interesting DJIA to Gold Chart

derryb

Notice the correlation between Dow to Gold ratio (red) and the Fed Funds Rate (black). Now that Fed Funds rate has reached near-zero, what will the ratio do? I predict it will hold between 6.5 and 8 as long as fed funds rate holds near zero. This chart tells me that the Dow will have to rise for gold to rise and that a crash in equities will not be good for gold. Unless the ratio breaks its trend with the Fed Funds rate a declining Dow will result in lower gold prices. Based on this chart and the FED's recent committment to keeping rates low, the Dow will have to rise significantly in order for gold to rise significantly. A declining dollar (good for gold) should also be calculated into the mix.

Most gold bugs know that a near 1:1 ratio has historically indicated an end to a cyclical gold bull market. Is it possible that indefinite, near-zero rates guarantee an indefinite bull market for gold? I say yes.
Is the first hike in rates by the FED going to be an early warning to exit gold? Again, I say yes.

Thoughts to ponder.



More Gary Dorsch charts with some interesting commentary

gecko109

Doubtful we will see any significant hikes in interest rates for a very, very long time. Remember, with the U.S. owing close to 16 trillion in debt, and with such a thirst for new debt, a rise in rates = a rise in treasury note returns. Uncle Sam currently uses 17% of all revenue collected just to pay interest on its loans now at these historically low rates. Imagine how much that percentage would change if interest rates went above 5 or 6%!

Can the U.S. government sustain its day to day operating costs if more than 25% of all collected revenue goes towards interest payments on outstanding debts? Wait, they cant balance a budget now with just 17% going towards debt interest only payments.

roadrunner

The rising interest rates would also require that $275 TRILL in otc interest rate contracts held by our biggest banks start to perform...which they cannot.
The current interest rate structure protects both our debt payments and the otc derivative's stockpile. A FED fund rate of 0.25% is effectively zero based on
all the other freebies the big banks get with that "loan." Once a parameter gets to 0% I'm not sure anything can be tracked against it with accuracy. When
the Dow/gold ratio peaked at 42 during the end of the last bull market (2000) it created a very nice 80 yr, 5 wave broadening top pattern. There's a pretty good
chance it will match the 2 previous DGR bottoms (1932 and 1980) of 1-3 as the broadening top decline fully plays out.

Rising rates don't have to be negative for gold...except possibly for an initial shock. Gold ran strong for 2 years from 1978-1980 as interest rates essentially
doubled. Gold increased >5X and silver >10X in that period. It's rising real interest rates approaching zero % that would stop gold's advances.

cohodk

The market will raise rates long before the FED does. The markets are bigger than the FED/ECB/JCB, ect, combined.

gecko109

<< <i>The market will raise rates long before the FED does. The markets are bigger than the FED/ECB/JCB, ect, combined. >>





And that will be checkmate for the U.S. monetary system as we know it. Who in the world will lend money to the government at a 3% return when they could get 6% at a local bank?

This will lead to banana republic style printing, which will lead to real inflation, which will lead to even higher private company interest rates, which will then force the U.S. government to raise its own rates on T-bonds to make them more competitive, which will lead to an unsustainable % of total revenue going towards interest only payments on outstanding and newly issued debt.

Got gold?

roadrunner

<< <i>The market will raise rates long before the FED does. The markets are bigger than the FED/ECB/JCB, ect, combined. >>



What "market" has $600 TRILL in world-wide bets to counter otc interest rate contracts? US banks carry at least $275 TRILL of these while
foreign banks carry the rest. And if you reapply the marked to maturity fudge factor from 2008, the $600 TRILL is actually more like $900 TRILL.
Pimco already learned in 2011 which force is greater, the market or the big banks working together. The market can try to raise rates but a
leveraged IR bet of $2 TRILL at 50-1 (ie $100 TRILL notional) would negate any such short term attempt. Until the otc IR contracts are removed
from the playing field, rates aren't going too far. These IR bets have been working like a champ for years for the banks. Why would they stop?

derryb

The market will set consumer interest rates and their low will be based on FED funds rate. Competition has not been completely eliminated - yet. Competition will keep them competitive.

jmski52

A 1:1 DGR will be transitory in nature even if it gets to that point. With inflation masked, the Real Rate is trickier to track even with Fed Funds flatlined around zero. I like roadrunner's 1 to 3 range, with 3 as the exit point. This still implies a double in the price of gold.

