Identifying the Trend

This is the tenth post in a series entitled Currency, Money and the Economy.

What did the example in the previous post demonstrate, besides the fact we missed the boat on making a killing (provided we had been alive since 1903)? It demonstrates that in times of extreme deflation or inflation, precious metals will hold their value. So, now knowing the lessons of the past, how does that help us for the future? Let’s return to our example and start from the year 2000.

As stated in the last post, in 2000, you could buy the Dow for 42 ounces of gold, an all-time high. In 2007, the Dow hit an all-time high of 14164, but gold had risen to $695 an ounce. That meant it only took 20 ounces of gold to buy the Dow. Therefore, even though the Dow had retraced its dot-com high and made new ones, the value of the stock market dropped by 51% in just 7 years.  This is not some measure like the Consumer Price Index (CPI) the United States government loves to manipulate and quote in order to tell the public that inflation is under control. This is a measure of a hard asset against a paper asset.

Right now, the Dow is at about 10000 and gold is at $1000 an ounce, meaning it only takes 10 ounces to buy the Dow.  The value of the stock market has dropped 76% since 2000 and very few people know it!  Compare this number with the 80% reduction in buying power of the US dollar stated in the eighth post.

If we put all of the information we have learned in the last two posts into a table, we get this:

Time Frame	Dow low / Gold	Dow high / Gold	Dow low / Gold	Economic Period
1903-1929	1.5	19	-	Growth
1929-1932	-	19	2	Deflation
1932-1966	2	29	-	Growth
1966-1980	-	29	1.2	Inflation
1980-2000	1.2	42	-	Growth
2000-Present		42	10 and falling	???

All of a sudden, the trend becomes clear as a bell. This table clearly identifies cycles between growth and pain, and the relationship between the Dow and Gold during those cycles.

Now let’s project these trends out into the future. Based on historic cycles, we will expect that the value of the Dow will continue to fall until you can once again buy the Dow for about 2 ounces of gold. But how does that help us if we do not know if the economic period will be deflation, inflation, or something in between? Let’s examine all of them in the next post.