Signs of Life

Source:

"Wait until the Dow and gold reach the same number, then the light you see on the horizon may be daylight."

Yesterday, investors thought they saw a little light on the horizon. . .perhaps a rescue ship? The number of pending sales, of existing houses, actually went up in December. This was enough, according to the press reports, to bring them back into the stock market and raise the Dow 141 points.

Oil held steady at $40. And gold rose $14 to $892.

Our guess is that the little light investors thought they saw will turn out to be another torpedo blowing up. Millions of homeowners and stock market investors have gone down already, but there are many still afloat. And many torpedoes that still haven't found their marks.

You can avoid the fuzziness caused by inflation by looking at the price of stocks in terms of gold. Over the very, very long term, gold holds its value. An ounce of gold buys about as much stuff now as it did during the reign of Julius Caesar. How could that be? The explanation is simple: mankind adds to the quantity of gold above ground at about the same rate that it adds other goods and services.

That doesn't mean that gold's price is stable - far from it. The price goes up and down - depending on what else is going on. Generally, the more confidence people have in the financial system, the less need they have for gold. But over the long run gold has been the world's most reliable, most universal store of value.

The stock market low of the early '80s coincided with a low-ebb of confidence in the dollar and in bonds. At one point, the price of gold rose over to $800 an ounce. . .while the Dow fell to 776. That one-to-one ratio marked a turning point. Then, stocks soared and gold fell.

The next turning point came 17 years later - in 1999 - when gold was back to $260 and the Dow was over 10,000. At the peak, it took 43 ounces of gold to buy the Dow stocks.

Since then, gold has been in a bull market, while stocks have declined. But even now, it still takes about 10 ounces of gold to buy the Dow stocks, which tells us that this correction still has a long way to go. Wait until the Dow and gold reach the same number, then the light you see on the horizon may be daylight.

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