Thursday, May 31, 2012

do away with the fed with the dow/gold ratio

hate the fed? if you want to see the market position corrected for all monetary interventions (and/or inflation) then look at the dow/gold ratio. here's a picture of what i'm talking about:

5 year chart of the dow/gold ratio, weekly aggregation period.
the reason why this works is that the ratio tells you the value of the market in terms of a commodity that is an inherently stable store of value. gold reserves grow by roughly 2% a year and are not depleted much by industrial applications - very high percentages of all the the gold ever mined is still in circulation.

however, i do not endorse a gold standard. the reasoning i employ to come to this conclusion involves understanding why it was that the us gold standard was dropped. the basic overriding reason was that a gold standard potentially cedes control of the economy to foreign powers. if you have a real gold standard then you cannot then also prevent redemption. since the us currency is the reserve currency of the world then foreign countries are required to hold dollars. if foreign countries start redeeming their reserve dollars then this reduces the liquidity of the dollar thus pushing the dollar up in price. a strong dollar makes a recession worse by pricing us goods and services too high for export. the 30's depression, it is widely acknowleged, was made worse by france when france got nervous and redeemed dollars. france again began redeeming dollars in 1970 and president nixon, well studied in the depression economics, was quick to shut it down by shifting to a non-commodity standard, or fiat currency. from this viewpoint i would have to question the intelligence and/or loyalties of any politician that endorses a return to the gold standard.

here's how to create a dow/gold ratio chart on the thinkDesktop platform from td ameritrade.

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