Further, as derryb implies a rise in the stock market is generally spurred by the same conditions that cause gold to rise. This is a reflection of the liquidity being injected as much as anything else. Accordingly, the capital markets are so interconnected that I do believe a crash in the stock market will necessarily cause gold to drop as funds are required to meet other liquidity needs.

I tend to agree with roadrunner that interest rates can rise steadily for a time before killing a gold rally, as in 1978-9 and that the main signal for an end to the gold run would be a Volker-like figure making that interest rate decision. As Gecko points out, any significant rise in Treasury rates will exascerbate the already-uncomfortable debt issue. And as cohodk correctly notes, the market will move before the Treasury ever does - which will put the Treasury in a very tight spot.

However, I disagree with Gecko that the outcome is certain in favor of uncontrollable money creation. They have seen that movie before and know where it leads. They aren't stupid, but they are corrupt. I just listened to Bernanke tell Chuck Grassley that inflation is likely to fall to under 2% for the next two years.

Once again, it comes down to "who do you believe?" Just keep an eye on government finance. Bonds (and the dollar) are the dog, gold is merely the tail. They will fight to keep the government in full operation. Everything else can be sacrificed. To me, this means that retirees and bondholders are but grist for the mill. I plan to dodge the bullet accordingly.

So, why would I disagree with Gecko about exploding money supply and much higher gold prices? I think that is the outcome only if things don't get out of hand. There is always the possibility of a revaluation and/or default with the attending declarations on what you can and cannot do with your own money (and gold or silver). I simply don't trust the politicians, and history points out many examples of why my distrust is well founded.

I do think gold is going to double, but beyond that point I think it'll be time to step back and take another look around.

cohodk

<< <i>

<< <i>The market will raise rates long before the FED does. The markets are bigger than the FED/ECB/JCB, ect, combined. >>



What "market" has $600 TRILL in world-wide bets to counter otc interest rate contracts? US banks carry at least $275 TRILL of these while
foreign banks carry the rest. And if you reapply the marked to maturity fudge factor from 2008, the $600 TRILL is actually more like $900 TRILL.
Pimco already learned in 2011 which force is greater, the market or the big banks working together. The market can try to raise rates but a
leveraged IR bet of $2 TRILL at 50-1 (ie $100 TRILL notional) would negate any such short term attempt. Until the otc IR contracts are removed
from the playing field, rates aren't going too far. These IR bets have been working like a champ for years for the banks. Why would they stop? >>




I dont contend that they would stop. Japan has kept rates low for 2 decades. No reason the same cant happen here. Im just commenting that if the market wants higher rates, then the market will get higher rates, regardless of the central bank's desires. Higher rates may or may not impact the POG. Its the reason why the rates are higher that is more important.

The USA is not going to turn into a Banana Republic either. If rates go higher then it will probably be due to inflationary pressures. Those pressures will also raise notional GDP (as well as tax receipts) as the price of goods and services increase. The effect will be a net-net.

derryb

Mountain of Money about to fuel equities and commodoties

Fed's goal is to devalue the dollar 33%

2012 should be a monster year for PMs. Lock 'n load.

roadrunner

I still contend that if the market wants higher rates, and the CB's want higher rates, but the top dozen or two investment banks in the world don't want higher rates, then
the outcome will be rates staying low. The leverage of the derivatives wins out until that tool is removed from the available options. But I don't think even the CB's want
higher rates based on their huge debt loads and the need to service them economically.

Baley

The USA is not going to turn into a Banana Republic either. If rates go higher then it will probably be due to inflationary pressures. Those pressures will also raise notional GDP (as well as tax receipts) as the price of goods and services increase. The effect will be a net-net.

This rings true to me.

IMO, dow:gold of 1:1 is an unrealistic goal. I agree that if we see 3:1 and all else is equal/stable, it's time to consider selling lots of gold

derryb

<< <i>IMO, dow:gold of 1:1 is an unrealistic goal. I agree that if we see 3:1 and all else is equal/stable, it's time to consider selling lots of gold >>


If we see 3:1 gold nothing will be equal or stable and holding will become more imperative as the parabolic move continues. Closely monitoring conditions will also become more imperative. From 3:1 to 2:1, gold should easily more than double. It's gonna take a pretty good downturn to convince me to bail at 3:1 or even 2:1. In bad enough circumstances we could actually see the the ratio invert. I'd like to be sitting on a stack at a 1:2 ratio. Didn't the platinum to gold ratio recently invert?

gecko109

"The USA is not going to turn into a Banana Republic either."




