Most of us gold bugs are ready for the explosive blowout top after a long,
spectacular parabolic rise in the price of gold, so that we can then move along
to Phase 2 of the Terrific Mogambo Retirement Plan (TMRP).
This is the part of the TMRP where we shamelessly spend vast fortunes in the
pursuit of fun and the absence of responsibility, except for the part where we
sleep something off, get any new tattoos removed, nullify new contracts or
marriage licenses, and pay for any damages. Otherwise, whee!
Phase 1 of the TMRP, of course, is when we spend those grueling years at our
stupid jobs, smiling on the outside but secretly
plotting our revenge while continuously buying gold, silver and oil with what
we can salvage from our meager pay, gradually accumulating gold, silver and oil
in a sheer panic because the Federal Reserve was creating too much money, which
the federal government borrowed and spent to enlarge itself and its scope, and
creating too much money which everyone else borrowed, too, to enlarge
themselves and their scopes, which has gotten us all in debt up to here, a
waistline out to here, garages full to there, and now we're freaking doomed,
except for ... (pause for dramatic effect) ... those who were buying gold,
silver and oil when they were cheap, like now.
So how much money are we talking about? Well, Joel Bowman, managing editor of
The Daily Reckoning, notes, "Historically, the peak of a gold bull market/stock
bear market occurs when you can pick up the 30 bluest stocks for about one,
maybe two, ounces of gold. The Dow/Gold ratio, at that point in time, is said
to be around 1:1 to 2:1. During the furor of tech mania in the late '90s, early
'00s, when the Midas metal was scoffed at in polite company, that ratio reached
45:1."
In terms of the sheer weight of that much gold, in case you want to, for
example, calculate how much gold your kids will have to carry if you are
planning to sneak across the border, if needs be, "it would take you 2.8 POUNDS
of Mother Nature's money to buy the Dow"! Wow!
Then, to show you how gold holds its value, he notes that "During the past
decade, as stocks stagnated and gold rallied fourfold, that ratio has slipped
dramatically", and now, today, gold has risen in price so much that "it takes
about 8.6 ounces of gold to buy the Dow," which is less of a burden on kids
("if needs be"), and even less of a burden next year when he expects "a
Dow/Gold ratio of about 6:1".
Ian Gordon of the Longwave Group verifies, in his essay "The Perpetual War:
Gold vs Paper" that the current price of the Dow Jones Industrial Average
divided by the US dollar price for an ounce of gold currently stands at 8.54,
which he considers quite high, considering that "the trendline joining the two
lows in 1932 and 1980 is currently at 0.68 (0.68 ounces of gold to buy the Dow
Jones Industrials)" which "would be equal to something like 2000 points on the
Dow and a $3,350 gold price." Wow!
Phase 2, here we come!
Before I could get carried away with wild daydreams of pleasure and gluttonous
debauchery paid for with piles and piles of ready cash, I am instantly on
defensive alert when Mr Gordon's warning rings out, loud and clear, "It's a
possibility, but not a ratio to which we give a high probability." Darn!
Being a pathetic guy whose hopes and dreams are always crushed by a cruel,
uncaring world, I naturally expect the "but", since it implies that gold is not
going to soar soon, and I'm going to have to keep working at my stupid job
longer than I had hoped, meaning that I will have to put up with the wife and
kids and family and boss and neighbors for one more hour, one more day, one
more week, one more month, or one more year than I had feared. Or more! Oh, woe
is me!
On the other hand, it makes sense to keep working as long as gold, silver and
oil are so cheap! Looked at it like that, what can one say except, "Whee! This
investing stuff is easy!"?
Richard Daughty is general partner and COO for Smith Consultant Group,
serving the financial and medical communities, and the editor of The Mogambo
Guru economic newsletter - an avocational exercise to heap disrespect on those
who desperately deserve it.
(Republished with permission from
The Daily Reckoning. Copyright 2010, The Daily Reckoning.)
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