At the beginning of a hyperinflationary cycle, the stock market virtually always makes substantial gains which is just reflecting the sheer weight of printed money…After the initial enthusiasm the stock market loses its lustre and falls in tandem with the economy into a deflationary depression. The U.S. is now slowly entering such a hyperinflationary phase…and with it the dollar is likely to start a severe decline this year on its way to the intrinsic value of ZERO. This will not only happen in the U.S. but also later in Japan, the Eurozone and the UK. Here’s what that means for the future price of gold.
So says Egon von Greyerz (goldswitzerland.com) in edited excerpts from his original article* entitled Trade of the decade.
[The following article is presented by Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), the FREE Market Intelligence Report newsletter (sample here) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Gold always reveals the destruction of paper money as the graph of the Dow/Gold ratio below shows. Since 1999 the Dow has fallen 72% in real terms (i.e. as measured against Gold). The ratio made a bottom in 2011 when Gold was $1,900. We have been forecasting new highs before 2014 is over and we still believe that is likely. Thus the Dow/Gold ratio could soon turn down and start its journey to below 1 to possibly 0.5. In 1980 the ratio was 1 with gold and the Dow both around 850. If the ratio overshoots, which is likely, and goes to 0.5 that would mean that the Dow would fall another 96% from here against gold.
A look below at the monthly chart of the Dow/Gold ratio shows a dead cat bounce of 20% of the whole down move since 1999. Technically this correction now seems to be finishing with the momentum indicators showing bearish divergence on the monthly chart. In addition the Dow could form an important cycle top in April/May.
At what level would we find Gold and the Dow if the ratio hits 0.5? That would clearly depend on the amount of hyperinflation we will see. It could mean the Dow at 6,000 and Gold at $12,000 but if hyperinflation really takes off, we could see Gold at $50,000 and the Dow at 25,000.
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Furthermore, we mustn’t forget what happened in the Weimar Republic when Gold went from 100 marks in 1918 to 100 trillion marks in 1923. In that scenario I would expect the ratio to be a lot lower because it would be unlikely to see the Dow at 50 trillion during a hyperinflationary depression.
The trade of the decade, and possibly of the century, is likely to be short the Dow and long Gold.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://goldswitzerland.com/trade-of-the-decade/ (©2014 GoldSwitzerland)
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