1. Given the
perspective of 100 years from now, analysts might very well find
currency inflation the common source for the rise in both the
Dow and gold. If currency inflation could take the Dow from 800
to 11,750, why couldn't it take gold from $270 to $4050?
2. Markets
tend to move in strong, primary trends of 15 years or more. The
current stock market rally, from this perspective, looks more
like a short-term bear market reversal, outside the primary trend,
than it does a new uptrend. Gold, on the other hand, looks to be less
than mid-way in its primary 15-18 year uptrend. Needless to say,
there appears to be plenty of time remaining in the bull market to
incubate some unexpected results including price levels most would consider a reach at
this juncture.
3. Bull market
thinking is different than bear market thinking. In keeping with
our comparison to the stock market, buying gold today would equate
to buying stocks with the Dow at roughly 2200. Once you realize
that gold is rising for good reasons that aren't likely to disappear
anytime soon, the nominal price becomes a secondary issue. The
primary issue is and has been the debasement of the currency
and its effects on the financial and monetary systems. For the
ordinary investor/saver, the real question is how are you going
to go about insuring your wealth against currency debasement.
4. As pointed
out in "Disturbing Trends 2007 - The Dollar Under Siege,"
when gold recently achieved the $650 milestone and the Dow 13,400,
both had risen about 1800% since the dollar went off gold in
1971. What this tells us is that both may be influenced by the
same prime mover (monetary inflation) though they take
turns in the batters' box. Gold does well when the dollar is
under siege and the real rate of return goes negative. Stocks
and bonds do well when the real rate of return goes positive.
Now gold is in the batters' box and could remain there for as
much as another decade.
5. The stock
market is just one example that makes the point about inflation-driven
markets statistically. The same point can be made, for example,
by charting the price of gold in marks during the Weimar hyperinflation.
When it started, gold sold for roughly 87 marks per ounce. By
its end gold sold for roughly 63,000,000,000,000 marks per ounce
- give or take a few billion. So, as you can see, the price of
gold in nominal terms is strictly a matter of relativity. Similar
analysis can be applied to any number of currency crises. Wikipedia
lists over 30 such events running from the most recent in Zimbabwe
to the most interesting on the island of Yap.**
History's lesson
is that there is no predictable top to the price of gold during
a fiat money binge or crisis. Theoretically, the top extends
to infinity, or as long as the inflation lasts, or until the
arrival of the inevitable bust. Even then, gold will serve more
than adequately for the more cautious savers among us.
_____________
** Monetarily
speaking, everything progressed smoothly on the island of Yap
where large stones weighing hundreds of pounds were transported
around to serve as money. That is until something unforeseen
happened to the value of the money. For centuries, the stones
served in exchange because there wasn't much of this type of
rock on Yap itself. The depreciation of the stone money began
when an enterprising Western businessman realized he could produce
stone money cheaply and in copious quantities on a neighboring
island and transport it to Yap, where it could be used to procure
goods in demand elsewhere. In other words, this oceanic cousin
of John Law printed Yap stone money to buy his wares at what
might be called a "favorable" discount. By this process,
the yap stone money was debased until it became worthless. Little
did the citizens of Yap know that they were deprived of their
wealth, and their money destroyed, by the process of monetary
inflation.
