The Great Credit Contraction, similar to what some call a Kondratieff Winter, is intensifying. Predictably the DOW and S&P 1,500, representing about 85% of the entire US equity market, are continuing to crash. The 10 February 2009 DOW close was 7,888.88 and the S&P 1,500 ($SPSUPX) closed at 187.70. The Gold London PM fix was $909.75 and the Silver London PM fix was $1,296.
DOW/GOLD - As of 10 February 2009 8.671 ounces per DOW unit
[Update: 11 February 2009 about 8.418 ounces per DOW unit]
DOW/SILVER - As of 10 February 2009 608.710 ounces per DOW unit
[Update: 11 February 2009 about 584.547 ounces per DOW unit]
Earlier I explained the process and importance of both gold backwardation and silver backwardation.
Silver appears confused. The 1, 2 and 3 month silver contracts have been backwardated every day from 21 January 2009 to 10 February 2009. The 6 month contract popped back into contango on 9 February but the rate drove lower on the 10th. The 12 month contract is likely confused. Is the market sensing a true liquidity crisis?
PORTENTS OF THE VALUATION
The DOW and S&P 1,500 are hitting vicious record lows when priced in gold. Gold is the most powerful currency and functions as a presentation currency under International Accounting Standard 1. Every investor or holder of capital would be wise to keep an extra set of income statement(s) and balance sheet(s) using gold as the presentation currency because of its monetary properties in assisting the mental calculations of value. Remember, the issue of whether to use gold as a presentation currency is a completely separate issue from whether to purchase gold.
The current stock and real estate valuations when priced in gold portend the onset of an extremely serious depression. The Greater Depression has arrived and this credit contraction may last years or decades depending on how long the inmates, all infected with the Financial Insanity Virus, are allowed to continue running the asylum in Washington and Wall Street.
Iceland, one of the first nations affected, has already collapsed. The last time this type of currency crisis affected America the response was the Coinage Act of 1792. Under Section 19 the death penalty was prescribed for the type of ridiculousness the inmates are currently engaged in.
The earning capacity of corporations, in terms of gold and silver, is waning. The real estate stasis will continue as the credit contraction intensifies. The good businesses will continue running faster while going backwards on the moving sidewalk. Toyota, with their first lost in decades, is a perfect example. Swimming upstream against the current was never easy for even the strongest salmon.
The mediocre and bad businesses will either be bailed out or evaporate. While January had a modest 598,000 job losses there will be millions and millions slashed by the end of 2009. The oil majors should have taken my advice on 30 December 2008 to just buy gold and wait.
For individuals, corporations and governments there is no bottom line without a top line. One thing is for certain, as the great deflationary credit contraction continues grinding and intensifying the generation of top lines will get more and more difficult.
Disclosure: Long physical gold and silver. No other positions.