Fitzwilson:  There is a term in ice hockey called a stick save.  Instead of using the curved end of the hockey stick, the player uses the handle end to move the puck.  It has been described as having no points for style, and often fails, but sometimes saves the day for the player and his or her team.

Below is a chart of the Dow Jones Industrial Average from 1970 to the present.  You can clearly see two stick saves early last decade and the second during the 2008 meltdown.

The first stick save was engineered largely by the policy of driving rates to zero.  While it saved the stock market and thrust the real estate markets to new heights, it sowed the seeds for the horrendous crash in 2008....

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“A larger stick save was required in the 2008 debacle, requiring the completion of the zero interest rate objective as well as the creation of massive amounts of money on a global and historic scale.

It is no wonder that many people are terrified of equities when one looks at this chart.  The volatility has been incredible.  You can barely see the Crash of 1987 on the chart, although that was a stomach churning decline on the order of 23%.

The chart below is for gold during the same period.

While the Dow Jones has increased by roughly 14 times since 1980, the price of gold has merely doubled from the peak.  Despite that disparity, most people look favorably at the chart for stocks, and are adamant that gold is overvalued.

For stocks, valuation metrics are used such as price-to-earnings ratios.  For gold, there is no attempt to relate the price to the forces that drives the metal’s price.  What drives gold is the excessive, massive creation of fiat currency.  Since 1980, the amount of debt-based money has exploded.  If that simple valuation metric of comparing the price of gold to the amount of money is applied, gold is drastically undervalued. 

Given that the zero interest rate policy and unlimited printing of money have been a major factor in the current prices and valuation factors for stocks, it is not accurate to look favorably on how cheap stocks might be while saying that gold is overvalued, when both are being driven by the same artificial supports.

Gold is not being driven by inflation, regardless of which statistics one believes.  The term inflation itself was quietly converted last decade from increases in the supply of money to prices.  Jastram’s seminal work on gold showed that gold actually outperforms in deflationary environments.  During World War I, as the prices of commodities soared, gold actually lost relative value.  However, the dialogue in the media continues to focus on a lack of price inflation as to why gold has been selling off.  It could not be further from the truth.

One cannot look at the two charts and be very concerned about the relative attractiveness of stocks versus gold.  We are not arguing that all of the gains in stocks have been illusory.  Equities should have risen as we did have growth through population, productivity and abundant natural resources until the late 1990s, although recent gains are being driven by the same factor as gold.  A balanced standard of analysis needs to be applied to both.

Unless the central planners come up with a monstrous financial stick save, gold has the highest relative value between the two.  We expect that they will continue with quantitative easing.  One Fed governor said this week that not only were they not removing the punch bowl, but were going to spike it.  The recent rapid devastation in the bond market sent the message that they must.”

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