Don't Get Excited About Dow 11,000

In my alert of November 5th, I advised that the stock market was over-priced and that investors would be better off by waiting in cash, but not 'dollar-cash'. They need to be holding 'gold-cash'. My recommendation was: "Ignore the bullish hype about the stock market, and stay in cash (i.e., gold) until the stock market returns to a better value (i.e., a much lower price in terms of goldgrams)."

The bullish hype I referred to has continued to grow, and the stock market has climbed higher too. Therefore, it is worth taking a look at what has happened over the past month.

From November 4th to December 2nd, the Dow Jones Industrial Average has climbed from 10,530.76 to 10,877.51, an increase of 3.3%. Not bad for one month. But we get a very different result if we measure the price of the DJIA in terms of gold. During this same period, when measured in terms of goldgrams, the DJIA fell from 717.82 to 672.22, a -6.4% decline.

Clearly, gold's rate of exchange to the dollar (what we usually call the gold 'price') is rising more rapidly than the DJIA's appreciation in dollar terms. Thus, despite what one might be hearing from all the misguided hype being bandied about as the DJIA approaches 11,000 and its all-time record high, over the past month you were better off owning gold instead of the DJIA. But this same strategy has made sense not only for the past month, but also for the past few years, as we can see from the following chart.

Even though stocks may be rising when we look at their prices in terms of dollars, they are falling when we look at prices in terms of gold. In gold terms, stock prices have been falling since July 1999, six months before the DJIA peaked in dollar terms. As the purchasing power of gold has climbed since then, stocks have become cheaper.

As we can see from the above chart, the downtrend in the gold price of the DJIA is well established within the declining parallel trend channel (red lines). I expect this downtrend in the gold price of the DJIA to continue in the months - and years - ahead. Therefore, continue to follow the safe strategy. Stay in cash (i.e., gold) while waiting for the price of stocks to drop to more reasonable levels.

Published by GoldMoney
Copyright © 2005. All rights reserved.
Edited by James Turk, alert@goldmoney.com

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