August 10, 2009 – The Dow and other major stock market averages are rising because of the outlook for worsening inflation, and not improved economic conditions. The federal government is spending trillions of dollars to bail-out financial institutions and to meet the other spending aspirations of politicians. These dollars have to end up somewhere, and the stock market is one choice. So are other currencies, which explains why they are rising and the dollar is sinking. But the most logical choice to place these new dollars is in gold.
I refer to the chart above of the Dow Jones Industrial Average, which is presented in terms of gold. The DJIA measured in terms of gold has been in a decade-long downtrend. The DJIA broke down from its downtrend channel in 2008 as it tanked that year while gold climbed. Recently the soaring DJIA has retraced back to the bottom of its long-term downtrend channel.
The DJIA may climb back into this downtrend channel. Then again, it may just start falling again from here. Basically, it doesn’t really matter because the long-term trend remains intact. When measured in terms of gold, the price of the DJIA is falling. In other words, gold is outperforming the DJIA.
So for now, I continue to recommend that investors stay out of the stock market (except for my recommended stocks). Continue to hold ‘gold-cash’, not ‘dollar-cash’, thereby keeping your money safe and sound in bullion until stock prices fall to more reasonable levels when measured in terms of gold. I do not have any trading recommendations at the moment.