Editor’s Note: Emma Walsh here, managing editor of the Diary. This weekend’s guest edition is something a little different…
As regular Diary readers know, Tom Dyson, his ex-wife, and their three kids are on a road trip across the U.S. Recently, they visited Bonner-Denning Letter coauthor Dan Denning at his family home in Colorado.
While they were there, Tom sat down with Dan for a chat. And of course, the recent spike in the gold price was the first thing these two goldbugs got to talking about…
Dan Denning: Gold made another new high earlier this week.
In the context of your Dow-to-Gold trade, is that a big deal?
Tom Dyson: It’s a very big deal. If you look at the chart of the gold price, it peaks in 2011. Then it corrects.
Now, the correction is over. And we’re about to hit blue sky again.
I’m not a technical analyst. But looking at the big picture, I think this chart is very bullish.
This is a big deal for the Dow-to-Gold ratio. As gold goes up, my thesis is that the Dow-to-Gold ratio will go to 5.
And my best guess is that it goes to 5 because gold has gone up a lot… not because the Dow has gone down a lot.
I think they will both go up. But gold will go up so much more than the Dow that the ratio will fall.
So I think gold still has a long way to go.
Dan: I was going to ask you specifically about that. The Dow crashed 37% in March. But since the March lows, it’s up about 47%…
So this gold price signal comes at the same time that the Dow is only about 8% from its all-time high.
And it’s important for folks to grasp that we’re not talking about the Dow crashing to 15,000, or even to 5,000 points.
We’re talking about gold going up a lot – both in terms of paper currencies and stocks.
Tom: The most important concept to understand is the difference between real prices and nominal prices.
People don’t understand what “real” means. Real prices have been adjusted for inflation. So, although nominally, the Dow is rising… in real terms, it’s falling.
And it’s down – a lot – over the past 20 years. In fact, in gold terms, it’s been a terrible bear market.
Nominally, I think the Dow will probably end up doing quite well.
It will keep everyone at peace with their 401(k)s and with the government. And President Trump will be able to say, “See, the stock market is at all-time highs.”
But the stock market is being driven by the momentum of some huge stocks. If you look at the S&P 500 – a broader index than the Dow – the top five companies by market value are Microsoft, Apple, Amazon, Facebook, and Google parent company Alphabet.
They’re up 41% year-to-date. But the other 495 stocks that make up the index are down 5%.
Dan: Now that gold has made a new high in dollar terms, we’re seeing interesting price action in other commodities.
Are you taking advantage of other trading opportunities? Or are you content to stay with your Dow-to-Gold trade, and keep away from speculating on these other commodities?
Tom: It’s tough for me because I’m so invested in the Dow-to-Gold ratio.
I have such conviction in it that any other idea has a high hurdle to jump over – just to get me interested.
I expect this Dow-to-Gold trade is going to compound at 15% or 20% a year over the long term. So any other investment has to be better than that. And not many are.
But commodities are responding to the same forces that are pushing the Dow-to-Gold ratio down – the rebalancing from paper financial assets into real assets.
There is a tremendous rebalancing that needs to happen. Think of it as a seesaw…
Right now, everyone has rushed to one side. That’s the side of the dollar and claims against the dollar. I’m talking, in particular, about the U.S. bond market.
Meanwhile, there are very few people right now on the other side of the seesaw – tangible commodities such as gold, silver, and oil.
And if people start to worry about the purchasing power of the U.S. dollar, there’s going to be an almighty rebalancing. So I’m interested in that.
Does this other opportunity affect my personal allocation to gold? I don’t think so. I’m trying not to be greedy.
Also, on a personal level, I don’t want to be a speculator. I’ve found this other value in life that’s beyond money. I’m with my family. I don’t want to spend all day looking at a screen, trying to figure out the next ticks.
Dan: I am interested in silver, though. The Gold-to-Silver ratio blew out to about 125 in March, when silver went under $12.
That’s just another way of saying you could buy one ounce of silver with just 1/125th of an ounce of gold. That’s the cheapest silver has ever been in gold terms. Typically, an ounce of silver fetches between 1/80th and 1/50th of an ounce of gold.
Silver is up about 120% since then.
And I heard something from legendary resource investor Rick Rule at the Sprott Natural Resource Symposium a couple of weeks ago. Rick believes silver will be how the speculators play the precious metals bull market. That’s how it worked in the past, because the true gold bugs are in bullion.
Then the resourceful, entrepreneurial folks who do their research get into gold and silver mining stocks… which move later.
Then silver starts to get in on the action.
And when the Robinhood traders get involved… along with the folks who’ve never heard of precious metals bull markets and don’t understand them… it’s the price level in silver that attracts them. That’s because it’s so affordable to take a position in it.
P.S. Want to read the full transcript of Dan and Tom’s discussion, where they talk more about the prospects for gold… the implication of all the “Help Wanted” signs up around the country… and what Dan calls the de facto gold standard? It’s all in this week’s Bonner-Denning Letter update. If you’re a subscriber, just click here. Or to sign up to The Bonner-Denning Letter, just go here.
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