Today the Dow Jones Industrial Average (commonly called “The Dow”) dropped 353 points, wiping out weeks of gains. This was the largest one-day loss in two years. If that surprises you, you haven’t been listening to me for the last year.
I am writing this on Thursday, June 20, 2013. By the time you read this on Monday it may have dropped more, or it may have moved up past the all-time closing high of 15,409 that it hit three weeks ago. It doesn’t matter. Whatever happens in the short term, the Dow is going to crash – and crash big – in the foreseeable future.
Past of the reason this is true is that the Dow never actually reached 15,000 in real terms. Let me explain.
On February 1, 2013, when the Dow hit 14,000 for the first time since George Bush was in office, an Obama lackey exclaimed, “This just shows that Obama is a good economics president. The Dow hit 14,000 under Bush, and now it has hit 14,000 under Obama.”
That just shows how little Obama and Company understand about economics. (Or perhaps they do understand what really happened, and are more than happy to lie about it.) Either way, Dow 14,000 under Bush and Dow 14,000 under Obama are two entirely different animals. The reason they are different is not because Bush was a Conservative president, and Obama is a Socialist president. It’s all about verifiable numbers.
The fact is that 14,000 under Obama is equivalent to 7,000 when Bush was in office, due to the inflation factor. Just because the Dow has gone up in dollar terms doesn’t mean it has gone up in reality. After hearing the Obama sycophant’s claim, I did some research.
When I looked at common and reliable indicators of inflation at the two points when the Dow reached 14,000, it was immediately clear that when you adjust for inflation, the Dow was really at 7,000 back in February. Likewise, today the Dow closed below 15,000, which would put it at about 7,500 inflation-adjusted. There’s not enough room in this article to go through all the calculations, but if anyone is interested in the details (including the inflation indicators), send me an email.
To understand more about this subject, request my video on the Dow-Gold Ratio (or research the Ratio online). The fascinating thing about this indicator is that it has accurately predicted every major move up and down in both the stock markets and the precious metals markets for the last 117 years.
In simplest terms the ratio shows clearly that the Federal Reserve System pumping trillions of dollars into the economy has artificially inflated the stock market. You can accurately say that the Fed is injecting cocaine into the stock markets. Once it stops providing drugs to the markets, they will experience massive withdrawal symptoms.
This drop in the stock markets was triggered by Fed Chairman Ben Bernanke’s remarks to the effect that he would slow QE3 money printing. If just a warning that such a move might take place caused such panic in the markets, what will happen if he actually makes good on his “threat?”
The interesting thing about this drop in the stock markets is that there has been a parallel drop in gold. Customarily the stock markets and gold move in opposite directions, so why did gold drop along with stocks this time? The answer is that most of the selling of gold has been in “paper gold.”
What's the difference between physical gold and paper gold? By and large the people who own physical gold have not been selling. They're holding gold because it is the best insurance policy against a government gone wild. Paper gold is any form of gold ownership other than physical gold. It includes gold stocks, gold certificates, gold funds and gold futures.
The big problem with paper gold is that it is possible to buy on margin. Margin means that an investor can borrow money from his brokerage firm to buy more securities than he can afford. In the case of paper gold when real gold goes up, margin works in your favor. But when real gold goes down the investor can be devastated.
Here is an example: An investor buys a gold fund such as GLD, which trades like a stock. He or she can buy $200,000 worth of GLD with $100,000. If GLD goes down a lot (as it has done recently), the investor gets a "margin call" that requires him or her to deposit additional monies with the broker. If the investor fails to do so (depending on how much GLD has gone down) the entire original investment of $100,000 can be lost.
Keep in mind that many of the investors (or gamblers) have bought paper gold with far more than the 2 to 1 margin described in the previous paragraph. Depending on the security they use, their margin could be 30 to 1. With that kind of margin entire fortunes can be lost in a matter of minutes in an emotional, fear-driven market such as we are experiencing.
The bottom line is that a major factor in the recent drop of gold has been the fact that billions of dollars worth of paper gold have been bought on margin by people who thought that gold had hit its bottom. These people are now "panic selling" their paper gold, causing the “spot gold” price (the price you see on TV) to drop dramatically.
Today some very smart people are taking advantage of the current low prices by buying physical gold, but they're doing it the right way. They're buying what they can afford. They’re not using margin to make their investment. A good lesson to be learned here is that it is not smart to borrow money for investments.
All of this turmoil can be laid at the feet of incompetent government. Since the last major stock market crash, the National Debt has risen almost 30 times faster than United States productivity. This is a prescription for disaster. The fact that the Fed has pumped trillions of dollars into the economy, which has driven the stock market to new heights (at least on paper), has produced an artificial prosperity. The Fed's actions have driven the national debt higher and higher, and have done nothing to improve productivity.
What can we learn from this? You should seriously and prayerfully consider moving your retirement money from paper assets to hard assets. The list of paper assets that are destined to suffer greatly from continued government “stimulus” includes stocks, mutual funds, CD’s and all paper ownership of precious metals. Hard assets include real estate and physical ownership of gold and silver.
The bottom line? The stock market must go down, and gold must go up. Don't get caught on the wrong side of history.
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