DRIGGS, IDAHO – Let’s look at the most important chart in economics… the Dow-to-Gold ratio.
The Dow-to-Gold ratio shows us the relationship between the stock market and gold.
The first thing the ratio tells us – looking back 120 years – is there is a clear cycle in this relationship.
At times, stocks get cheap compared to gold. You can buy the Dow with only a few ounces of gold. This was the case in 1896, 1932, and 1980.
Other times, gold gets very cheap relative to stocks. It takes many ounces of gold to buy the Dow. 1929, 1966, and 1999 are examples of this.
The ratio seems to cycle between these extremes every decade or two. Take a look…
The second thing to notice is that extremes in the Dow-to-Gold ratio tend to mark important tops and bottoms in the stock market.
At important bull market tops – like 1999 – it takes many ounces of gold to buy the Dow. At important bear market bottoms – like 1980 – it takes only a few ounces of gold to buy the Dow.
This makes sense. In bull markets, people don’t want the safety and protection of gold. In bear markets, people flee from stocks and treat gold as a safe haven.
We can say, therefore, that the Dow-to-Gold ratio is a good indicator of the primary trend in the stock market.
Based on my reading of this chart, the stock market entered a bear market in 1999… And it will remain in a bear market until the Dow can be bought with only a few ounces of gold.
My guess is that will occur at some point in the next 10 years.
Stocks Are in a Silent and Insidious
Today, one share of the Dow will buy only 14.5 ounces of gold. That’s down from 42 ounces back in August 1999. In other words, since 1999, the Dow has lost 65% of its value in terms of real money – gold.
Talk about a silent and insidious bear market.
Why is this bear market taking so much longer to play out than previous bear markets? And how can the Dow still be near all-time highs in nominal terms if it’s in a bear market?
The bear market is being prolonged by aggressive intervention from governments and central banks from all around the world.
They have chosen the soft landing approach: to do whatever it takes to prevent the bear market from doing its work… and to prevent the Dow-to-Gold ratio returning to single digits.
My guess is, in the end, these efforts will all be in vain.
The Dow-to-Gold ratio will return to low single digits (below 5) anyway… And the government policy of “do whatever it takes to avoid recessions and bear markets” will have been completely discredited.
The End of Banks?
Will banks be obsolete soon? It’s hard to imagine… but I wonder if that’s the direction we’re heading in…
Banks came into existence as warehouses where people could store their gold and then, later, their cash.
Using a clever technique called fractional reserve banking, in combination with government deposit insurance, banks became profitable businesses. They also became the central nervous system of the modern financial system… and the engine of money supply inflation and debt growth.
But what if, because of the invention of digital wallets and non-bank payment systems, we didn’t need checking accounts anymore? We would each have our own digital wallet… connected by the internet… outside the banking system…
Or what if the Federal Reserve controlled this system of digital wallets? The Fed could then dish out cash and loans and control interest rates on deposits directly without having to influence the banking system to do its dirty work. The Fed could even introduce a universal basic income this way.
I think it’s coming… and I think it’s going to be very inflationary as the Fed will be able to increase money supply without depending on banks to increase their lending activities…
– Tom Dyson
P.S. We had our first snowfall. It snowed about six inches and the temperature fell to -8 degrees F overnight. It’s going to be a long, cold, icy winter here in Driggs…
Miles (10) in the snowstorm
A reader follows up on the “son of Parkinson’s” journals Tom wants to start writing in these postcards…
Reader comment: Does health come before wealth? I have Parkinson’s Disease and look forward so much to receiving your Parkinson’s journals you mentioned. You could devote one day each week to health issues.
I have been following your travels across America since you left Florida. What a beautiful country; there’s so much to see and do. And I love your postcards. All the very best to you and your family, and stay safe on the slopes whilst learning to ski.
Meanwhile, others continue to give their take on bitcoin… and driving safely in winter weather…
Reader comment: Any exchange item (cash, gold, nails) you hold is of value to you only if someone will give you something for it in exchange. For example, if everyone already has more nails than they can use or they can make their own, you won’t be able to get rid of any of yours for other goods.
At present, people around the world are willing and able to exchange their bitcoin for many different currencies and thus purchase almost anything. When currencies lose their purchasing power, such as has occurred in Venezuela and Argentina in recent times, people have been flocking to bitcoin to try to preserve their wealth without having to worry about transporting, safeguarding, or storing any physical assets, and then they have access to it anywhere they can access a computer.
