What New Record?

June 4, 2007 – Last week the S&P 500 Index made a new all-time record high, finally joining the Dow Jones Industrial Average in that exulted territory. Much has been made of this news, and all types of reasons have been offered for the remarkable gains being scored by these major stock indices. However, when viewed through the rights lens, these gains are illusory, as indicated by the following chart.

This chart presents the S&P 500 Index measured in terms of gold, rather than dollars. Rather than being at a new all-time high, when measured in this way the S&P 500 is 71.19 goldgrams, well below the July 16, 1999 peak of 173.53 goldgrams. In other words, if you held the S&P 500 during this period instead of gold, you would be 59% worse off. Even allowing for dividends received, you would still be almost 50% worse off had you held the S&P 500 instead of gold.

More importantly, the real reason for the so-called ‘record high’ in the Dow and S&P is being ignored. A flight from the dollar into safer stores of wealth has been underway for years, but is now palpably gaining momentum.

What does the US have in common with Argentina in 1999, Russia in 1998 and Weimar Germany in 1923? They all had rising stock market prices when measured in terms of these countries’ domestic currency before the currencies of those countries collapsed.

The new record high in the S&P 500 made this week is an important event. It reconfirms what the Dow Jones Industrials has already been telling us for months and what commodity prices have been telling us for years — that there is a flight out of dollars underway. Money is flowing out of dollars into tangibles (commodities, etc.) and near tangibles (stocks that own/produce tangibles like oil companies and commodity producers).

The sharply rising stock markets in Argentina, Russia and Weimar Germany were an important sign that a crisis was approaching for those countries’ currencies. The US stock market making one record high after another is telling us the same thing — a dollar crisis is rapidly approaching.

Timing is of course impossible to predict, but I think a dollar crisis is very close, which explains why central banks have been dishoarding so much gold in recent weeks. They are trying to keep gold under $700. I expect they are thinking what I am thinking — that when gold finally climbs above $700, it will just keep climbing higher and the dollar crisis I am expecting will have by then begun in earnest. Central banks do not want to see that event. But rather than force the US to mend its ways by managing the dollar responsibly, they are instead acting to keep the fiat currency game going in the hope that a capped gold price will cause people to take their eye off the ball.

I believe that a dollar crisis could happen any week now. In fact, it has probably already begun given the stock market’s relentless climb, but watch gold carefully here. A break above $719 into new multi-decade highs will be the next sign that the flight from the dollar is gaining momentum.