The Chart Every Investor Needs to See

DRIGGS, IDAHO – Greetings from our Teton Valley bolthole…

Seven months ago, we set out to explore America by car.

We drove by day and slept in a tent by night. We only used back roads, never interstates. And we stayed in America’s heartland, never reaching a coast.

We slept in barns, horse pastures, parking lots, driveways, campgrounds, and county fairgrounds…

We saw the amber fields of grain, the purple mountain majesties, the halcyon skies, and the enameled plains…

We saw the great cornfields of Iowa and the Great Lakes of Michigan… the forests, the rivers, the hot springs, and the great grasslands…

But with winter coming, we decided to take a break from traveling. We’re currently in Driggs, Idaho, a small town in the Teton Valley. We’ve rented an Airbnb apartment, and we’re hunkering down for the next few months.

While Kate and the kids learn the fundamentals of language, science, history, personal achievement, and art… I use my free time to study economics, finance, and money…

The Most Important Chart in Economics

As regular Postcards readers know, the No. 1 trend on my radar today is the decline of the Dow-to-Gold ratio. In fact, to my mind – and for my money – it’s the most important chart in economics…

The Dow-to-Gold ratio shows us the relationship between the stock market and gold.

Looking back 120 years, the first thing the ratio tells us is that 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.

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. Take a look…

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.

A Silent and Insidious Bear Market

Today, one share of the Dow will buy only 16.4 ounces of gold. That’s down from 42 ounces back in August 1999. In other words, since 1999, the Dow has lost 61% 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.

While all this plays out, Kate and I are sitting on the sidelines in gold. We don’t want any part in the feds’ financial experiment, and we won’t sell our gold until the Dow-to-Gold ratio falls below 5.

In the meantime, nothing will take away my gold position.

– Tom Dyson

P.S. Two years ago, I went “all in” on a single trade. You see, the financial system is rotten to the core with intervention, manipulation, fake money, fake trades, fake deals, fake news, and robotic trading. The system has become very, very fragile.

The bottom line is, I don’t want to participate in this toxic mess. I want to sit on the sidelines in this one trade and get on with my life… until it’s safe to return to the financial system. It’s a trade that will play out over several years. But I have total conviction in this idea. I explain it all in detail right here…

Like what you’re reading? Send your thoughts to [email protected].

Today, readers talk gold and bitcoin – including two different theories about why bitcoin’s days may be numbered…

Reader comment: Your scepticism toward bitcoin has merit, unless I am far behind the power curve. I am concerned that the entire cryptocurrency system could become nil in an electronic magnetic pulse (EMP) situation unless the entire system is protected with Faraday cages.

I’m aware that my attitude sounds fatalistic, however in today’s world, if war should occur, a first strike would likely be an EMP strike. Any electronic system, including home computers, would become useless unless Faraday cages were used on every piece of equipment connected to cryptocurrency systems. Air Force One is protected, as I am sure most government facilities are. Picture not just our country, but many countries, suffering EMP attacks. Any funds held in bitcoin and other accounts would just disappear, never to be restored.

Reader comment: Love your travel exploits and it reminds me of my travels around the world when I was 32, traveling from New Zealand to Australia, across Indonesia and Southeast Asia. Keep up the adventure – your kids will cherish these times as the freest and most memorable in their lifetimes, no doubt.

I am also 100% behind your investment strategy in gold since it has lasted 5,000 years so far. Bitcoin has many good properties as money also, but the big questions for me are who really invented it, and is it really impenetrable to hacking. If the CIA or NSA were involved in creating it, then it could be possible that a “back door” exists in it. Once it gets too big, then the appropriate agency could presumably pull the plug on it and all the billions that went into it could be lost forever, or possibly seized by the agency.

Sounds hard to believe – possibly. But am I going to take my chance on a cryptocurrency that I don’t know who invented it, why it was invented, that I can never see, and have to put my faith in… that I am actually an owner of a small fraction of a coin that I can’t prove exists? No. Give me a gold coin that I can hold in my hand any day. Keep up the adventure in life.

Meanwhile, one reader weighs in on the COVID-19 debate, after the Dysons drove 5,200 miles in one week to spend Thanksgiving with Kate’s parents…

Reader comment: Good for you! I’m glad you went to be with Kate’s parents for Thanksgiving. There is no need to live in fear. This virus has been blown way out of proportion. To the reader who commented on the number of deaths, let me give you some perspective.

I live in a county in Florida which has about 310,000 residents. If all of the COVID-19-attributed deaths in the USA were from my county, there would still be several thousand residents alive and well. How many million people live in the USA in total? Stop believing the fake news and get proper perspective.

Tom’s note: As always, thank you for your messages! We read every note you send us. Please keep your questions and comments coming at [email protected].