One of the things I’ve been warning my readers about is the bubble-style economy that is currently bursting at the seams, waiting to implode. Last week, I discussed the Dow-to-gold ratio and how we are at levels that have only been seen less than a handful of times throughout the last 100 years. It’s a metric of how much everything is overvalued relative to hard assets, and historically, massive corrections have taken place. It’s worth noting that in 1932, the Dow-to-gold ratio was 1.6, and it was 1.0 in 1980! Right now, it’s 18…
It would take an extreme case of market movement to see this, and it could work itself out in a number of ways with a historical precedence.
1. The Dow Jones could collapse by 95% to gold’s price of $1,300. The Dow-to-gold ratio would be 1:1 (unlikely, in my opinion).
2. Gold could increase by 18x and rise to the current value of the Dow Jones ($23,500), and the Dow-to-gold ratio would also be 1:1.
3. Maybe they could both meet in the middle, at $11,700…
All of these options would yield a ratio of 1:1, which would be an extreme move, with the Dow-to-gold ratio moving down from 18.
But the reality is that even some sort of reversal to below 10 could spell significant corrections for investors, and it’s not just me that is taking note of this.
Consider legendary investor Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund that is managing some $160 billion for more than 350 institutional clients, such as pension funds and university endowments. Over the past four decades, the firm has made more money for its investors than any other hedge fund in history—nearly $50 billion through last year, according to Bloomberg. Dalio himself has become one of the 100 richest people in the world, worth around $17 billion.
Money isn’t everything, but Dalio’s success with money, for me at least, indicates his ability to traverse the financial markets. Money has a way of finding its way into the hands of people that are creating value, and Dalio is one of those guys.
Needless to say, when he speaks, it might be worth listening. As of lately, Dalio has been issuing grave warnings for the markets.
He doesn’t believe that the Fed will be unwinding their $4.5 trillion balance sheet to the tune of their current expectations.
He’s expressed his concerns of a market downturn, especially if tighter interest rates continue to be part of the Fed’s decision-making process.
In previous comments, Dalio said, “we fear that whatever the magnitude of the downturn that eventually comes, whenever it eventually comes, it will likely produce much greater social and political conflict than currently exists.”
Dalio is doubling down on gold…
***The latest news is about Ray Dalio going on a “gold buying spree” and adding 575% to his GLD holdings, becoming their 8th-largest shareholder. I’d say this is him putting his money where his mouth is, because I’ll remind you that on August 10th, he urged investors to buy gold in case “things go badly.” The hedge fund went and bought 577,264 GLD shares for $68.1 million, as well as 3.1 million IAU shares, worth $36.8 million.***
There’s not much to say here other than that one of the world’s most successful investors of all time is worried about market values, and he’s placing his bets on where he thinks he and his clients will fare best.
It is incredibly important to be positioned properly as we traverse the uncharted waters of the new economy. I wouldn’t be surprised to start seeing some serious moves in gold that reinvigorate the precious metals community with a fire that has been largely doused for the past few years.
John Rubino, of DollarCollapse.com, believes that in short order, we will be discussing gold the way we are raving about Bitcoin at the moment. Quite frankly, any material moves in the Dow-to-gold ratio could spark some serious inverse moves in stocks and gold.
To make and preserve your money in life, you don’t necessarily have to be smart, you just need to do what the smart people are doing – and in this case, it’s buying gold.
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Chief Editor, CrushTheStreet.com