all weather investment for todays shrinking dollar.pdf

7/29/2019 all weather investment for todays shrinking dollar.pdf

1/8

It may be the most-important question that determines your financial future. And for that matter, the future of the U.S. economyDo we face inflation or deflation? Will your dollars have less or more purchasing power in the future?

In mid-2008, gasoline topped $4 a gallon. That was inflation. Then the financial crisis hit, and in early 2009, filling your tancost just $1.75 a gallon. Deflation. By 2012, its almost back up to $4.

Now? Its become a lot more fuzzy. We definitely face inflation when it comes to what we eat and the energy we consume.

But home prices are still deflating, as they have been since 2006. And while stock prices have risen for nearly two years, theyrstill well below their 2007 highs. Those are the only prices Ben Bernanke and the Federal Reserve care about when they decidwhether were experiencing inflation or deflation. Seriously they care most about the core consumer price index, whicexcludes your cost of food and energy.

So which is it going to be now?

Plug the term inflation or deflation into Google and you get nearly 2.5 million hits. You could spend all your waking hour

exploring the question. And by the time you figure it out, months or years later, history would have passed you by: Your dollarwould already be worth less or more.

But what if you didnt have to worry about getting this question right? What if you could look at one simple yardstick anmake one simple investing decision and be right no matter what?

You wouldnt have to spend hours or days on the Internet or in the library trying to figure it out. You could take a handful obasic steps and youd be protected from all but the most extreme end-of-the-world scenarios.

You could finally sleep at night.

Sound impossible? Not at all. In this special report, we reveal that very yardstick. Then well show you two ways to play thtrend that yardstick reveals. And if youre feeling a little more adventuresome, well show you how to take on a little more ris

for a lot more reward.

Lets get started

Inflation? Deflation? Who Cares!A Simple Formula That Keeps You Covered No Matter What

We wont keep you in suspense: The yardstick you can follow to guide your decisions and not have to worry about whetheyoure right on inflation or deflation is the Dow-gold ratio.

Its pretty simple Take the reading of the Dow Jones industrial average. Divide it by the price of gold in U.S. dollars. Th

ApogeeA D V I S O R Y[ap-uh-jee] Investment Ideas from 30,000 Feet

ADDISON WIGGIN

T H E

The All-Weather Investment for

Todays Shrinking Dollar


2/82

resulting number is the ratio.

Heres another way you can think of it: How many ounces of gold would it take to buy all 30 stocks in the Dow? Your answeris the Dow-gold ratio.

Now All of that probably seems rather dry and academic not exactly relevant to the question of, What should I be doingwith my money? But stick with us because the Dow-gold ratio yields critical clues to that question and then well diveinto the specific answers those clues reveal.

First, lets get a visual fix on the Dow-gold ratio.Heres a chart of it, going nearly all the way back towhen Charles Dow first devised his famous indexof industrial stocks in 1896.

Theres more than a century of history in this chart.Turning points in the Dow-gold ratio also markedturning points in the market.

For instance, the ratio reached a high of nearly 20:1as the Roaring 20s approached their climax. Stockswere strong relative to gold.

But the relationship reversed as the Depression setin, and the ratio crashed to 2:1 as stocks bottomedin the summer of 1932.

An even more impressive run-up came during the 1960s. The ratio approached 30:1 as investors couldnt get enough Nifty 50stocks and the Dow approached 1,000 for the first time. Once again, stocks were strong relative to gold.

But the stagflationary 70s brought the ratio to a historic low of 1:1 in 1980.

Then the next big run-up began. As the dot-com craze reached its zenith in 1999, so did the Dow-gold ratio, to a staggering43:1. The Dow grew more than tenfold in the 80s and 90s while gold was stuck in the $250400 range.

But once again since 1999 the ratio is climbing down, down, down. For the last couple of years, its been about 8:1.

Actually, you can trace the history even fartherback. The gold bug website ShareLynx devised aproxy for the stock market that predates the Dowsinception and takes it back 200 years. (It looks alittle different from the other chart because its ona logarithmic scale.)

The storys been remarkably consistent althoughback in the 19th century, both the highs and lowswere much lower than theyve been more recently.

Thats what nearly 100 years of the Federal Reservemonkeying around with the money supply hasdone. Its made everything a lot more volatile.

So knowing all this, what do we do now?

