This my first rant. My goal is to catalog things that are important to my understanding of the financial world and bring a few others along for the education and interaction
Like many, I was taught/believed everything WRONG when it came to managing money and asset allocation in terms of investing. "Hold for the long term," "dollar cost average into stocks," etc., etc.
Of course, it's all bullshit. No one cares about you or your money more than you should. No, money is not the most important thing in life, but there's nothing wrong with taking care of your money just like your apartment, house, or car.
When it comes to understanding the macro environment, nothing made it clearer for me than a Dow to Gold ratio chart. The chart below compares the price of the Dow Jones Industrial Average to the price of one ounce of Gold in U.S. Dollars. In other words, if the Dow Jones is at 10,000 and the price of Gold is $1000/ounce, the Dow:Gold ratio is 10.
Let's take a look over a long period of time (chart from www.sharelynx.com, a great site):
Notice the timeline along the bottom of the chart, as this is a 200 year phenomenon, with the acceleration in the wildness of the swings since we gave a monopoly contract to a private bank to print money in this country (i.e. The "fed," which of course is not federal or constitutional). This chart is missing the most recent data but conveys the message of what you need to know clearly. As a society, we alter between favoring "paper" assets (i.e. Dow Jones as a proxy) and "tangible" assets (i.e. Gold as a proxy). These swings in sentiment and confidence are reflected in the ratio and reflect either confidence in the financial system versus a lack of trust in it. Gold is nothing short of a vote of "no confidence" in Wall Street's financial offerings.
As a basic fundamental investing fact, at major bottoms and tops in this ratio, if all you did was switch to stocks at the bottoms of this chart and switch to Gold at the tops, you would do better than at least 90% of investors over the long run. Other financial and hard asset proxies could create a similar-looking ratio chart, but these two have long and reliable histories with much historical data widely available for those who care to look.
Notice that when a swing in one direction starts, it doesn't stop until it gets to an extreme at the opposite end (though not without wild twists and turns along the way to keep investors alternating between fear and greed). The implication of this chart is clear: at some time in the next decade, the price of one ounce of Gold will be equal (or nearly equal) to the price of the entire Dow Jones Industrial index. As of today, Gold is in the neighborhood of $800-850/ounce and the Dow Jones is in the 10000-10500 range. Clearly, this current "cycle" has a long way to go.
In other words, you are making the wrong decision if you are invested in the Dow Jones (or S&P 500, etc.) for at least the next 2-3 years. This assumes you are not day-trading, playing weekly swings, or shorting the market. The easiest thing to do for a passive and/or novice investor would be to sell all stocks (including foreign stocks, which will tank with us) and buy Gold and possibly Gold mining stocks.
Do you doubt that this cycle can repeat? It has happened with a deflationary decade (i.e. the 1930s) and with an inflationary decade (i.e. the 1970s). We are in the middle of a global crisis in confidence that makes all financial firms suspect and people are wondering whether or not their bank will exist next week. Forget the so called "bail out" package (and the next one that will be proposed) - the government can't stop this train wreck from happening because they helped cause it in the first place, but that story is for another day.
I do not know some of the most important information, which includes the million dollar question everyone who is interested should be wondering: at what price point will these two intersect and when will it happen? It could be at a Dow Jones of 1000 or 20,000 and don't think it is impossible for either of these two scenarios to occur. Personally, I think it will be closer to 1,000 but a currency crisis could change some of the dynamics. The bottom line for investors: we are in a bear market for stocks (stay AWAY! SELL!) and a bull market for Gold (buy, buy, BUY!), and neither is over by a long shot.
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8 comments:
Can you remind me why Gold didn't work out for investors in the 80's and 90's? Gold has had a nice run this decade, but for gold bugs its been long overdue. We still had inflation during the 80's and 90's, one would have expected gold to rise. Is confidence in the dollar the theme that explains the 2 decades mentioned, as well as this decade? Your input would be very much appreciated. -Randy Fierro
Randy-
Every dog has its day. Asset class rotation. Inflation in a fiat system is hard to track because it meanders into different asset classes. Stocks good, Gold bad = 1980-2000. Stocks bad, Gold good = 2000-? (2015?)
Adam,
Thank you for your reply. 'Every dog has its day' is not an investment tool. How does that help the forward-looking investor?
The monetizing of debt,qualitative easing, and out of control federal deficits do portend higher gold pricer in the future, but it would be nice to have a unified theory that explains stock market behavior currently as well as the past. I think that human behavior and government interventions add uncertainty to the markets, thus you get exuberant markets and big corrections. I like the dow to Gold ratio concept, likely more applicable in these days of significant US fiscal problems and loss of confidence in the dollar. Thanks for your input. -Randy Fierro
October 2008 ?
Are you sure your not backdating these articles to be right in hindsite a year on ?
Dow to Gold Ratio
An interesting concept.
If you really want to unravel all this credit, fiat-currency, commodity-currency/money(gold)stuff, I suggest you wade through Ludwig von Mises excellent tome entitled "Money and Credit". You can get it at the bookstore at URL: http://www.mises.org/
DM Myers/cogito01@comcast.net
Randy-
Actually "every dog has its day" is an absolutely essential concept in investing! Asset classes fall in and out of favor, which is why we have secular stock bull and bear markets and secular commodity bull and bear markets and real estate bull and bear markets. For the "forward-looking investor," this means get out of general stocks and buy Gold, holding it until the Dow to Gold ratio approaches 1 - couldn't be any easier!
Though one can make things more complex, inflation is always lurking in a paper currency system, it simply rotates from sector to sector. There is, of course, more to it than this, but it takes more than a blog comment reply to get there. Try reading about The Kondratieff Cycle (google it if you don't know it). Ian Gordon's site is a good place to start.
Anon-
Don't be a hater, bro/sis!
DM-
Spot on - Austrian economics comes much closer to the truth than Keynesian economics ever will.
"We still had inflation during the 80's and 90's, one would have expected gold to rise."
This is precisely why the Treasury Dept. and Fed under the Clinton administration (Rubin, Summers and Greenspan) actively encouraged central banks to sell and/or lease their gold reserves into the open market, thus keeping a lid on the $ price, which is why you see a big spike in the DOW/gold ratio from 1994 to 2000. Some call it a "conspiricy"; I call it the cornerstone of their official "strong dollar" policy. Either way, you can't defy the economic reality forever, that policy is coming back with a vengeance as central banks (India, China, Russia, et. al. are net buyers) now, so the ratio is likely to reach 1 to 1 again, probably sooner than the typical cycle would suggest, due to the "snap back" effect of this anomolous intervention which put such extreme downward pressure on the price of gold for so long... JMO
I keep reading that this is a bull market for Gold. I think the Dow:Gold ratio is quite eye opening and I do like Gold in the following years. Will they meet at 4000? Perhaps 6000:3000, perhaps 8000:2000, or perhaps 12,000:1200. Only time will tell.
You picked my curiosity with "The easiest thing to do for a passive and/or novice investor would be to sell all stocks (including foreign stocks, which will tank with us) and buy Gold and possibly Gold mining stocks."
I fall in this group and I have a lingering question: Why "possibly"?
When people say this is a bull market for gold, does it mean only actual bullion and/or bank certificates because the us dollar is tanking? Or, are mutual funds in precious metals (Goldcorp, Inc., Kinross Gold Corporation, and others) also expected to rise with gold? You seemed to make a distinction and I wanted to know why.
Thank you
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