DJI at 50,000 in less than 5 years ?

Is it possible? Nobody really knows.
Anyway yes, it could be that we see a much higher DJI within a short time. But if that’s going to happen we can almost be certain that inflation will have been a lot more than the increase in the DJI. That means if today we would define a basket of goods that could be bought with one DJI and would compare how much we could buy of the same basket with a DJI at 50,000, most probably what one would be able to buy will be less than today’s basket (maybe less than half).
Of course with a DJI at 50,000, the investors who hold stocks represented in the index, would feel a lot more wealthy. However they would only feel as such because if they would sell are their stocks to buy real things, they would only be able to buy less than today. So in fact they would have become less wealthy. Well, when at some point in the future they become aware of it, the awakening will not be that nice.
On the other side holders of precious metals, especially gold, most probably will be able to buy more goods of this basket. In that sense if we see DJI at 50,000 I expect gold to be above USD 10,000 oz. because DJI at 50,000 means real high or hyperinflation. By the way if the FED and other Central Banks go on injecting/creating money as they did over the past 4 weeks, we will double money supply within a short time (at actual speed we will end above the +25 to 50% in the US)
To explain above assumption, let’s have a look at the numbers over the past years

DJI
5years +67.92% average p.a. 11.58%
6years +49.26% average p.a. 8.21%
7years +22.12% average p.a. 3.16%

Gold
5years +118% average p.a. 23.6%
6years +144% average p.a. 24%
7years +173% average p.a. 24.7%

Of course if we would include the years 1980-1999 the situation changes in favor of the DJI. The 80ies and 90ies have been excellent equity years but the situation clearly has changed since 2000. The Bull market in commodities or precious metals has definitely been stronger than US equities.

Now if we compare above numbers with the inflation numbers according to http://www.shadowstats.com/, we can say that US equity holders barely covered inflation over the past 5 years. Going back to 7 years the equity holders even lost purchasing power.

On the other side holders of Gold have increased their purchasing power by roughly 60% over the past 6 years.

Now, take a minute to look at what the investors believe. Almost everybody believes that equity was an excellent investment over the past years while almost nobody really looks at gold and therefore is not aware of the clear outperformance of Gold vs. US equities. Why is that?
Well on one side Gold and Silver is actually the most misunderstood investment. Rarely anybody looks at the fundamentals. Furthermore the financial press (TV and newspaper) have clearly a negative approach towards Gold, be it because the journalist are told to be negative or be it because of their ignorance or arrogance. The comments from these people are really ridiculous and shows how superficial the whole industry really is. One would live a lot better having the TV’s switched off.
Well to be fair, maybe the reason why Gold fundamentals are misunderstood and therefore Gold is reported badly is because reporting about Gold is not a good business for the journalist. For them talking about stocks gives them more people watching or reading them. News about Gold does not sell as good as news about equities that is a fact.

Following a comment from a posting last week on lemetropolecafe.com.
Quote
"More importantly as Doug Noland is pointing out there is now a run on Wall Street Structured Finance. European and Asian Banks have found out that Wall Street has sold them pigs with lipstick. Many hedge fund Investors do not know what the value of their investments are. Investors are now panicking for real money; this is why they have run to T-Bills. Once they start using their brains and stop listening to Wall Street and Washington they will come to realize their T-Bills are yielding 4% while M-3 has re accelerated to 13%. At some point just like in the 70’s European central banks will stop selling their Gold and their will not be enough to go around. If they don’t they will find themselves with none

Three things the markets need to come to grips with are 1) How are we going to fund our trade deficit if the rest of the world doesn’t want our junk at any price and our Treasuries at current yields? 2) How does the U.S. consumer continue to spend when his Mortgage Equity Withdrawals have disappeared? Yes, banks are willing to make loans but they now want more collateral not less. 3) What happens to the price of California Real Estate when banks demand 20% down and eliminate exotic financing?"
Unquote


What happened during the week:
Important maybe are the increasing number of rumours about problems of financial institutions.

Countrywide had to borrow a lot more money and it seems that there problems still are not solved.

Britain's fifth-biggest mortgage lender was in serious problems. Their customers tried to get their money out as fast as possible (see: http://www.telegraph.co.uk/money/main.jhtml;jsessionid=XBV5D2AH3XHJZQFIQMGCFFOAVCBQUIV0?xml=/money/2007/09/14/bcnnorth414.xml)

There are as well rumors some Canadian Banks have problems with their Money market Funds (some of them hold up to 50% in Asset Backed Commercial Papers). It seems that these Funds face huge losses due to these Commercial Papers. It seems that the banks will try everything to postpone the problems to 4th quarter so that any potential losses will not appear in this years balance sheet.

That means that not even cash is that safe anymore in some (increasing) cases. Please be careful and work only with top quality investments

Gold closed now several days above the important USD 700 oz. mark. Gold really looks strong and I expect a strong rally soon. However I am well aware that the Central Banks will do whatever they can to keep the price under control. Technically Gold has a strong support around 690 USD oz. and resistance around 730 and 775.

