Navigating Central Bank Policy: Understanding Asset Flow Patterns
Adrian C. Spitters FCSI®, CFP®, CEA® President, Author, Private Wealth Advisor
I Execute Tax-Efficient Investment Portfolio Solutions So That Your Business, Family, And Estate Assets Are De-Risked And Protected Against Financial Risk, Economic Threats, Inflation And Higher Taxes.
Source Article: DOW/Gold Ratio and Stock Market Crashes
How Monetary Policy Shapes the Markets
Cash moves through the markets in predictable patterns, and central bank monetary policy is solely responsible for driving cash either into or out of certain assets. Central Bank monetary policy IS THE number one driver of the markets. Period.
As an example, after the stock market meltdown and financial crisis of 2008, the Federal Reserve implemented what has become known as quantitative easing (QE). QE is defined as "the introduction of new money into the money supply by a central bank." This process involves vast purchases of debt by a central bank and massive issuance of debt, with the currency itself being units of debt.
At its core, QE allows a central bank to vastly inflate the overall debt, which is, of course, their overall goal. The more debt a central bank issues, the stronger it becomes. QE then initiates a revolving door mechanism by which a central bank issues debt via one door and then buys it back through another. This mechanism artificially pushes bond yields lower, and this, in turn, opens a doorway for cash to make its way into risk assets and stocks, thereby inflating stock market bubbles.
QE hyperinflates the money supply and overall debt, which is massively currency purchasing power negative. With that, it is only a matter of time before all those extra bills, in whatever form they exist, make their way through the system. The result is inflation and massive price action distortions across the entire spectrum of asset classes.
The Ripple Effect: Inflating Bubbles and Deflating Commodities
Quantitative easing (QE) is responsible for inflating stock market and real estate bubbles and creating inverse bubbles. When a central bank initiates QE, cash is pulled from other asset classes, more specifically commodities, resulting in an enormous undervaluing of these assets. This undervaluing of assets then creates the opportunity to buy commodities "on-sale" or at a huge discount.
Understanding that QE, easy money policy, suppressed rates, and currency devaluation drive cash either into or out of certain assets, we can look at gold, or more specifically, the DOW Gold Ratio, to gauge how extreme these central bank-induced price action distortions are.
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The DOW Gold Ratio: A Historical Perspective
Just prior to the stock market crash of 1929, which led to the Great Depression, the DOW Gold Ratio peaked at around 18 (meaning it took 18 ounces of gold to equal the DOW). During the Great Depression, the DOW Gold Ratio fell to 1.59, meaning it took 1.59 ounces of gold to equal the DOW. In 1980, the DOW Gold Ratio fell again to 1.35. Just prior to the Dotcom stock market crash, the DOW Gold Ratio was 42, which then dropped to 6.7 after the crash.
Today, the DOW Gold Ratio is around 17, very close to where it was just prior to the 1929 stock market crash. The distortions in the market are at extreme levels. Never before have we seen a larger debt market hyper-bubble. With that, we will likely see a substantial drop in the DOW Gold Ratio. In fact, a 1 to 1 DOW Gold Ratio is a distinct possibility.
Complimentary Portfolio Evaluation and Gold Investing Opportunities
As a valued reader, we are offering a complimentary portfolio evaluation to discuss how owning Gold fits into your portfolio allocation. This consultation will provide insights into how you can potentially enhance your portfolio's resilience and diversification in the face of economic uncertainty. You can email aspitters@pfcwealthsolutions.com or use my Calendly Link to book your complimentary portfolio evaluation.
Alternatively, you can contact New World Precious Metals to discuss purchasing options for physical Gold. In these turbulent times, it's crucial to ensure that your portfolio is well-positioned to withstand potential economic challenges and market fluctuations. By considering the incorporation of Gold, you may be able to fortify your investments and better navigate the complexities of the current financial landscape.
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