The Road to Weimar

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"Nearly 20 months since the first two Bear Stearns funds went belly up and policy makers are still. . . trying to figure out which 'tool' is the best for the problem. The problem is not with the toolbox - the problem is with the tools."

Mining with its cycles of capital spending and fluctuating commodity prices based on demand and supply is about as cyclical as you can get. But assuming there's not a lot more downside in commodity prices, how fast commodity shares recover depends on access to finance and a pick-up in demand.

With the clowns who believe they're running the global economy, a recovery in demand is getting further away - not closer. The G-7 finance ministers met this weekend and the result was not encouraging. They issued a statement that read, "We reaffirm our commitment to act together using the full range of policy tools to support growth and employment and strengthen the financial sector. The stabilization of the global economy and financial markets remains our highest priority."

Nearly 20 months since the first two Bear Stearns funds went belly up and policy makers are still tripping over the neckties trying to figure out which 'tool' is the best for the problem. The problem is not with the toolbox - the problem is with the tools.

In the meantime, all this rumbling and stumbling and bumbling weakens confidence in the stock market and strengthens the case for gold. Swarm Trader Gabriel Andre writes in this morning to say, "We had a look this morning at the DOW/GOLD ratio. It is nothing revolutionary. But it's useful. It shows you the how many ounces of gold it takes to buy a 'share' of the Dow."

"During the last 20 years," Gabriel continues, "roughly between 1980 and 2000, the ratio rose. It means that the Dow Jones was rising faster than gold prices. Since 2001, the DOW/GOLD ratio began falling within a clear bear market trend."

"The bear was obviously in the Dow and not gold. Gold prices have performed a lot better than the U.S. equity index." Today the ratio has accelerated its decline, and may break on the downside a support level. That is, the Dow is getting weaker in terms of gold, or gold is getting stronger in terms of stocks.

There is a possibility that the ratio goes even lower more quickly. In layman's terms, it means that either the Dow Jones will collapse or either Gold price will soar. A ratio of five5 might be a technical objective: therefore a Dow Jones at 8,000 points would imply an ounce of gold at 8,000/5 =$ 1,600 =>$ 1,600 USD!! Or maybe if gold price remains around 900 USD, it would imply a Dow Jones at 900*5= 4500 points!

"The link with the markets here down under? Well if the main U.S. equity index crashes or even remains at the same level, the perspectives for the ASX 200 are also bearish." But not for everything, the Swarm Trader points out. The gold and precious metals shares may be the place to be for the remainder of the quarter.

Over at the Wall Street Journal's European edition, Frenchman Jacques Attali reckons we are all on the road to Weimar now. That is, he believes the entire planet may be headed for a depression and massive inflation. We are slouching towards Weimar Germany, where inflation was rampant.

"The major powers think that the crisis is only fleeting. . ." he writes. "No one really wants to undertake the profound changes necessary to resolve it. Although the world's public debt should be cut, now it is only being increased."

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