Coming Soon A Rerun of 1932and 1980

We see two basic trends here, looking back overthe era since the Feds inception in 1913. The

A CENTURY OF HISTORY IN A SINGLE CHART

The Dow-gold ratio, 1900present

Source: World Gold Council, Haver Analytics, Gluskin She

45

40

35

25

20

15

10

5

0

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

ratio

AN EVEN LONGER-TERM VIEW

The Dow-gold ratio, 1800present

Source: ShareLynx

100

50

20

10

5

2

1

0.5

0.2

0.1

1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

Stocks HighGold Low

Stocks HighGold Low

Stocks HighGold Low

Stocks HighGold Low

Stocks LowGold High

Stocks LowGold High

Stocks LowGold High

Stocks LowGold High


3/8

Dow-gold ratio hits new highs every few decades, climaxing just before stocks enter a long-term bear market, like 1929and 1999.

And then it retreats to about the same level either 2:1 or 1:1:

July 1932: In the depths of the Great Depression, the Dow sank to 41. America was still on the gold standard,and an ounce of gold was fixed at $20.67 an ounce. The Dow-gold ratio was 1.99: 1.

January 1980: As inflation threatened to rage into hyperinflation, the Dow languished at 872 still below its

record set 14 years earlier. The world piled into gold for protection, driving the price to $850. The Dow-goldratio was 1.03: 1.

No sooner did we first let Addison Wiggin Apogee Advisory readers in on Dow gold than the ratio proceeded to plummetthanks to the debt-ceiling crisis here at home and the eurozone crisis abroad. The ratio touched below 6 in late August andearly September as gold topped $1,900 and the Dowdipped below 11,000. Since then, gold has retreated andthe Dow has recovered.

At press time for this report, the Dow stands near 13,000.An ounce of gold fetches $1,630. The Dow-gold ratio isa shade under 8: 1.

By now you see where this is going. From its present level,the Dow-gold ratio still has a fair way to go down.

But what does this mean, exactly? And how do you play it?

But one look at the chart and the conclusion is hard toescape: The Dow-gold ratio has moved into a new rangethats much lower than the one where it sat in the two years leading up to last August.

Worst-Case Scenarios And Some More Likely Ones

That gets us back to the old inflation-deflation question. Lets examine the worst-case scenarios: Severe deflation. Were talking late 2008/early 2009, but much worse and longer lasting. Gold could end up

merely holding steady, or even retreating to around $1,000 an ounce. That would mean a stock market thatmakes the Panic of 2008 look like a picnic dragging the Dow to 2,000, or even gulp 1,000.

Thats a horrible possibility. The Dow would retreat to levels last seen in the early 1980s and thats beforeyou account for the loss of purchasing power since then!

Hyperinflation. Say we go the way of Weimar Germany, or, for a more recent example, Zimbabwe. TheDow could zoom to 100,000 but imagine gold costing $50,000 an ounce or even $100,000 at thesame time. (Of course, the reality in both of those examples was far worse. In 2009, Zimbabwe issued banknotes for 100 trillion Zimbabwe dollars equal to US$300.)

In the case of either severe deflation or hyperinflation, wed have a lot more to worry about than how gold or stocks are pricedin U.S. dollars. If its the end of the world you want to prepare for, there are plenty of books and websites that can help youWell stick to some more likely possibilities as the Dow-gold ratio approaches 2:1:

Plausible scenario No. 1. Lets say gold tops $6,000. Thats not too far out of line. Gold went from $35 to$850 during the 1970s more than 24-fold.

During golds more recent bull run, it started from a low of $252 in 2001. If it multiplied by the samedegree this time, wed be looking at a price of $6,118. At a 2:1 Dow-gold ratio, that would put the Dowjust over 12,200 not far from where it is at press time, but priced in a dollar that has a whole lot lesspurchasing power.

FREE FALLAND RECOVERY

The Dow-gold ratio has settled into a new and lower range

2010 2011 2012

10

9.50

9.00

8.50

8.00

7.50

7.00

6.50

6.00


4/84

Plausible scenario No. 2. This comes from David Rosenberg, one of the most sensible economists whoget respect from mainstream sources like The Wall Street Journaland CNBC. After a long career as chiefeconomist for Merrill Lynch, he now holds forth at a boutique firm in Canada called Gluskin Sheff.

In June 2010, Rosenberg took a good hard look at the same Dow-gold chart we showed you on Page 2. Hecontemplated the 1932 and 1980 lows. And he wrote this

If this ratio ends up retesting the two fundamental lows that it has achieved in the past; andif we are correct in our assertion that gold goes to $3,000 per ounce, then what we would be

talking about here is a Dow 5,000 trough at some point down the road.

Ouch. Just for perspective, the Dows early 2009 low was 6,547.

So How Do We Play This?

OK, OK, youre saying, youve made a convincing case, but what the heck can I do with my money thatll keep me in goodshape no matter what?

