DOW-Gold Ratio, Tax Loss Selling, and CIBC Jeff Rubin Speaks!

My apologies for the lack of updates last few days. Needless to say this week the optimism on Wall street came to a screeching halt on Monday with a near 10% drop on DOW and major indexes. The 14% 4-day rally last week is only going to last so long.

CIBC's Jeff Rubin says gold will soar (along with oil and other key commodities) on BNN Monday evening.

$1.5 trillion US deficit = 11-12% GDP

"War Level deficits" - Vietnam and Korean War Level mortgaging the US future. He calls it future taxpayers generations afterwards might wonder why the government chose to mortgage.

He goes to advise possible monetization of these deficits (as they have in the past) - unlike Brazil and Argentina - people lend money in US$ Funds. 

"When US tries to finance these deficits - the US$ is going down." Instead of sending $1.5 trillion to public - might give it to Federal Reserves Board to spend, resulting in inflation forces = higher commodity prices, real estate, and goods. 

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The chart to the left is from an intelligent investor in Minera Andes. The chart tracks the volatility in the DOW to Gold index over time.

The index, as its name suggests, compares the DOW Index number to the value of gold at that certain point in time to achieve a ratio. As you can see in the last little while the ratio has been jumping all over - similar to the VIX^ index we discussed in previous entries. 

This environment is perfect for daytraders - difficult for value investors. Short term optics remain blurry - Warren Buffet's entry point 2 months ago could not have been worse - so far. In 3-5 years he might very well be correct as a value investor - but the short term challenges for any investors remain as the only clarity in this market. 

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On a more positive front, Tax Loss Selling seems to have subsided for a bit - perhaps the sellers were using their redemptions on a shopping spree on Black Friday? 

For those unfamiliar with the Tax Loss Selling rule here it is in a nutshell. Hopefully that means we will see a slight turnaround in markets in early 2009.

Since we're heading into December, the timing is right to look at a possible silver lining to those investing losses. 'Tis the season for tax-loss selling – when you sell equities that are losing money to claim the tax advantage that comes with capital losses.

Experts are expecting a huge amount of tax-loss selling this year because the conditions are perfect for it. Over all, share prices have plunged (as of yesterday, only 12 of the 241 stocks on the S&P/TSX composite have gained in 2008) and the markets have already seen big selloffs, particularly in September and October.

Losses are also coming after a few good years on the markets, which means that many investors have claimed capital gains over the past three years. According to tax expert and Globe and Mail columnist Tim Cestnick, the issue of capital gains is one of two crucial factors for investors in deciding whether to take advantage of tax-loss selling. (The other: “If you just don't like the investment any more.”) If you file for losses this year but have filed capital gains in the past three years, you can get a refund for some of the taxes you paid.