When it comes time for me to use my gold holdings, it may be several years in the future when inflation has severely eroded currencies’ buying power. I anticipate many people would be more willing to exchange their gold for bitcoin at that point than for suspect currency. Bitcoin could hold its value while inflation causes people to lose trust in currency manipulated by countries that can only repay runaway debt by printing currency and reducing the value of savings.
Bitcoin has no physical backing and would suffer greatly if found to be manipulated or subject to fraud, but people are willing to buy it, hold it, and exchange it. Some trust it more than pieces of paper issued by their government and largely just represented by figures on a computer screen.
Reader comment: Hi Tom. You may be right about bitcoin having no value; but I’m afraid that it is entirely a subjective quality, or lack of, that you have proscribed. My thought is that bitcoin is the next level of evolution for money. And it will definitely be around for longer than you and I will be alive.
Reader comment: Hi Tom, thanks for sharing your stories! Your bitcoin essays have me thinking hard about NOT speculating in bitcoin. I initially was ready to pull the trigger when BTC was about $400 and Ether was under $20. I asked my wife to research how to buy it; she called a financial advisor who advised against it, and it promptly went to $20,000 before falling.
I have been studying how to purchase a fraction of a bitcoin since I can’t afford a full one now but am seriously re-thinking it. This past year I lost over $140k trying to short TSLA and have very little extra to invest. Right now, my biggest holdings are gold and silver that are doing well. I’ve been a gold bug for the past 10 years and slowly built a position. I do have a different outlook on holding physical gold as the best way to ride out the coming financial storm. We’ve invested in land to grow food and keep animals, a food freeze dryer to keep what we don’t use from spoiling without the need for refrigeration, solar electricity with battery backup, and the means to keep those less prepared from stealing it. Looking forward to your winter adventures.
Reader comment: OMG Tom. I’ve been in and out of the automotive field since 1969 and I cannot believe the advice some long-term winter drivers are giving you. In the age of vehicles with ABS brakes, the last and worst thing to do in the snow is pump the brakes!! The best and only thing to do is slam down on the brake pedal as hard as you can. Totally disregard the strange thumping sounds, as well as the brake pedal “jitters,” and let the car do its thing. Believe it or not, you can even steer and drive while this weird situation is going on.
NEVER EVER, EVER put the transmission in neutral. I repeat: Never ever do that!!! The day will come (and it will) when you will need to accelerate in an instant and all you’ll get in response is a whole lot of engine revs and nothing else. When your car is in neutral, accidents will happen.
Another hint that most people don’t know about automatic transmissions is… If you happen to get stuck in a snowy rut, or the tires begin spinning right away because of a slippery, snowy slope, put the transmission selector lever in second gear or even in third gear (if it displays one). Gently and slowly step on the gas and you should get going. Don’t forget to put the selector back into the drive mode.
I drive a school bus in all kinds of winter weather, and I had to mention this second-gear thing to a whole room of drivers who didn’t know about it. DOH! An automatic transmission in D mode starts off in first gear; fully ready to spin tires on slippery surfaces.
Another thing; never drive with cruise control on in the rain or when it’s snowing. Keeping it off will prevent the vehicle from suddenly accelerating! If your vehicle starts slipping on snow or hydroplaning in a rain puddle, the speed sensor will assume the wheels have stopped turning and will send a signal to the computer to step on the gas. And sure as shooting, your vehicle will spin out faster than you can say, “What the hell?”
Reader comment: I’m a retired Canadian who grew up north of Toronto. When I started driving, we had a lot more snow and ice than we do currently. On some snowy days, my friends and I would go to a large, empty parking lot and drive around, trying various maneuvers at reasonable speeds. We purposely put our cars into skids and learned how to recover control again.
I’ve always driven a stick shift and would never put my car into neutral on a downhill slope. I would downshift to second gear, or even first if necessary. Nowadays, we have ABS brakes and if coupled with four snow tires, driving is much safer. Have a great winter and please continue your interesting postings.
Tom’s note: Thanks to everyone who wrote in! By the way, we’re trying something new in these postcards…
Going forward, I’ll publish your questions – along with my answers – every Friday in a special mailbag edition. That way you’ll have all my answers in one easy-to-find spot each week.
As always, please keep your questions and comments coming at [email protected]. And let us know what you think about our new Friday mailbag editions…