Dollar vs. Gold In A Dual Inflation-Deflation Economy Part 3

Continued from Part 2

Bernanke and the Stock Market

In September 2010 I said I was bullish on the stock market when the DOW was 10,800. I am less bullish now than I was then with the DOW today at 12,250. Bernanke still has some game in him and I can’t be a bear just yet. But I would be close to taking profit by lightening up on any longs. While gold and silver may be due for a pullback, the DOW could go up another 2,000 points. Who knows what it may do. But the data doesn’t back up any rise in the DOW. The Baltic Dry Index is dried up. P/E ratios are too high to be of value. Dividends are still less than 2%. Businesses still aren’t borrowing to grow their company, but are increasingly laying off workers (independent study).  The DOW moving higher is not the real economy. Things are not what CNBC would have you believe.

And finally this brings us to the analysis of gold.

Various Currencies Priced In Gold

How fast is the world currency ship sinking? If you looked at just the Dollar Index, you’d think the ship has a slow leak, but everything is still ok, while watching to see if we bust into the 70 – 74 range closely. This is the danger zone and we’re not too far away from that level now.

But by looking strictly at the Dollar Index as an indicator of strength, people don’t realize that the ship is already filled with water, the life boats are about ready to drop and they should be rounding up the women and children!

The following table shows the return of gold in the major currencies that make up the Dollar Index. It’s not a pretty sight.

It comes down to this….

If 82.20% of the Dollar Index has lost on average 19.10%, 125.36%, and 281.20% the last 1,5 and 10 years versus gold, how can anyone call this stable? And the dollar itself has lost 25.98%, 158.59% and 446.10% to gold the last 1,5 and 10 years. Whether this kind of a reaction is because of inflation, perceived inflation, or even deflation, the purchasing power of gold is increasing. That’s because illusions of wealth are chasing the real wealth found in gold and silver.

And you’re sitting there with no gold or a small allocation to gold and silver in your portfolio. What do you think will change in this dynamic over the next five years to get you to invest in gold? Will you wait till gold is up over 500% before making the decision to diversify? 600%? 1,000%? Don’t let a debate on whether there is inflation or deflation in our future hold you back. Buy some. And if it falls in price, buy more.

There is no doubt inflation will rear its ugly head even further in the years to come. But as shown in Part 1, rising prices are also the result of supply and demand issues and political turmoil for oil and grains. Deflation is still a concern hence the second round of quantitative easing as revealed in the following chart showing the velocity of money depressed.

There is still a lot of credit unwinding (see chart below). How will the unwinding of this debt occur? Is it inflationary or deflationary? What about the over $4 trillion of sub-investment grade derivatives are coming due in the next 1-5 years for the nations top five banks? Who will be the most likely counterparty to that debt? Answer: the lender of last resort, the Federal Reserve. This is reason enough to have an allocation into gold and silver. Gold and silver are insurance against the unknown.

What To Do: Buy Gold and Silver Now

I have a specific request for you to insure your portfolio from what’s to come, whether it be inflation or deflation; buy 1 ounce American Gold Eagles, 1 ounce American Silver Eagles and 90% bags of silver (aka “junk silver”). These are all American coins that offer the investor the most gold or silver for their money while at the same time are easily liquidated if there ever is a reason or need to convert back to U.S. dollars. You hold onto these metals for five years minimum and see what transpires. You can sell half of your allocation once you have doubled your money, but you’ll have the tough decision of what to do with the proceeds. This will of course depend on where the stock and real estate markets are at that time. You may not be taking your profit if they haven’t bottomed out yet.

As much as we want to believe in this great nation and have faith our government will make the right choices in getting us back to the glory days, the simple fact that they got us here in the first place should be reason enough to buy gold. I have more faith in my Cubs winning a World Series this year than I do in the government and Fed not messing things up even further. And I’ve been disappointed for 41 years now since I became a Cubs fan at the age of 11. At least at Wrigley Field I can have a beer and forget about all this stuff for a few hours….oh…and root, root root for the home team!


Go To Buy Gold And Silver Safely Store
About Doug Eberhardt

Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534


Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with capital you can’t afford to lose. This is neither a solicitation nor an offer to Purchase/Sell futures or options. No representation is being made that any account will or is likely to achieve gains or losses similar to those discussed in this outlook. The past track record of any trading system or methodology is not necessarily indicative of future results.

All trades, patterns, charts, systems, etc. discussed in this outlook and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author.

No Comments

Leave a Comment

Your email address will not be published. Required fields are marked *