We wish we could tell you about an exchange-traded fund whose value is linked directly to the Dow-gold ratio. Its value wouldgo up as the ratio goes down. Unfortunately, for all of Wall Streets ingenuity in devising exotic ideas for ETFs, nobody hasdeveloped this one yet.

So instead, were going to pursue a pair trade investor parlance for a bet you make on one asset going up and another assegoing down.

Playing the Dow-Gold Ratio, Part 1:The All-Weather Investment

This debate between deflation and inflation is always interesting, but I dont think it matters if

youre invested in gold. I think in either outcome, gold wins.

John Hathaway, Tocqueville Gold Fund manager

Playing the gold half of the Dow-gold ratio is pretty easy: Buy gold!

Chances are you know how gold can preserve your purchasing power during times of inflation. Gold jumped from $35 to $850an ounce between 1971 and 1980. Thats a 24-fold increase. The cost of living? That merely doubled.

But what about deflation, you wonder? Isnt gold a bad thing to hold in case we head into a deflationary period?

Not at all.

Gold was held at a fixed price of $20.67 an ounce in the early years of the Depression but gold mining stocks made boatloadof money for a handful of brave investors.

And now? If deflation takes hold in the United States, writes author and bullion dealer Michael Maloney, foreign investorswill be looking at a slowing U.S. economy and will sell U.S. investments.

Once investors have sold their dollar-denominated assets, they then have to exchange those dollars into their own currencyThis would cause the U.S. dollar index to fall, and precious metals to soar.

Bottom line: I dont think you have to know which well get to decide if you should buy gold, says John Hathaway, veteranmanager of the Tocqueville Gold fund one of the best-performing gold mutual funds out there.

If we have a deflationary morass, where were stuck in a liquidity trap for the next five years, it will make the government doall kinds of crazy things that will undermine the value of money, which will ultimately turn out to be inflationary.

This debate between deflation and inflation is always interesting, but I dont think it matters if youre invested in gold. I think


5/8

in either outcome, gold wins.

So to get back to our original point: Buy gold! And not just to play the gold half of the Dow-gold ratio.

At Least 10% in Precious Metals More if It Helps You Sleep at Night

You want to own physical gold and silver as core holdings in your portfolio, says Agora Financials Byron King, editor oOutstanding Investments. For the past couple of years, Ive been saying 510% in precious metals, or more if it helps yousleep at night.

But with the amount of economic turmoil around the world lately, Byron is boosting that allocation. Im going to change thato At LEAST 10% in precious metals, or more if it helps you sleep at night. Start with bullion coins over rare coins. Just gofor the metal, to start.

What if youre investing inside a retirement account? A handful of firms can set up a precious metals IRA for you. But we havenproperly vetted these firms, and we wont recommend one.

That leaves the assorted ETFs and closed-end funds. Were not 100% sold on the ETFs: They have a network of custodians andsubcustodians so dense and complex its conceivable both a retail ETF investor and an investment bank can have a claim onthe same chunk of gold.

Solution? The Sprott Physical Gold Trust (NYSEArca:PHYS). It offers allocated, audited storage (in the Royal Canadian MintPHYS is a newcomer, introduced in March 2010. But its backed by the amazing pedigree of Canadian hedge fund manager EriSprott. He caught onto the bull markets in precious metals and natural resources years ahead of the crowd, in 2000.

And even though gold is near its all-time record, he sees bigger things: Itcould go to $2,000 an ounce. I could imagine it at $5,000. I am not giving atime frame on that, but I could certainly see that happening.

PHYS is not an ETF; its a closed-end fund. That means the share price cantrade at either a premium or a discount to net asset value. You definitelydont want to pay a huge premium. A couple months after PHYS begantrading, buyers were paying a 21% premium over the spot price of gold!

Now its much less of an issue. It was recently trading at NAV. Dont paymore than 6%, which is roughly the premium youd pay for a gold coin.

Playing the Dow-Gold Ratio, Part 2:Keep Smiling as the Dow Plunges to 5,000 or Below

Playing the Dow half of the Dow-gold ratio is a little more complex than playing the gold side. That is, how do you sell the Dow

The answer is you do it with an inverse ETF.Its value rises as its underlying index falls.

(Conversely, its value falls as the index rises.)For the Dow, the vehicle to pull it off is theProShares Short Dow30 (NYSEArca:DOG).

As you can see, DOGs performance is a prettygood mirror image of the Dow:

Understandably, DOG has performed like, well,a dog since stocks began their big run-up in fall2010, shortly after Federal Reserve ChairmanBen Bernanke announced a new round ofquantitative easing that is, easy money.

