Potential targets for the Dow & Gold are approx:

by Nick Laird (AKA Sharefin) | March 7, 2008

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From a purely technical charting point of view the Dow potentially could fall to between 5000 & 2000 with a good probability to overshoot to the underside.

Manias always return to below their starting point. Always! 

With regards the Long Term Dow/Gold ratio I do believe that the creation of the FRB/Feds was the beginning of a new era - that of Fiat & unlimited creation.

This fiat creation started with the formation of this banking cartel back in 1913. On formation of the FRB/Feds, the seeds were planted for fiat creation utilizing fractional reserve banking. From here on it started to leverage the money supply. It started to debase money when it revalued gold in 1934.

It then went to the next step when it totally removed any vestiges of the gold standard in 1970.

Hence you can see the change in valuations from the steady growth channel of 1800 - 1920. From the 1920 on we see Wall St bubble in 1929 and then the wild swings in valuations throughout the decades.

Technically the Dow/Gold Ratio is the most honest monetary valuation metric known to mankind. 

With potential for the Dow to decline to the 2000-5000 region we also have the potential for the Dow/Gold Ratio to return to the 1:1 zone.

Presumptions are that if we get a mild deflation with great dollops of fiat creation to support the decline then the Dow will turn down to say the 5000 & we could potentially see gold move up to 5000 to achieve the 1:1 ratio.

However if we get the real hard sweep of a depression & huge levels of deflation then we could potentially see the Dow at 2000 with gold at 2000 to achieve the 1:1 ratio.

In the first instance we do not suffer rampant deflation with all assets marked severely down. 

A situation like this would be supported with fiat creation that not only would support a higher Dow price but also a higher Gold price. 

In the second instance with severe deflation & a strong depression all assets would eventually plummet in value. Hence a lower Dow and also a lower Gold price.

It is interesting to note that in both these examples with the Dow/Gold Ratio achieving a 1:1 ratio that there is a large difference in the price of gold. But that said the purchasing power of gold would be similar in both cases. In an inflationary scenario houses, stocks et al stay higher but gold moves up in consideration of the fiat creation. In the deflationary scenario all assets plummet in value and hence gold does not move higher, but it does still hold it's purchasing power.

So the more the FRB/Feds inflate the higher the price of gold will go. Hyperinflation will bring about a highly inflationary gold price.

In both cases the age old metric of 100 ounces of gold for an average house will come back into play.
And as mania's go it won't surprise me to see overshoot.

Now the above is all speculation based on a couple of charts that show history as it stands in the past. But I believe that there's good chance that the above will come into effect. Therefore presumably we can look forwards to a gold price somewhere between $2000 & $5000 and this will be dictated by whether we suffer through deflation or inflation.

Not written in stone but yet to be mapped out by gold.

Copyright © 2008 Nick Laird
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