well as any coinage (and I would lose a bet to a 68 year old man who has physical pallets of $100 bills).

Thu, 08/23/2012 - 17:23 | 2731740 viahj
viahj's picture

pure digital will never work.  requires global electrical/telecomunication infrastructure.

 

Thu, 08/23/2012 - 20:18 | 2732189 DaveA
DaveA's picture

Pure digital currency already exists. It's called Bitcoin. Of course, TPTB will fight this too (in vain) because they can't control it. As long as you protect your wallet file, your Bitcoins cannot be stolen, taxed, frozen, devalued, or linked to your real name. Bitcoin cuts off both legs of the modern welfare state: income tax and fiat money creation.

Of course, the State can still tax your house, your car, and your swimming pool. Sales and excise taxes could pay for police and national defense, but they cannot support any sort of welfare state because they hurt workers more than the rich. E.g. the Luxury Yacht Tax of 1990 left rich people without new yachts and yacht-builders without jobs.

Fri, 08/24/2012 - 01:16 | 2732738 Don Keot
Don Keot's picture

I kinda sorta get it but I can't exactly put my finger on it.  But thanks, I get the concept.  Maybe there will be a black market.

Thu, 08/23/2012 - 16:39 | 2731629 falak pema
falak pema's picture

camels have two humps, not three. This chart is a fake!

Or a premoniton of morphed camel humping.

Fukushima effect on camels! 

Next we know WE won't have a pair, but triplets! 

Thu, 08/23/2012 - 17:49 | 2731800 linrom
linrom's picture

Agree, the chart is useless.

Thu, 08/23/2012 - 17:00 | 2731679 Debeachesand Je...
Debeachesand Jerseyshores's picture

"The real inflation will come once the money is handed out at the street level"

 

No shit DickHead: If the money was given out "at the street level",most of the BullShit we been experiencing since 2008 would have been avoided.

 

But instead,all the FUCKING MONEY was given to insolvent Banksters and their Cohorts.

Thu, 08/23/2012 - 21:26 | 2732352 chistletoe
chistletoe's picture

The money IS given out at the street level!!!!!  already!!!!!!

 

No one, I mean no one, actually works anymore.....

There's social security, and then there is unemployment insurance, and then there is disability and food stamps.

The people who have "jobs" drive in to work every day and they sit at their desks and play computer games

or look at pornography (or read Zero Hedge!) all day.

No one actually works.  No one.

Fri, 08/24/2012 - 01:20 | 2732743 Don Keot
Don Keot's picture

That's because some one else did it.

Fri, 08/24/2012 - 08:55 | 2733300 madcows
madcows's picture

But that would have been bad, as we'd have all the money, and the banks would be BANKrupt.

Thu, 08/23/2012 - 17:39 | 2731775 saycheeeese
saycheeeese's picture

put the chart in LOG scale...  it looks better.. especially the downside potential

Thu, 08/23/2012 - 17:53 | 2731818 Stuck on Zero
Stuck on Zero's picture

The chart is meaningless before American's were allowed to own gold.  Before then the price was established by government decree.

 

Thu, 08/23/2012 - 17:54 | 2731820 linrom
linrom's picture

DOW up, gold up at a faster rate. Then whats next? DOW down , gold goes to zero, the chart gets in synch. The third peak in the chart above is inverted.

Thu, 08/23/2012 - 18:30 | 2731924 Hype Alert
Hype Alert's picture

The second, and more likely scenario, would be a further expansion of the Fed’s balance sheet (QE) but this time directed at the public at large. The key thing so far has been that the Fed’s actions have really only benefitted speculators as they have borrowed cheaply and purchased assets (hence the rally in markets). The real inflation will come once the money is handed out at the street level.

 

You mean like giving everyone an EBT card, 99 weeks of unemployment or putting them on disability?  Pretty soon this may cover everyone making less than the magical $250K.  Of course, when minimum wage is $250K, who will care.

Thu, 08/23/2012 - 18:37 | 2731951 Roandavid
Roandavid's picture

Allright, I've been trying to avoid this moment and figure it out for myself, but I gotta ask the dumbass question.