How to play the gold half of the Dow-

gold ratio: Buy the Sprott Physical Gold

Trust (NYSEArca:PHYS). Dont pay more

than about a 6% premium over net asset

value. You can track the current premium

at http://www.sprottphysicalgoldtrust.com/NetAssetValue.aspx

MIRROR IMAGES

The Performance of DOG versus the Dow

35%30%25%20%15%10%

5%0%

-5%-10%-15%-20%-25%

6/21/2010 10/4/2010 1/3/2011 4/4/2011 6/20/20

Dow Jones Industrial Average Index

ProShares Short Dow30


6/86

This gets us to the other complication about selling the Dow. We dont think its a big deal but we need to address it.

Picking From the Plausible Scenarios: Dow 5,000

First of all, if an end-of-the-world hyperinflationary scenario unfolded, the Dow could easily zoom to 100,000 or more, andDOG would be nigh worthless. But as we said before, if matters reached that stage, wed have a lot more to worry about.

Lets return to the two plausible scenarios we laid out on page 3. In the first one, we showed you how gold could run as highas $6,118. If the Dow-gold ratio returned to 2:1, that would mean a Dow of 12,200 1,000 points below where it is as of

this writing. DOG would merely tread water.

But heres the thing: If the Dow-gold ratio returnedto 1:1, that would mean wed be looking at a Dowof 6,118. Even a ratio of 1.5:1 would send theDow to 9,177. DOG would make money.

Besides, we think plausible scenario No. 2 iseven more likely. Using the numbers crunchedby David Rosenberg, gold nearly doubles fromwhere it is now to $3,000. And the Dow plungesto 5,000. Thats a Dow-gold ratio of 1.67:1 andDOG more than doubles, too.

So what makes a Dow drop to 5,000 more likely?Well, the Dow is in a secular (long-term) bearmarket.

Take another look at the first chart on Page 2.Look at the two times the Dow-gold ratio hitbottom during the 20th century. Both times,the Dow also hit severe lows, from which it thenbegan to rebound sharply. Lets zero in on the

more recent episode.When the ratio hit 1:1 in January 1980, thatwas just the beginning of the end of a long andpainful period for people who owned stocks.The Dow peaked more than a decade earlier February 1966 at 995.

The following 14 years saw a long, slow grind tonowhere, as you can see in the first chart to your right.The Dow finally bottomed at 777 in August 1982.Adjusted for inflation, the losses were far worse.

Sure, there were highs and lows in the middle, butthe fact remains that stocks ended a big run-up in1966 and didnt begin the next big one till 1982.

And so its been since January 2000, when the Dowreached its dot-com high, witness the second chart.

If the current bear market runs as long as the lastone more than 14 years we have until mid-2014 before the next bull market in stocks begins.

No guarantees but 14 years is a decent ballpark

1,100

1,050

1,000

950

900

850

800

750

700

650

600

1966 1968 1971 1974 1977 1980 198

LONG, SLOW GRIND TO NOWHERE

The Dow Jones industrials, February 1966August 1982

14,500

14,000

13,500

13,000

12,500

11,500

11,000

10,500

10,000

9,5009,000

8,500

8,000

7,500

7,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201

HISTORY DOESNT REPEAT BUT IT SURE CAN RHYME

The Dow Jones industrials, January 2000present

THE Q RATIO SIGNALS BEAR MARKET BOTTOMSAnd were nowhere near one now

2.00

1.90

1.80

1.70

1.60

1.50

1.40

1.30

1.20

1.10

1.00

0.90

0.80

0.70

0.60

0.50

0.40

0.30

0.20

0.10

0.00

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

1.08 1.08

Arithmetic

Mean=0.71

1.06

1.82

0.30 0.30 0.30

0.66

0.33

0.94


7/8

figure. Turns out thats the average length of the four previous bear market cycles during the 20th century, according to analysRussell Napier.

His bookAnatomy of the Bearpicks apart all four of those bear markets. They bottomed in 1921, 1932, 1949 and 1982. Napiesays the most reliable marker of those bottoms is something called the q ratio, also known as Tobins q.

Heres how Nobel laureate James Tobin says you calculate the q ratio: Take the total market value of a company. Then divide by the replacement value of its assets (in other words, how much youd pay to build the company starting from scratch).

You can apply the q ratio to a company or the entire stock market which is what you see on this final chart on page sixplotted over the last 100-plus years.

As you can see, the ratio hit a ridiculous high at the end of the dot-com boom just like the Dow-gold ratio. Meanwhile, it hroughly 0.30 during each of the bear market bottoms identified by Napier.

Were nowhere near the bottom now. In fact, after the rally that started in autumn 2010, the q ratio is back to levels we sawduring much of the previous decade, despite some stomach-churning moments since last August.

