The forecasts are getting scarier.Every bull run has its share of optimistic forecasts. And every bear run has its share of pessimistic forecasts. Here is one pessimistic forecast that I came across a couple of days back:

...if we're right, this bear market won't end until the Dow trades under 5,000...and possibly under 2,000. And it won't end until the price of gold and the Dow are about the same number. -Bill Bonner (Bonner is Editor of The Daily Reckoning, a widely followed investment newsletter. I and my colleague Sundar happened to interview him sometime back. You can read the complete interview here)

Bill Bonner's forecast is the scariest forecast that I have come across on the current bear run, till date. Before getting into the merit of this forecast, let me first elaborate on what he is trying to say.

The Dow Jones Industrial Average (or Dow as it is more popularly known as) is a stock market index made up of 30 American stocks, a majority of which are listed on the New York Stock Exchange and the remaining on NASDAQ. Like the Sensex in India, it gives the investors an idea of where the broader market is headed.

Yesterday the Dow closed at 6763.29 points. What Bonner is effectively saying is that for the bear market to end, the Dow needs to fall around 1800 odd points more or 26.5% from its current level. In a worst-case scenario, the Dow may even fall by around 70% from its current level by around 4800 points to go under 2000 points, he feels. To give you a sense of perspective, the Dow last traded at under 2000 levels in 1988. So what Bonner is saying is that nearly 20 year returns may be wiped off.

That's just one part of what Bonner is saying. The second part is even more interesting. Gold is currently trading at around $927 an ounce (one ounce = 28.35 grams). Now assuming that gold continues at its current level, then the Dow has to fall by nearly 5900 points or almost 86%, for the price of gold and the Dow to be at the same level. That's again an extreme scenario. What Bonner clearly implies here is that gold is an asset that speculators (or investors as some people like to call themselves) should be investing in. The price of gold, he believes, will go through the roof, though not many people realise this.

As he wrote in one of his recent columns, "It bothers us contrarians - a bit. We don't like to see a crowd gathered around...admiring our favorite refuge. Still, the crowds are pretty thin, compared to what they will be when the bull market in gold really takes over. Then, your neighbors will be talking about gold...and telling you how much money they made in gold. That's still ahead...when gold goes over $1,000...over $1,500...over $2,000."

Now to come back to the original question why does Bonner believe that Dow will fall so drastically? There are several reasons behind his skepticism. To start with, the United States is printing a huge amount of dollars and throwing them at all the financial problems that are cropping up. It wants its banks to start lending again and its citizens to start borrowing and spending again. But as I have explained in previous post (you can read the full post here) that isn't happening anytime soon.

And of course all the dollar printing is not going to end anytime soon. As Puru Saxena, a Hong Kong-based wealth manager, wrote in a column sometime back, "In fact, central banks will continue to print money until the world runs out of trees." But all this dollar printing will create its own set of problems.

When an item is available in abundance its value tends to go down and vice versa. All this dollar printing will lead to a situation wherein the purchasing power of dollar will continue to come down. This would mean that even more dollars will have to be printed.

Now who loses out if the purchasing power of dollar comes down? All those investors who have invested in financial securities issued by the US government. Right now that is not the case. All investors seeking safety of capital are rushing to invest in these securities. But this of course cannot go on forever. Once investors realise the obviousness of this all, they will want to get out of the securities issued by the US government and of the US dollar.

Once they get out of securities issued by the US government, their prices will crash. Prices crashing would mean that the returns on these securities will have to be very high to make it viable for investors to continue investing in such securities. These high returns would mean that interest rates in the United States will have to rise from near zero rates that they currently are at.

And once that happens, American citizens and American companies will have to borrow at higher rates. Well when they are not borrowing at the current low rates, expecting them to borrow at those high rates, would be foolhardy.

The progress of American companies seems to be so highly dependent on people taking on more debt and spending, there chances of reviving anytime soon seems to be highly unlikely. So that explains why Bonner is so bearish on the Dow. As he wrote in a recent column, "Even after recent losses, most stocks are still selling for 15 times earnings - or more. When you get to the bottom, that multiple goes down to 5-8. And while stocks have lost 50% of their value...we remind readers that at the bottom in '32...and Japan's bottom now...stocks were down 90%."

As investors rush to get out of the US dollar, the US dollar will crash. "In the meanwhile, the rush to get out of the dollar would mean that the dollar would crash as well against other currencies...There is no way you can have a strong currency when you are the greatest debtor nation in the world (debt of US$54 trillion)...As the jokers in Washington continue to 'save' the US economy (i.e. bail-out their rich friends on Wall Street), the US Dollar will eventually become worthless or it may be replaced by another currency," writes Saxena in a recent column.

Also, a lot of this money getting out of the US government financial securities and the US dollar, will look to get into hard assets like gold, sending its price through the roof.Some money is already moving into gold and even silver.

Now what does that mean for all of us sitting in India? Will some of the money that comes out of the US come to India? It's plausible, but there really is no sure shot answer for that. If it does, the resultant liquidity will lead to the stock market going up. But there is no way we can say for sure.

Should we buy gold? Yes, we should. But there is a risk there as well. If the dollar is expected to crash against other currencies, it might crash against the rupee as well. (For a more detailed understanding read this) This would mean that gains in case of investing in gold can be limited. It could also mean losses could be more, if gold does not rise as it is expected to and falls.

The moral of the story is, these are interesting as well as very confusing times. The least you can do is stay tuned. As Javed Akhtar once wrote "Kyon dare zindagi main kya hoga kuch na hoga to tajurba hoga."

Vivek Kaul/ DNA-Daily News & Analysis Source: 3D Syndication