What program/site are these charts being constructed on.

I like the pretty colors.

Thu, 08/23/2012 - 18:49 | 2731988 carambar
carambar's picture

I like this chart. It tells you get rid of your gold.

The gold bubble is close to the end.

Thu, 08/23/2012 - 19:00 | 2732017 BlackholeDivestment
BlackholeDivestment's picture

Golden BTFD Cup of Fornication in the hand of the Whore of Babylon riding the Market Beast, imagine that!  http://bible.cc/revelation/17-4.htm

Blaaa haa haa haa. What's next, physicists will start painting pictures of Genesis?  http://www.smh.com.au/technology/sci-tech/melbourne-researchers-rewrite-big-bang-theory-20120821-24j5z.html

http://bible.cc/genesis/1-2.htm 

http://www.youtube.com/watch?v=sCNPXpehoCM&feature=related

Thu, 08/23/2012 - 19:56 | 2732139 toomanyfakecons...
toomanyfakeconservatives's picture

Story after sotry like this... just more fuel for formerly-unthinkable events such as the coming MASS ARRESTS, the death of the Federal Reserve Note, and the restoration of the Constitution... http://tinyurl.com/cd5cyjo/

Thu, 08/23/2012 - 22:20 | 2732478 Dross1958
Dross1958's picture

Hate to sound stupid.  But how is this calculated? 

dow/gold.  At some point it's got to be arbitary.  The Dow is a collection of stocks that changes.  What unit is gold in oz?  grams? 

When he says reaches the ratio of 1 to 1.   1 what to 1 what?  One ounce of dow to 1 shares of gold?

How many oz of gold it takes to buy 1 share of all the dow industrials?

 

Fri, 08/24/2012 - 01:15 | 2732732 Bernankenstein
Bernankenstein's picture

"How many oz of gold it takes to buy 1 share of all the dow industrials?" ..Yes, that is it.

Fri, 08/24/2012 - 01:16 | 2732735 Bernankenstein
Bernankenstein's picture

"How many oz of gold it takes to buy 1 share of all the dow industrials?" ..Yes, that is it.

Sorry for my double-speak. Just comes naturally.

Fri, 08/24/2012 - 03:04 | 2732845 dunce
dunce's picture

My biggest investing mistakes were things i did not do, like sell all my paper assets in 2008 to invest in either gold or silver and reverse the trade today. My portfolio has got back to near even after three tears of trading stocks but that just means i lost three years of my life getting nowhere.

Fri, 08/24/2012 - 08:54 | 2733296 madcows
madcows's picture

That's it?  Only your last three years.  Crap, the last 10 years have been flat.  Your up 7 on the rest of us.

Fri, 08/24/2012 - 05:53 | 2732946 Grand Supercycle
Grand Supercycle's picture

SPX / DOW / NASDAQ / DAX / FTSE choppy daily charts are still breaking down.

http://www.zerohedge.com/news/2012-12-24/market-analysis

Fri, 08/24/2012 - 08:51 | 2733281 TrumpXVI
TrumpXVI's picture

Krieger's analysis matches my own.  The Dow:Gold is one of the pole stars I use to sail my own little ship; and has been since spring of '06.

It has been discouraging to watch the Dow:Gold go from under 6 roughly this time last year back to 8.2 about two weeks ago.  8.2 hadn't been seen for nearly two years.  This was probably the last time to ditch stocks for gold.  Either that, or gold investors were about to get killed.

The former situation is very most likely the reality.  With energy prices plus too much un-payable, global debt placing a hard cap on growth, hard assets and especially hard money are still set in an uptrend.

I'm not a trader.  I'm a "buy and holder".  For this strategy to work identifying long term trends early enough, and then to ride them, is crucial.

Fri, 09/28/2012 - 15:11 | 2839780 econprof70
econprof70's picture

Thought you folks might appreciate seeing this chart in an interactive format and using a log scale - gives a much better context than the charts in the article: http://www.macrotrends.org/1378/dow-to-gold-ratio-since-1915

Do NOT follow this link or you will be banned from the site!