In other words, the stock market is overvalued. Napier sees the Dow headed below 5,000 by the time it reaches bottom in thcurrent cycle. DOG will help you ride the cycle in style even if the Dow rallies from here in the short term.

In January 2012, Napier stuck to his call of a bottom in

2014, with the S&P 500 registering near 400. Ouch that implies a Dow of 4,0005,000.

And while were not sure Napier would agree, the historyof the Dow-gold ratio suggests an accompanying gold pricesomewhere between $4,000-10,000 an ounce.

If Youre Feeling More SpeculativeTwo Ways to Play the Dow-Gold Ratio More Aggressively

So now you have it: Two plays to take advantage of the Dow-gold ratio falling from its current level of 8:1 to the likel

endgame 2:1, or even 1:1.

But if youre willing to take on a little more risk for a lot more reward, we have two more ideas you can pursue.

If you want to pursue gold more aggressively: Buy a basket of gold stocks. As veteran precious metals investors will tell yougold stocks give you leverage to the price of gold.

It works like this: Say a company pulls gold out of the ground at a cost of $500 an ounce. If the gold price is $1,500, that$1,000 in profit. But say gold goes up to $1,800 a 20% move. Assuming the costs of mining stay the same, that become$1,300 in profit a 30% move.

The Market Vectors Gold Miners ETF (NYSEArca:GDX) tracks the performance of the NYSEArca Gold Miners Index. That

31 stocks in all, with Barrick, Goldcorp and Newmont making up about 40% of the holdings.

The potential downside is something else veteran precious metals investors will tell you gold stocks are, first and foremoststocks. If theres a severe stock market panic, gold stocks will get dragged down with everything else.

Indeed, they got crushed in 2008 but they also started recovering months before the rest of the stock market, and in a mucbigger way tripling in only 18 months.

If you want to pursue the Dow aspect more aggressively: Bet on a sector within the Dow thats especially vulnerable U.Sretailers are one such sector. They face two related head winds:

Theircostsaregoingup.Thegoodstheybuyaremadewithgloballypricedcommoditiesorthingsderived

from commodities (think plastics). And as we explained earlier, many of those prices are going up

How to play the Dow half of the Dow-gold ratio: Buy

ProShares Short Dow30 (NYSEArca:DOG). If the current

rally in the stock market makes you skittish about doing this

now, average into your position over the next several months.


8/8

Theircustomersaregettingsqueezed.Theyrealreadypayingmoreforfoodandenergybuttheirincomesare

flat. Thats less money to spend on discretionary items.

To try to compete, many retailers are keeping a lid on prices as best they can. Theyre eating their own rising costs just to makesure traffic keeps coming through the door. Thats bad for profit margins, and this margin collapse is shaping up to be oneof the big stories of 2012.

You might consider short selling the SPDR S&P Retail ETF (NYSEArca: XRT). Short selling involves borrowing sharesfrom another investor and then selling them. You hope to buy them back and return them to the original owner after the

price falls.

XRT tracks the performance of the S&P Retail Select IndustryIndex with a basket of 95 stocks. Most of them are big-boxstores, and if theyre not feeling their margins compressing now,they will soon.

Sorry, but your online discount brokerage probably cant helpwith short selling. This is the sort of thing you need to do theold-fashioned way, over the phone.

Final Thoughts: An Exit StrategyYou might have one final question about playing the Dow-gold ratio the way weve suggested: Whats the exit strategy?That is, how will you know when its time to pare your positions, or get out completely?

Once again, the key is to watch the Dow-gold ratio. As it reaches, say, 3:1, youll want to start paring back on your goldposition even if the gold price is jumping $50 a day.

And if the q ratio is near the 0.3 level, that indicates a bottom in the stock market (well stay on top of this for you). Youll beable to start snapping up stocks at truly bargain prices.

In fact, thats when a new bull market in stocks will be under way even as magazine covers declare stocks dead and buried.

2012 by Agora Financial, LLC. 808 St. Paul Street, Baltimore, MD 21202. All rights reserved. No part of this report may be reproduced byany means or for any reason without the consent of the publisher. The information contained herein is obtained from sources believed to

be reliable; however, its accuracy cannot be guaranteed.

www.agorafinancial.com

How to pursue the Dow-gold ratio more aggres-

sively: Buy the Market Vectors Gold Miners

ETF (NYSEArca:GDX). GDX is at historic highs,

so average into a position over several months.

Meanwhile, short sell the SPDR S&P Retail ETF

(NYSEArca:XRT) .

all weather investment for todays shrinking dollar.pdf

Documents