Three new charts over at Ride the Gold Bull: Yearly Silver/Gold 1833 to Present and Daily Gold Price in Various Currencies. Please be advised that these charts DO NOT show the actual gold price in each currency, but a comparison to the price of gold in US dollars. All currencies are normed to the US Dollar as it was at the beginning of the chart in 1971. At that point gold was $40.80, so each currency is made to match 40.80 at the beginning of the chart, but then continues, either following or deviating from the price in dollars. In this way a comparison can be made as to how well each of the currencies performed. So here you can see that the British Pound has really taken a beating, but with the exception of the Yen, most currencies follow the US Dollar.

I will probably be refining the currency charts over time. If I’m missing a currency you want, just let me know.

The Dow/Gold Zoom has been updated. The current ratio is yet another new low at 8.39. I imagine there will have to be a bounce in this at some point. What will it be? A jump in the Dow or a dip for gold? I’m tending to think a dip for gold… but who knows.

I’m trying something new with the Weekly Commercial Paper versus Dow Update this week. Because the Fed publishes lagging numbers (VERY lagging numbers) it’s really hard to see what’s going on. Since I have the Dow for the week-ending Feb 9, I’ve included it on the chart. Maybe the Dow can tells us something about Commercial Paper versus the other way around. Or maybe nothing can tell us anything, because it all resides in the heads of wicked crones! (Smile….)

The Dow/Gold Zoom has been updated. The current ratio is 9.07.

The Weekly Commercial Paper Outstanding vs. The Dow Jones Industrial Average has been updated. Financial has taken a bit of a dip.

The Dow/Gold Zoom has been updated. The current ratio is 8.70, another new low for this cycle.

The new chart Weekly Commercial Paper Outstanding vs. The Dow Jones Industrial Average has been updated. Financial and Asset backed look like they are heading lower, a bad sign for those expecting a market rally.

The Dow/Gold Zoom has been updated. The current ratio is 9.22, which is a new low.

The new chart Weekly Commercial Paper Outstanding vs. The Dow Jones Industrial Average has been updated. With Asset Backed paper still falling, the Dow seems unable to climb, despite the positive move in Financial Paper.

The Federal Reserve publishes Commercial Paper figures weekly. I will now be updating two new charts at Ride the Gold Bull on a weekly basis, one comparing YTD Financial and Asset Backed Commercial Paper Outstanding vs. the Dow Jones Industrial Average and one showing 2001 to present  All Commercial Paper, Asset-backed, Financial, and Non-financial vs the Dow. I hope you find the new charts useful.

The Dow/Gold Zoom has been updated. The current ratio is 10.49. Note that for the end of the year I’ve also updated the yearly average. The average Dow/Gold ratio for the year 2008 was 12.90.

Cryptogon is an excellent news site which I highly recommend to anyone who would like his news pre-filtered for importance. In a recent post Cryptogon expresses surprise that the Fed might start buying treasuries. In fact, most of us have been wondering why the Fed HASN’T been buying treasuries, since, in fact, this is what the Fed does (buy treasuries in the open market) to implement monetary policy (i.e., inflate). Of course, inflating right now is not actually a good idea. Nevertheless, Helicopter Ben has made it seem that this is exactly what he would do to prevent a stock market crash and depression and well… so far he hasn’t done it. Maybe he’s smarter than he lets on.  (Why inflating right now is not a good idea is actually a bit complicated, I’ll try to come back to that in a follow-up post.)

You can see what treasuries the Federal Reserve currently holds by looking at the SOMA. All of the Feds holdings are here. (It is interesting that it’s called soma, which is the also the name of the happy pill from Brave New World! How Keynesian!).

Many people are also wondering why the dollar has been getting stronger. The banking system is a fractional reserve system. This means that the banks can pyramid loans on only 10% held in reserve, i.e., they can loan out 10 times what they actually have in deposits from people like you and me. When the Fed buys treasuries in the open market, they are adding to the banks’ reserves. However, if people like you and me take our money out of the bank and hold it in cash instead, we are subtracting from the banks’ reserves.  Either way, banks can ”pull in” loans or stop lending. If they do this the money supply shrinks by the amount of the expansion. As the money supply falls, so do prices. Hence, the falling stock market (and gold!) and the rising dollar. 

The quest for “liquidity” is related to this. When highly leveraged players (i.e., players who have used big loans to buy stocks) are asked to repay their loans, they have to sell their stocks to do it. The more they sell the more prices drop tripping the next round of repayment requests and so on.  The banks do not renew these loans or else individuals who would take loans to buy stocks remain on the sidelines waiting for the prices to fall further… and the credit contraction continues.

This is a fairly simplistic explanation of what is going on, but I think it will help you understand it conceptually and maybe understand the news a little better. When you hear the Fed is considering buying treasuries, you will now know that they are thinking of increasing bank reserves. I am currently working on an explanation of inflation and deflation for my new series “The Basics” and I hope to have that up for you soon. That article will go into detail about what inflation and deflation actually are. Stay tuned and by all means post any questions you have and I will do my best to answer them.

The Dow/Gold Zoom has been updated for the week ending Wednesday 11/19/2008. The current ratio is 10.50. Gold seems to have stabilized and is holding up while the Dow fell under 8000 Wednesday for the first time since 2003. The massive credit contraction continues.

At this point, it’s worth taking a look at what happened in 1929. If you’re not yet familiar with this chart, let’s just say that you probably will become familiar with it over the next few years. This chart is from Yahoo. Click the image to go to Yahoo’s Finance site and play with it for yourself. (You may need to adjust the chart yourself back to the date range shown here.) I’ve put the cursor over the week of November 11, which is right before a powerful rally. But it’s a fools rally. For the next two years the Dow continued to decline another 85%! In fact, here are the stats:

1. a 40% decline from a high of 380.33 starting August 26, 1929 and ending the week of November 11, 1929
2. a powerful 28.5% rally that lasted until April 1930
3. a fall of 86% over the following 2 years until a low of 41.63 was reached on July 5, 1932

A total fall in the value of the Dow of 90%. If this were to happen today the Dow would end up at 1409.30. No the decimal is NOT in the wrong place.

If you are watching gold and the dow/gold zoom, then you have probably already considered that this could happen. Let me make this clear… THIS COULD HAPPEN. That doesn’t mean it will. What it means is that it COULD. It’s very easy to become so used to certain situations, hey, sometimes they’re all we’ve known in our entire lives, and we come to believe that things will always be as they are. The best way to save yourself in this market environment is to realize what could happen and protect yourself accordingly. Don’t fool yourself into thinking it can’t happen. That goes for the political environment, too. If you’re new to the idea that gangs of criminals run the governments of the world, I suggest you read a little history and recognize that about all that’s changed is the sophistication of the criminal. 

Educate yourself while you can still do it.

Be careful out there.