Dow Plunges Investors React

Yesterday the Dow plunged 225 points, as bigger, more conspicuous moves up and down seem to be growing more common.Today, so far, we are seeing further weakness and the mood has shifted to that of a 10% to 15% correction instead of DOW 12,000.For those who believe growing deficits and exploding debt will ultimately affect a major market correction, it's easy to see how some may view this 225 point plunge as just the beginning of a now anticipated correction or even total collapse.

It's no secret trillions of dollars have been pumped into the world's economies.This has given the illusion of rising revenues, increased earnings and a sense of recovery.But you can't help but think every investor in the market hears that little voice saying, "this can't last forever."What happens when the free money runs out?

A few days ago I illustrated how our GDP was rising (3.2% 1Q 2010) at a pace unequal to the amount of stimulus we pumped into the economy.If you pump an amount of stimulus equal to 7% of the total economy, shouldn't we see the GDP rise at an equal rate.I guess for us it doesn't work that way.We pump in 7% more cash and get a GDP that rises at half the pace.I mean the only way I can see that happening is if you are pumping money into an economy that isn't done shrinking yet.

Obama may have said it best.Had we not done what we did to grow jobs, we would have lost a lot more.No Kidding!I say without stimulus we still have a shrinking economy. So again I ask, what happens when the stimulus runs out?I think GDP goes negative and the markets may be showing signs of agreeing with that conclusion.

OK, so an increasingly volatile and uncertain market is explainable, but why did Gold drift lower along with the markets?I think it's the same old story we've told in the past.When markets make violent moves down, investors have to take profit off the table.Profit is taken for a variety of reasons.Some investors need to convert to cash in order to make margin calls.Others may take profit because losses offset the gain allowing them to even out the tax score a little bit.

Whatever the reason, those who chose to buy gold along with stocks are now being rewarded for their gold diversification efforts.All things considered, gold is holding up well in the face of global debt crises.Today it's Greece, then who?Spain, Portugal?One analyst even questioned Britain's ability to avoid a severe debt crisis.And yet another, raised the prospect of a gold-backed Euro.

The conclusion arrived at was that wholesale printing of Euros may be necessary to inflate the European Community's economy.So don't forget! When you think of inflation and gold you have to think in global terms.Inflation anywhere is going to cause even more people to buy gold.Gold demand will continue to rise as those who hold dollars along with other currencies can just use dollars to buy a gold coin instead of Euros, Pounds, Yen or whatever.

Rest assured we will be keeping a close eye on gold supply and demand as global unrest sets in.