“With the debate today about Inflation, deflation and Depression comparing back to 1929 We need to remember that the dollar was still backed by Gold until 1933 so also the Dow was basically valued in gold dollars as it collapsed from 1929 to 1933.  What the implications are of that I really havn’t thought them through yet but would welcome anyones Ideas.”

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If you look at the chart of the long-term Dow I posted in this latest editorial…..

http://www.gold-eagle.com/editorials_08/goldrunner031208.html

….I think it means the difference between total panic and crash like in 1929 and a similar chart pattern to the 1970s where the Dow, like in 2007, went to new highs; then dropped into lower lows for the time period.  Here is the chart I am talking about in the editorial………

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The reason for this has a lot to do with what you mentioned.  In a time of deflation there is a loss of confidence in paper with a resultant panic that caused investors to sell everything in an attempt to survive financially.   But in that 1929’s deflation the dollar was backed by Gold so the Dollar did not drop dramatically like it did in the 1970’s or today.  In the 1970’s and today, the dollar dropped dramatically in value, and since the Dow is actually the Dow denominated in US Dollars or the Dow divided by Dollars……….the falling Dollar makes the Dow look higher than it would if the Dollar was constant like back in 1929.  Thus, the falling Dollar combined with the “bounce” in the Dow allowed the Dow to bounce back to new highs in the 1970’s and in 2007.

If you chart the $Dow:$Gold, you basically are dividing the Dow/USD by Gold/ USD  so the USD is factored out and leaves you with a true Dow/ Gold fraction.  Thus, if you look at a chart of the Dow (Dow divided by USD) you see that the Dow is higher now than at the 2000 top, but if you look at a chart of the $Dow:$Gold, you will see that the Dow has at the same time dropped about 73% since the 2000 top against  more constant Real Money Gold.

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This is the “effect” of the falling value of the USD in the 1970’s and today, IMO…….the effect of US Dollar inflation on the dramatic drop in the Dow.  The real crash in the Dow is against inflation > against Real Money Gold that is stable………….thus in the 1970’s and now the Dow to Gold ratio reverts back toward 1:1, just like in the 1929 deflation, even though the Dow will not drop nearly so badly as in 1929……….as it will “mimic” the 1970’s environment as the Dow “price” is again supported mightily by the falling value of the US Dollar.  Thus, we might see the Dow and Gold meet around the 8,000 level, or something like that.

When you look at the deflationary headlines, today, and see that the Fed has basicaly just monetized about 200 billion in bad debts gone awry, you are looking at the USD drop vertically.  Thus, you have a Dollar falling aggressively that will support the “price of the Dow” to some extent since the USD is the divisor (bottom of the fraction) in the $Dow, or Dow/ USD.  As the bottom number gets smaller in a fraction the result goes up…………………..

Now, we have to consider one more aspect.  We see what happened to the Dow in the first chart in 1929 when confidence in paper was lost with a stable Dollar that was backed by Gold…………..Deflation….. The Dow crashes.  We see in that chart what happens when confidence is lost in paper while the US Dollar falls in value in the 1970’s……..Stagflation……… The Dow first drops, then rises to new highs, then drops to a lower low- but overall, the Dow only dropped about 40%.  NOW, what happens if we currently have a loss in confidence in paper while the US Dollar falls in value more dramatically than in the 1970’s Stagflation? ……..it can be more flation than stag, or it can go all the way to hyperinflation………….but, the Dow might not even drop as much as 40% against the “real high” in 2000………even though the ratio of Dow:Gold drops to 1:1.  That is possible, IMO, if the value of the US Dollar drops far enough.  Thus, at the same time the Dow appears to be fairly strong historically, the Dow at the same time might drop over 90 or over 95% against (constant) Gold.

This Dow crash is mostly hidden to many Dow investors at this point, and is screwing SOEE out of a high percentage of his Dow puts gains to date, witnessed by the crash of the Dow against Gold while the Dow is “up” compared to the 2000 top.  SOEE would have had to have gone “long calls on $Gold” and “long puts on the Dow” to gain the full effect and make his $50 million this year.

By using Dollar inflation and the drop on the value of the Dollar, the Fed has been able to hide the crash in the US Dollar against inflation/ against constant Gold……..pretty well up until, now.  They also have been able  to avert a panic like 1929.  They also have been able to “save” the interest rate cuts to now to use more aggressively in bigger chunks and to thus far “protect the Bonds.”  These will fail to some extent after the next intermediate term top as we run down into an intermediate deflation scare bottom across the board, and will fail further into 2012……….but as long as the value of the US Dollar is aggressively dropping, the numbers to the average investor will look dramatically better than they would have given a stable Dollar…….will avoid a panic.  Plus, the Dollar Inflation will be used to monetize more debt across the board………………Love those Cayman Islands accounts.

 GR