By the way I made changes to the video part (right hand side) now you find videos about the "credit crisis", please check by clicking on the picture you see below the Gold and Silver chart

Trust

Trust is the important issue right now. On one side those institutions having cash do not trust those in need of cash and therefore are not willing to lend them any cash. This of course is part of the liquidity crisis we are facing right now. Central Banks go on pouring billions into the system but unfortunately with little effect. It seems that they will have to go on doing it for a while. According to http://www.shadowstats.com/ the M3 in the US is already plus 14% this year. Of course as mentioned before; this is inflationary!!. Well it is not only the US, pumping liquidity into the market, it's the Central Banks around the world. Investors are slowly waking up to realize that all currencies at the end are only paper or FIAT currencies. The only real currency are precious metals, especially Gold. Therefore if we talk about Gold, "In Gold we Trust"
(see http://www.atimes.com/atimes/Global_Economy/II08Dj02.html). Well the real only currency is definitely on the move up. Prices went through the important resistances of USD 700 oz. and EURO 500 oz. Gold going up against all currencies is important to sustain the next strong upmove in this current Bull cycle (which will last several years). Well this is precisely what is happening now. Therefore it really seems that finally gold is going towards levels of prices where it should have been for some while. Inflation adjusted the gold price should be north of USD 1,500 oz. (and that is calculating at official inflation figures and not taking the real inflation figures). 5000 years history leads me clearly to believe that we will see a gold price above the USD 2,000 oz. in less than 5 years from now. Of course we will not move to that price in a straight move. However my feeling is that we just started the next strong up move which will lead us to close to USD 1,000 oz until early next year. Of course, Central Banks and the Working Group for Financial Markets aka Plunge Protection Team, will do whatever they can to keep this move under control. We will see now a fight for the USD 700 later the 730 and so on. Whenever we reach this important marks we might have a short correction. As I believe that the corrections will be short and minor, I would not speculate on it and just keep the position.

What do I expect
1. Gold: I believe that we are still in the strong Bull market. The next up move should bring us above the all time high price of USD 860. Possibly we will get close to USD 1,000

2. Stocks: Well there is not much trust. Investors are still selling. Sentiments are not positive. Is it the moment to buy? Well the contrarians clearly say yes. The contrarian believing is Buy when nobody wants to buy and sell when everybody is having a party. In that sense Puru Saxena believes that it is a good moment to buy. He likes especially the oil&gas companies and emerging markets. I certainly join him in the sense that I like oil&gas, refineries and other companies related to real assets (commodities).

3. Commodities: No change. The need for physical commodities is still high and I believe there will not be a change soon. Although US Housing will slow down (if not stop completely) the demand from China and India (infrastructure building) will keep the demand high.

4. Uranium: It seems that the Official Sector sold huge amounts of Uranium lately in order to bring U308 prices down. There is still a deficit of physical Uranium and demand is high and will increase. So it seems that buying Uranium now is a consideration worth looking at. Uranium can be bought either through a ETF Uranium Participation Corporation (U) (on Toronto Stock Exchange http://www.tsx.com/ to get to the stock, put a U where it says get quote, next page click on u (stock quote results). If you should have a problem send me a mail to musingsoffritz@hotmail.com. Furthermore there are some Uranium producer that might be interesting

5. Interest: No change to my opinion as per last post.
Short term: The FED will most probably lower interests by 50bps. However the LIBOR (London Interbank offered rate) for example will even go up. Why, because nobody trusts anybody anymore. Please read: http://www.ft.com/cms/s/0/d7a4be24-5b1c-11dc-8c32-0000779fd2ac.html and http://www.gata.org/node/5438
Long Term: please see comment from my last post. Interesting the article from the Telegraph
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/05/bcnchina105.xml&CMP=ILC-mostviewedbox
That means that demand for Treasuries will be low. So either the US official side has to buy them themselves (via the Caribbean money centers) or yields will shoot up faster then expected. Preparing oneself for higher interests might be a good idea

6. Hedge Funds: Some Hedge Funds made money speculating well. However there are several hedge funds loosing substantial amounts of money. I do expect several to close down over the next months, due to losses. From the approximately 10,000 Funds there might be less than half surviving.

7. Private Equity: So far the private equity managers were happy as they do not have to sell like the hedge funds. However the business for Private Equity has not become easier. The planned exit strategies might not be possible anymore. Investors might have to wait for payout, much longer than expected and even might have to face some losses. On the other side crisis are opportunities. New private equity funds might find excellent opportunities over the next months. So new funds, with sufficient liquidity and a clear defined target market, targeting sectors with future potential (energy, commodities) can do well.

8. Currencies: All paper currencies (FIAT) will have some problems. Some more than the others. Currency wise I like the currencies having strong exports of commodities and currencies where their Central Banks is more or less responsible (injecting less money) as for example Switzerland. The USD is a currency I do certainly not like. There are better ones.

9. Oil: Well the Peak Oil theory seems not to be a theory anymore but reality. Producers are more and more struggling to keep production levels at the actual levels (most are in decline already). Mexico possibly will stop exporting in some 18 months. This has an impact not only on the financials for Mexico but as well for the US who is the market of the Mexican oil exports. For more information read http://themusingsoffritz-peakoil.blogspot.com/ (Mexico out of oil in 7 years and further down the blog there is more info on Mexico look for title from http://lifeaftertheoilcrash.net/)