When the single largest buyer of U.S. debt is an entity controlled by the same organization borrowing that money, we really need to take notice. IMO, its the 1st step towards a banana republic as far as monetary policy is concerned.


If an entity simply prints IOU's to make up a shortfall in revenue vs spending, how is that any different than that entity just "borrowing" money from itself that it does not even have and thus is forced to print?

When sovereign nations lend us money via buying our debt, we are at least somewhat held accountable. When the U.S. run FED starts lending us money, we are now in the beginning stages of "print and pay".

derryb

one might consider a bottom occurring under a 1-to-1 ratio favoring gold

"As it currently stands, the dow/gold ratio is sitting at roughly 9-to-1. A move to a 5-to-1 ratio, would require a $2907 oz. gold price, a 3-to-1 ratio $4845 oz., and a 2-to-1 ratio would require a stunning $7268 oz. gold price. A 2-to-1 ratio move from here equates to a 400% move higher in gold, and of course, a 1-to-1 ratio ($14,500 oz.) would equate to an over 900% move left remaining in the gold bull market. So is a move to a 2-to-1 ratio or lower in the cards? That’s ultimately for you to decide. But when we look at the climate, it appears that the worst of the financial problems are only just now bubbling to the surface. Additionally, why would Central Banks be acquiring record-setting amounts of gold unless they also expect a powerful thrust downward in the ratio?"

renman95

Follow the money and not their public words. Central Banks around the world have been and are buying gold. My guesstimate is for 2:1. But I will take note reaching 5:1.

No one knows where the next blow off in POG will peak. In 1974 an $850 POG forecast for 1980 would have seemed irrational. Another shift in thinking will occur.

Imagine unimaginable numbers.

fishcooker

Heck, when Sinclair said $1600, that sounded unreal.

cohodk

<< <i>one might consider a bottom occurring under a 1-to-1 ratio favoring gold

"As it currently stands, the dow/gold ratio is sitting at roughly 9-to-1. A move to a 5-to-1 ratio, would require a $2907 oz. gold price, a 3-to-1 ratio $4845 oz., and a 2-to-1 ratio would require a stunning $7268 oz. gold price. A 2-to-1 ratio move from here equates to a 400% move higher in gold, and of course, a 1-to-1 ratio ($14,500 oz.) would equate to an over 900% move left remaining in the gold bull market. So is a move to a 2-to-1 ratio or lower in the cards? That’s ultimately for you to decide. But when we look at the climate, it appears that the worst of the financial problems are only just now bubbling to the surface. Additionally, why would Central Banks be acquiring record-setting amounts of gold unless they also expect a powerful thrust downward in the ratio?" >>





Or...

5 to 1 could be $1000. 3 to1 could be $1667 and 2 to 1 could be $2500.


When the previous 1 to 1 ratios were reached the DOW traded at about book value. What is book value today? Hint, look what I just wrote.

derryb

Just as with gold going up and resulting in a lower ratio, the dow going down will provide the same result. A 1:1 ratio could be had at 1500 gold. . . with a 1500 dow. Historically the near 1:1 tells us the dow has bottomed and gold has peaked. Until it nears that point it is not a good indicator of which to buy.

InYHWHWeTrust

<< <i>


Or...

5 to 1 could be $1000. 3 to1 could be $1667 and 2 to 1 could be $2500.


When the previous 1 to 1 ratios were reached the DOW traded at about book value. What is book value today? Hint, look what I just wrote. >>





If the DOW book value = 5000, then POG in US$ = 5000 at a 1 to 1 ratio! just showing off my ciphering skills

Baley

dreamers

derryb

<< <i>dreamers >>


yepper, since $400 gold and $6 silver. However, ever since then Kitco keeps tells me I'm not dreaming.

Wingsrule

When the previous 1 to 1 ratios were reached the DOW traded at about book value. What is book value today? Hint, look what I just wrote.

What is $5,000, Alex?