The rally is on! The Dow rose yesterday - up 168 points. Gold rose $7 - to close at $900. Oil is above $50 again, but just barely.
We repeat ourselves: one of the surest things in the investing world is a rally after a major downturn. Typically, prices recover 20% to 50% of the previous decline. Then, there is another leg down.
At first, when the rally comes, investors are hesitant. They've just lost a lot of money. They don't trust the market. They wait. Then, as prices rise more, they begin to pay careful attention and wonder: is it time to get back in? Gradually, more and more commentators answer: yes. And so the money comes back into the stock market. A trickle at first. Then, a flood. Prices rise...and the financial press talks about a new bull market.
But if it is a real bear market, this is just a way of bringing naïve investors back into the market so they can be destroyed. Prices fall again...to a much lower level. Often, this process is repeated several times before the real bottom comes. And by then...nobody cares.
Gold traded over $800 an ounce in the early '80s. Stocks, then at a major bottom, declined to the point where the Dow was also in the 800s. For one ounce of gold, you could have bought the entire group of Dow stocks.
Back in the early 30s, a similar thing happened. At its lowest point, the Dow fell to 41 on July 8th, 1932. Then, it took 2 ounces of gold to buy the entire Dow.
Could a similar thing happen this time? You bet it could. It now takes about 9 ounces of gold to buy the Dow. That's already down from a high of 43, set in 1998. Back then, the Dow was over 11,000...and the price of gold was only $260.
Since then, our 'Trade of the Decade' has been to sell the Dow and buy gold. But the decade is not quite out...and the trade still has some juice left in it. We could easily see the Dow below 5,000 in the next downward move. That alone would put gold in the 5 or 6 oz/Dow range. Keep waiting and it should eventually get to 1 or 2 ounces per Dow - perhaps at about 4,000 on the Dow...and $2,000 for gold.
Poor Ireland. It is expected to decline by 8% this year. And a think tank warns that the decline might rise to 14% of GDP by 2010. Soon, the ships will be leaving Dublin harbor again...bound for faraway places...and laden with huddled masses, yearning for a job. They will go to Sydney, to Baltimore, and to Buenos Aires...just like they did in the 19th century...filling the world with another great Irish diaspora, singing their sad songs and telling their sad tales...and dreaming of Erin's isle, without rain.
Bill Bonner
for The Daily Reckoning Australia
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- Does Gold Do Anything But Rise?
About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by GaryB on 2 May 2009:
Remember that this time the sucker rally has an accelerant, the plunge protection team. The PPT good ol' boys only need throw a few lazy million US taxpayer dollars into the stock market pot, and with so many nervous bottom pickers sitting on the fence, you're off to the races.