Monday, August 31, 2009
A Very Uncommon Forecast ...
by Larry Edelson
Dear Subscriber,
In my July 2008 Real Wealth Report, just 13 months ago, I warned my subscribers that the Dow Jones Industrials (DJI) — in real terms — had already lost 72 percent of its value when measured from its real, inflation-adjusted high of 14,198 in October 2007.
I also warned that ... "The U.S. dollar is on the edge of the abyss."
And that ...
"The only way to truly understand the U.S. economy — what's happening, why, and where it's headed — is to look at asset prices in terms of gold, the world's only real form of money."
It is absolutely CRITICAL that you understand that last point, because I believe that concept is the most crucial information you need to know to financially survive and prosper — now and in the years ahead.
It's also something maybe only 1 out of every 100 economists even considers.
As the U.S. dollar continues to crash and burn, the price of gold – the only true money – will increase in value.
But the simple fact of the matter is this: Ever since U.S. politicians severed the link between the dollar and gold, the only truly accurate way to analyze any asset price is to consider its historical cost in terms of gold.
That's because, before President Nixon dissolved the gold standard in 1971, anything and everything you did in your business, in investing, even in your personal finances — could be converted into or exchanged for physical gold by simply requesting the gold from your bank or the U.S. Treasury.
That's no longer the case. And that's also why since 1971, asset values have exhibited much more volatility and wild price swings than they did before the United States went completely off the gold standard.
Don't get me wrong. The gold standard had to go for a variety of reasons.
But understanding the impact that abandoning the gold standard has made on the world — ushering in an entirely new era of finance and economics — is so poorly understood, it simply amazes me.
Consider the following: The "real" value of the Dow Jones Industrials in terms of GOLD — TRUE MONEY, or what I like to call REAL WEALTH.
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Suppose you had $10,000 of paper dollars (or digital dollars in your brokerage account) to invest in the DJI at the beginning of 2001 ...
At the end of 2001, while your original $10,000 investment in the Dow was worth $10,021 — a gain of 0.21 percent — that paper money would have only bought you 38.5 ounces of gold.
At the end of 2002, your original $10k investment in the Dow would have been worth only $8,341.64 – a loss of $1,679.36, or 16.78 percent — and it would have only bought you 21.8 ounces of gold, 43.4 percent LESS gold.
Compared to 2002, in 2003 and 2004, the Dow actually slightly outperformed real money (gold), and would have bought you 25.9 and 24.9 ounces, respectively.
But then, look what happened to the real value of the Dow from 2004 on ...
At year-end 2005, you would have been able to buy only 19.5 ounces of gold with your money invested in the Dow ...
At year-end 2006, only 15.8 ounces ...
At the end of 2007, only 13 ounces of gold ...
At the end of 2008, only 10.4 ounces ...
At the March 2009 low of 6,440 in the Dow, your investment would buy you only 7.08 ounces of gold, an amazing loss of 81.61 percent of the Dow's purchasing power!
And if you think that's bad, then consider this: At that March low, the Dow had lost a FULL 87 percent of its value since its all-time peak purchasing power of 54 ounces of gold.
You can check out the "real value" of the Dow in this bar chart that I have for you:
Pretty amazing, eh?
A few questions I'm already anticipating ...
Question #1: Where does the Dow stand in terms of gold today, Larry?
A. As this column goes to press, the Dow Industrials-to-gold ratio stands at just over 10, meaning the Dow right now would buy about 10 ounces of gold.
That's up from 7.08 ounces at the March low in the Dow, a gain of 41.24 percent, a pretty big gain.
Question #2: In your opinion then, has the Dow in terms of "real money" bottomed?
A. Before I answer that question, I want to digress a bit and take a look at the individual components: The Dow, in nominal values, has gained 48.7 percent since the March low, while gold has gained about 7 percent.
Why is this breakdown analysis important? Because it shows you that since March, the Dow has outperformed gold. Dramatically.
I expected that. Indeed, it's one of the many reasons I turned bullish on the Dow in the middle of March, nailing the Dow's bottom virtually to the tee.
My reasoning at the time: The median low point for the Dow/gold ratio since the world went off the gold standard in 1971 is a ratio of 5 to 1.
So I calculated that at 7 to 1, the Dow would have lost nearly 90 percent of its real value from its high on the ratio of 54 to 1, fulfilling the 1932 Depression style collapse, which was also a loss of 90 percent for the Dow.
The big difference between then and now: Back then, the world was on a gold standard. So the decline had to occur in nominal values which were the same as real values — since every dollar was fixed to a specific exchange rate with gold.
Today, we no longer have that fixed measuring stick. Today, we live in a world of oscillating values, floating exchange rates, and no fixed values for anything. We live in a world of relative values.
