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Keep Your Eye on Gold

May 13, 2010

Those of you who were watching witnessed the DJIA drop 1,000 in less than 30 minutes last week.  The White House acted quickly, and by time the evening news was reporting the collapse, the whole escapade was explained away using the Fat Finger theory.

It was a lie.

Subsequent investigations have demonstrated that there was no Fat Finger mistake, there were no computer trading errors and, aside from the thought that Space Aliens manipulated our market, there is no reasonable explanation, other than the obvious.

The 1,000 drop in the Stock Market was a direct result of the instability in the banking market, especially in the context of Greece and the European Union.

Which means that it could easily  happen again.

November 2008, just before the Housing/Banking bubble burst, gold was trading at less than $750 an ounce (see Chart 1.).  Yesterday, gold closed at a record high; $1,242.70.

Unlike pieces of paper with government scribble on it (money), gold continues to have value even after governments fail.  Gold was valuable back in the time of the Pharaoh’s and will still be worth something to people in the very distant future.

Chart 1: 2 year Gold Prices

The basic rules of supply and demand say that the more in demand a product is, the more valuable it becomes. baring a new use for gold (medical devised, electronics), the price of gold will give us an inverse picture of what is going on in the world economy.  In tough economic times, especially in times that the banking system is stressed or straining, gold will increase in value because investors are buying it as a hedge against the devaluing of currency.  Conversely, when the banking system is sound and secure, the price of gold will tend to fall, or at least settle.  Very strong economic times invariably lead to increased luxury consumerism (gold jewelry, gold teeth, etc.) which can stabilize or even increase the value of gold.

All you have to do is look at the cover of your daily newspaper (or your isp’s homepage) to see that the current increases in gold prices are a direct result of the difficult economy and subsequent banking system struggles, not a byproduct of any economic boom.

Do not trust the government or the MainStream Media services to tell you, watch the value of gold yourself.  If it continues to skyrocket,  there may be more problems with the world banking system than the government is telling us.

EDIT: A few hours after I published this post, Fortune Magazine released this; Are Stocks About to Crash?

Below are two graphs.  Chart 2. shows the nearly 1,000 point May 6, 2010 drop in the DJIA and Chart 3. illustrates dramatic drop in the value of the Euro just moments before the Dow collapse.

The Dow:

Chart 2. DJIA for 5-6-2010

The Euro vs. the Dollar:

Chart 3. Euro vs. the Dollar Trend


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