Monday, November 17, 2008

Golden Weight on the Market (Bill Butler)

Bill Butler on how trends show that a 4000 Dow and $5000/oz price of gold may well be in our future:

For the last century, the United States ’ Keynesian economy has exhibited a peculiar but predictable pattern. In economic boom times, the historical dollar price of the stock market (as measured by its blue-chip index, the DJIA) in relation to the dollar price of gold has been high. Each and every peak in this ratio has been followed by a commensurately deep trough that correlates with economic recession or depression. A graph of this relationship can be found here.

From an Austrian economics viewpoint, the fluctuations in the Dow-to-gold ratio make sense. It shows that Keynesian interventions in the natural, organic, market cannot succeed and can only have the effect of delaying the inevitable pain that results when decades of dislocated labor and capital searches for employment. For Austrians, a rising Dow-to-gold ratio illustrates inflationary Keynesian centralized social planning. The subsequent, inevitable and unavoidable drops in the ratio illustrate gold laughing at Keynesian plans. Artificial values caused by Keynesian “stimuli” can delay, but cannot escape, the reality of real value as reflected in history’s best measure of real value—gold. Just like a ball thrown into the air must come back down, a currency (together with its fiat-denominated market) can only temporarily escape the bonds of real value.

Read the entire article

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