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After Monday's capitulation in the stock markets, which, if you read last week's missive, came right on cue, followed by yesterday's formidable rally, it's time to ask, 'Where next for the stock market?' I'll warn you right now – judging by past experience, the outlook is not pretty.
Meanwhile, precious metal investors should be aware that 'The Gordon Brown Gold Rally Indicator' has just flashed a buy signal – more on this below...
More similarities between the bust of 1929 and now
As you might know, I am fond of drawing parallels between 1929 and now. The cause of today's boom and bust – too much credit – was the same as the cause of the bust of 1929, so it is not unreasonable to expect the post-bubble contraction, the environment we are in now, to unfold in a similar manner.
My sincere thanks, as always, to Nick Laird of www.sharelynx.com for preparing these charts for me. Our first chart below shows the Dow Jones from August 1929 to April 1930.
Next we see the Dow from August 2008 to April 2009.
Although this time around, the Dow peaked a year earlier in October 2007, the pattern of the two crashes from September to November is virtually identical. On both occasions, the market then enjoyed a rally into December, but the modern Dow then began an inexorable decline into March, whereas the 1929 Dow rallied until 17 April 1930.
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In early March this year however, the stock markets made a low (an event which, if you'll forgive me for blowing my own trumpet a little, I nailed to the day - Stock markets are about to rebound sharply). Markets then embarked on one of the sharpest rallies in their history, back up to their October and January lows, and appear to have peaked last Friday, April 17th.
The outlook for stock markets is not pretty
So what now? Well, as Winston Churchill said, "The farther back you can look, the farther forward you are likely to see." So let's look at what happened after the rally into spring 1930.
I'm afraid it's not a pretty sight. After the Dow's rally into April 1930, when US financial publication Barrons declared, "it is thus apparent that the public preference for stock is… as marked as ever," the Dow embarked on one of the most horrible bear markets ever.
What is worrying me is that, of late, we have had numerous articles – similar to the Barrons one mentioned above - asking, "Is the worst over?". Let us hope the above chart is not an indicator of what's coming next.
One eventual target I am looking for is a Dow-to-gold ratio of 2:1 or even 1:1. By that I mean it would take one ounce of gold to buy one point on the Dow. Having gone from an extreme of almost 50:1 in 2000, the ratio now sits at about 9:1.
It could even go lower, as it did in the 19th century. But a ratio of 1:1 might mean 4,000 on the Dow and $4,000 gold. It might mean 2,000 on the Dow at $2,000 gold. We'll know for sure within the next few years.
The Gordon Brown Gold Rally Indicator flashes 'Buy'
We all know about Gordon Brown's disastrous decision to sell gold at the bottom of the market in 1999. It was one of The Worst Decisions Of All Time, up there with the substitution of Bobby Charlton with 20 minutes to go in the quarter-final of the 1970 World Cup, and 'The Decca Audition', when record label Decca rejected the then-unknown Beatles, saying 'guitar groups are on their way out'.
I have long since said that the time to sell your gold will be when Brown buys. But Michael J. Kosares of www.usagold.com has gone further, and devised a Gordon Brown Gold Rally Indicator. Kosares notes that every time Brown asks the International Monetary Fund (IMF) to sell its gold, there follows a major move up. It just flashed a buy signal, as his entertaining chart below shows, with Brown's latest attempt coming during the G20 meeting in London earlier in the month.
It's worth noting that every time Brown attempts to pressure the IMF, there is an initial sell-off, perhaps on fears that a load of IMF gold is about to flood the market, before a rally. We have just had the sell-off this time around too.
I believe we are getting set for gold's next big upleg, but I don't think we are quite there yet. We are enjoying a nice rally since Monday, which should take us up to the $930-$940 mark, but I would expect more of a retest of the $850 area sometime between June and August, making a final frustrating low, before the next lift-off.
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Dominic Frisby
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