muses of the moment

October 19, 2009

DOW at 10,000

As I mentioned yesterday, the DOW at 10,000 is an illusion.

This current economic environment requires an investor to take into consideration the impact of fiat currencies on the real value of his/her investment.

I chose two dates and compared the gain or loss on gold, the DOW, and the US dollar. I chose July 2006 and October 2009. I chose an 2006 date because this was before the big bubble frenzy in the DOW (DOW was around 11,000). The loss in the DOW was much more if purchased near the high (14,000).

You can use any dates you like, but here is the concept:

If you purchased one ounce of gold in July of 2006 and sold in October 2009, you would have made a 38% gain on your investment. For the DOW, you would have lost 11%. And for the US dollar, it would be a loss of 17%.

However, regarding the gold and DOW investments, you will have to take into account the loss of the dollar, because the investments are dominated in US dollars.

So, the real gain of gold would be 21% and the real loss in the DOW would be -27%.

I am not presenting this example to convence you to buy gold. These are the tools you will need to figure out if an investment is as good as the broker, Wall Street, US Government says it is. Right now, the government says that this stock rally is a recovery and the recession is over. This could not be farther from the truth. The real numbers do not support that conclusion at all. In fact, it looks very bleak. The Fed had to debase the dollar 17% just to keep the stock market from falling further in real terms.

The real value of the DOW is not 10,000, but 7,537. (Jon Stewart showed us the “graphic” details on his October 15th show.) The DOW is actually moving sideways. This is why insiders have been selling stocks all summer. They understand this concept.

Now, you know the tricks of this fiat currency system, do not be fooled. Since all global currencies are fiat, you may use these calculations for any foreign-denominated investment as well.

Side musing: Some will argue with me that this is not a valid point because inflation in prices has not risen with the fall of the dollar index. This is true…..for now. All the money printed in the last 15 months is sitting in the Big Banks, Fannie and Freddie, and just raised the DOW to $10,000 on the lowest trading volume in years.

BUT…when that money starts flowing again…watch out. Prices will rise. Prior to the collapse (as far back as 2000), the dollar index and the inflation index circled around each other, but US dollar trended down and inflation trended up. Check out the public section on for more info (on my blogroll). The real inflation numbers are something to check as we move forward. It will impact your investment value as well.

As hyperinflation begins in earnest, this knowledge will be very important to understand. The investment you chose must gain at least the same percentage as the loss on the dollar just to break even. This is why I am constantly repeating: in this financial crisis, purchasing power preservation is the goal.

When the US Government prints money, you lose investment money. The trick is to invest to stay ahead of the printing press. Gold, silver, and commodities are traditionally places to do just that.

You may also use the Gold/DOW ratio to take the “dollar devalue” out of an investment. Click here for more info.

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