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Gold, The Dow and You


In hard assets - in real money - like Gold, the Dow is nowhere near its 2000 peak.

The new all-time high in the Dow on July 17 is, if we are to take financial television's word for it, a congratulatory and excitable thing. Somebody must be making a ton of money is the not subtle between-the-lines message. "Why aren't you rich yet?" is another.

But if you happen to be a person who prefers to eat rather than starve, or chooses to use your vehicle to travel somewhere rather than go on foot, or even to keep your house at some reasonable temperature between, say, 60 and 80 degrees, well, you might be less than enthused about Dow 14,000. Why? Illusion.

British novelist Christopher Priest coined terms that associated the practice of stage illusions with having three parts: the setup (in which the magician describes what magic is about to happen), the turn (in which, say, an ordinary object disappears) and the prestige (in which that same object, say, reappears).

Dow 14,000? That's the prestige. What was the setup? The Fed lowering interest rates 17 times post the 2000 equity bubble burst. And the turn? Well, that was investors the world over becoming more risk seeking en masse as a result.

But it was – and is – all a form of money illusion. The denominator has changed, in this case the value of the USD, and that is what's given the U.S. that so noble of capitalist goals: all-time record stock market prices.

In hard assets – in real money – like Gold, the Dow is nowhere near its 2000 peak. The Dow priced in gold is down 56% from its all-time peak in 1999. And if for some reason you believe that most of the recorded history of man, in which gold was considered the only safe, reliable money, is bunk, then you will not be heartened to learn that stock prices in the form of other hard goods are equally, ahem, devalued: the S&P 500 priced in CRB index terms is down 37%; the Dow priced in Swiss franc and Euro terms is down 21% and 26% respectively from its 2000 peak. And this is to say nothing about the wipe-out of value the NDX has experienced against almost anything; no amount of denominator switching is going to bring back those values. No illusionist – not even the cartelizing force of the Federal Reserve – can make that happen.

Understanding the illusion above makes the everyday reality of living coincide nicely with the un-reality that is modern financial journalism. When you ask yourself, "How come I don't feel rich?", well, now you have my answer.

Not to be diminished either is the conclusion one might draw from this reality about the relationship between, say, gold, and the value of the USD (as reflected by the DXY index). To wit: massive credit creation over the last five years coupled with massive risk-seeking investor behavior has made everything that can be quoted, traded and settled in a back office somewhere in U.S. dollars go up in price. A lot.

So if gold has gone up massively because of the very credit creation plus risk-seeking herding process I have seen, lo, these many years, what happens when one or both of those forces abate and reverse (after all, cycles do cycle)? Well, gold goes down. And that's as unintuitive a result as most market participants are able to contemplate.

But the illusion is pervasive and the prestige utterly captivating.
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