The bottom fell out of the stock market today, with the Dow falling more than 600 points. It was even more brutal for the Nasdaq and S&P 500, which were both down over 6 and a half percent. This came after news from late last Friday that the S&P was lowering the U.S. government’s AAA rating. Today, the S&P announced more downgrades, including some municipal debt. The news keeps getting worse and worse. Meanwhile, gold exploded today, hitting new highs above $1,700 per ounce.
For anyone who has followed my speculation strategy of going long in gold and silver and shorting the stock market, you have done very well these last few trading days. If you have a lot riding on market shorts, you might consider taking a small amount off the table. While I expect the stock market to continue down for now, you never know if the Fed comes out with an announcement of QE3 that could drive the market right back up.
Of course, if the Fed does announce another massive round of quantitative easing (money creation), then this will be even more bullish for gold. The Dow to gold ratio is now less than 6.5 to 1. In other words, you need a little less than 6.5 ounces of gold to buy one share of the Dow. I have no magic ratio of what would make a good buy on the Dow or a sell on gold. There will continue to be roller coasters, but I think a Dow to gold ratio of 4 to 1 or less might be a good indicator. I would be very surprised to see it hit 1 to 1 any time soon, but we really are in unknown territory.
I think the S&P downgrade was largely symbolic. The U.S. government should have been downgraded a long time ago. The three major agencies (S&P, Moody’s, and Fitch) are basically granted a monopoly by the government. They are part of the establishment. I’m not sure what this tells us here. Perhaps the government will use this downgrade as an excuse for more taxes or more so-called stimulus. Or perhaps things are so bad that even the S&P could not ignore it. Whether the government will ever officially default is unknown, but it defaults almost every day by devaluing our money.
Besides gold, the other investment that did well today was bonds. The 10 year yield was down to about 2.34%. There is a tug-of-war going on between gold and government bonds. Investors are seeking both for safety, but for different reasons. Investors in bonds fear a major recession. Investors in gold fear major price inflation. Both sides may be right.
The Keynesian policies of this administration and the one before have put us in this situation, along with Congress and the Fed. The Fed has tripled the monetary base since 2008 and we have seen deficits of around $1.5 trillion. All of this and the economy is already going back in the toilet. This is what happens when the government does not allow the correction to take place. With all of the spending, debt, and money creation, things are only going to get worse.
My biggest fear right now is that these politicians will take a page out of Paul Krugman’s playbook and say that the only reason the economy is not recovering is because the previous stimulus was not big enough. If the government spends even more and the Fed goes crazy with QE3, then we could get hit really hard with price inflation. Ron Paul and Peter Schiff may be proven right sooner than we could have imagined as both have warned of severe consequences for the U.S. dollar.
Just remember that the name of the game right now is to keep what you have. If you can make any extra profits while maintaining your purchasing power, then consider yourself lucky or really good.