So any comparisons to the stock market of the 1930's Depression has to be made not in terms of nominal values but in terms of real values, and namely, in terms of gold — the one asset that has always held its purchasing power, throughout the ages.
In fact, my long-standing theory has always been — coming full circle — that unless you understand that the assets can no longer be measured accurately in terms of nominal values, and that in a world of floating exchange rates, gold is the only true way to value assets — you are virtually doomed to being on the wrong side of major trends, time and time again.
So has the Dow bottomed in terms of gold, in terms of real values?
My answer, and uncommon forecast: Yes, it has. We have likely already seen the major low in the Dow in terms of its purchasing power, it having lost almost 90 percent of its value back at the March lows.
Does that preclude any further moves down in stocks? No, it does not.
But from a long-term investor's point of view, I would no longer be shorting the Dow. Instead, I would be buying both select stocks — especially other tangible asset stocks like shares in natural resource companies — and gold, for the long term.
Best wishes,
Larry
P.S. Assessing real estate values in terms of gold is another very interesting analysis. At the peak of the housing market in March 2007, the median U.S. home price was $262,600, equivalent to 346.4 ounces of gold.
Today's median home price is $178,400, or 188.4 ounces of gold. So in terms of nominal values, the U.S. median home price has shed 32.0 percent. But in terms of real money, gold, it's lost a whopping 45.7 percent.
Even more interesting, since 1971, the average of the annual median home price in the U.S. is $73,333 (the annual median home price from 1971 to 2008, totaled, then averaged).
For the same period, the average annual price of gold is $349.
So for that entire period of 37 years (1971 to 2008) the average of the median home price compared to the average price of gold means that the median home price would have bought you 210.12 ounces of gold.
That ratio today is now 188.4, fully 10.3 percent below the average of the ratio for the last 37 years.
This is one of the reasons I forecasted a bottom in real estate prices in my June 29 column, a month ahead of just about everyone else.
For more in-depth analysis of how today's world really works, including all of my recommendations, I encourage you to join Real Wealth Report.
At $89 a year, a subscription to Real Wealth Report costs a fraction less than one-tenth of an ounce of gold — its lowest price ever in terms of gold — and a real bargain!
A Very Uncommon Forecast ...
by Larry Edelson
Dear Subscriber,
In my July 2008 Real Wealth Report, just 13 months ago, I warned my subscribers that the Dow Jones Industrials (DJI) — in real terms — had already lost 72 percent of its value when measured from its real, inflation-adjusted high of 14,198 in October 2007.
I also warned that ... "The U.S. dollar is on the edge of the abyss."
And that ...
"The only way to truly understand the U.S. economy — what's happening, why, and where it's headed — is to look at asset prices in terms of gold, the world's only real form of money."
It is absolutely CRITICAL that you understand that last point, because I believe that concept is the most crucial information you need to know to financially survive and prosper — now and in the years ahead.
It's also something maybe only 1 out of every 100 economists even considers.
As the U.S. dollar continues to crash and burn, the price of gold – the only true money – will increase in value.
But the simple fact of the matter is this: Ever since U.S. politicians severed the link between the dollar and gold, the only truly accurate way to analyze any asset price is to consider its historical cost in terms of gold.
That's because, before President Nixon dissolved the gold standard in 1971, anything and everything you did in your business, in investing, even in your personal finances — could be converted into or exchanged for physical gold by simply requesting the gold from your bank or the U.S. Treasury.
That's no longer the case. And that's also why since 1971, asset values have exhibited much more volatility and wild price swings than they did before the United States went completely off the gold standard.
Don't get me wrong. The gold standard had to go for a variety of reasons.
But understanding the impact that abandoning the gold standard has made on the world — ushering in an entirely new era of finance and economics — is so poorly understood, it simply amazes me.
Consider the following: The "real" value of the Dow Jones Industrials in terms of GOLD — TRUE MONEY, or what I like to call REAL WEALTH.
Internal Sponsorship
You Could Be Missing Out!
If you're worried that our massive deficits, record-shattering Treasury auctions and off-the-charts money-printing are going to gut the dollar — and by extension, the value of every stock on Wall Street ... And if you still need to keep your money growing no matter what happens next in the U.S. ...
It's high time you took a good, long look overseas — at what's happening right now in China!
Click here harness the economic power of these new economic superstars!
Suppose you had $10,000 of paper dollars (or digital dollars in your brokerage account) to invest in the DJI at the beginning of 2001 ...
At the end of 2001, while your original $10,000 investment in the Dow was worth $10,021 — a gain of 0.21 percent — that paper money would have only bought you 38.5 ounces of gold.
At the end of 2002, your original $10k investment in the Dow would have been worth only $8,341.64 – a loss of $1,679.36, or 16.78 percent — and it would have only bought you 21.8 ounces of gold, 43.4 percent LESS gold.
Compared to 2002, in 2003 and 2004, the Dow actually slightly outperformed real money (gold), and would have bought you 25.9 and 24.9 ounces, respectively.
But then, look what happened to the real value of the Dow from 2004 on ...
At year-end 2005, you would have been able to buy only 19.5 ounces of gold with your money invested in the Dow ...
At year-end 2006, only 15.8 ounces ...
At the end of 2007, only 13 ounces of gold ...
At the end of 2008, only 10.4 ounces ...
At the March 2009 low of 6,440 in the Dow, your investment would buy you only 7.08 ounces of gold, an amazing loss of 81.61 percent of the Dow's purchasing power!
And if you think that's bad, then consider this: At that March low, the Dow had lost a FULL 87 percent of its value since its all-time peak purchasing power of 54 ounces of gold.
You can check out the "real value" of the Dow in this bar chart that I have for you:
Pretty amazing, eh?
A few questions I'm already anticipating ...
Question #1: Where does the Dow stand in terms of gold today, Larry?
A. As this column goes to press, the Dow Industrials-to-gold ratio stands at just over 10, meaning the Dow right now would buy about 10 ounces of gold.
That's up from 7.08 ounces at the March low in the Dow, a gain of 41.24 percent, a pretty big gain.
Question #2: In your opinion then, has the Dow in terms of "real money" bottomed?
A. Before I answer that question, I want to digress a bit and take a look at the individual components: The Dow, in nominal values, has gained 48.7 percent since the March low, while gold has gained about 7 percent.
Why is this breakdown analysis important? Because it shows you that since March, the Dow has outperformed gold. Dramatically.
I expected that. Indeed, it's one of the many reasons I turned bullish on the Dow in the middle of March, nailing the Dow's bottom virtually to the tee.
My reasoning at the time: The median low point for the Dow/gold ratio since the world went off the gold standard in 1971 is a ratio of 5 to 1.
So I calculated that at 7 to 1, the Dow would have lost nearly 90 percent of its real value from its high on the ratio of 54 to 1, fulfilling the 1932 Depression style collapse, which was also a loss of 90 percent for the Dow.
The big difference between then and now: Back then, the world was on a gold standard. So the decline had to occur in nominal values which were the same as real values — since every dollar was fixed to a specific exchange rate with gold.
Today, we no longer have that fixed measuring stick. Today, we live in a world of oscillating values, floating exchange rates, and no fixed values for anything. We live in a world of relative values.
So any comparisons to the stock market of the 1930's Depression has to be made not in terms of nominal values but in terms of real values, and namely, in terms of gold — the one asset that has always held its purchasing power, throughout the ages.
In fact, my long-standing theory has always been — coming full circle — that unless you understand that the assets can no longer be measured accurately in terms of nominal values, and that in a world of floating exchange rates, gold is the only true way to value assets — you are virtually doomed to being on the wrong side of major trends, time and time again.
So has the Dow bottomed in terms of gold, in terms of real values?
My answer, and uncommon forecast: Yes, it has. We have likely already seen the major low in the Dow in terms of its purchasing power, it having lost almost 90 percent of its value back at the March lows.
Does that preclude any further moves down in stocks? No, it does not.
But from a long-term investor's point of view, I would no longer be shorting the Dow. Instead, I would be buying both select stocks — especially other tangible asset stocks like shares in natural resource companies — and gold, for the long term.
Best wishes,
Larry
P.S. Assessing real estate values in terms of gold is another very interesting analysis. At the peak of the housing market in March 2007, the median U.S. home price was $262,600, equivalent to 346.4 ounces of gold.
Today's median home price is $178,400, or 188.4 ounces of gold. So in terms of nominal values, the U.S. median home price has shed 32.0 percent. But in terms of real money, gold, it's lost a whopping 45.7 percent.
Even more interesting, since 1971, the average of the annual median home price in the U.S. is $73,333 (the annual median home price from 1971 to 2008, totaled, then averaged).
For the same period, the average annual price of gold is $349.
So for that entire period of 37 years (1971 to 2008) the average of the median home price compared to the average price of gold means that the median home price would have bought you 210.12 ounces of gold.
That ratio today is now 188.4, fully 10.3 percent below the average of the ratio for the last 37 years.
This is one of the reasons I forecasted a bottom in real estate prices in my June 29 column, a month ahead of just about everyone else.
For more in-depth analysis of how today's world really works, including all of my recommendations, I encourage you to join Real Wealth Report.
At $89 a year, a subscription to Real Wealth Report costs a fraction less than one-tenth of an ounce of gold — its lowest price ever in terms of gold — and a real bargain!