Sunday, September 27, 2009

Gold was $850 in 1980

Everyone into Gold has heard it many times and some, like me, want to scream every time some mainstream financial analyst puts this comment into one of their articles or commentaries. It must be part of the Wall Street and financial planner training manual. It goes something like this, for those who haven't heard or seen it yet: "Gold was $850/ounce in 1980 and in 2009 it is only around $850/ounce. When you factor in inflation, if you bought Gold at the exact top of its previous bull market in 1980 at $850, this would have been a terrible long-term investment."

Yes, this is why buy-and-hold forever is stupid advice in any asset class, and yet those who use this argument for Gold typically then tell you to just buy stocks and hold for the long term. The next time you read this argument about Gold (if you ever read mainstream financial articles you will read/see it again, trust me), remember the following historical data points:

*Gold at $850: 1980 and 2009 (29 years)
*Nikkei Japanese stock index at 7,000: 1980 and 2008 (28 years)
*Dow Jones Industrial Average at 386: 1929 and 1954: (25 years)
*Dow Jones Industrial Average at 40: 1897 and 1932: (35 years)

Similar examples can be found throughout history if one takes the time to look. What the typical Gold-bashing article fails to mention is exactly what it means for an asset class to have the same price 25-35 years apart. In an inflationary fiat world where the value of every currency is constantly sinking over the long term (i.e. inflation), it probably means that that the asset class in question is undervalued! It probably means it's a decent long-term buy. On the flip side, I know U.S. stocks and real estate are HORRIBLE investments right now for the long term precisely because they ran up too high in their most recent cycles. General U.S. Stocks may be a long-term buy again in the 2014-2020 time frame, but before then they are a losing proposition on an inflation-adjusted basis for buy-and-hold investors.

Because every asset class is cyclical, underperformance by an asset class for 20-30 years is a sign to think about going long that asset class! This is what "buy low and sell high" means. In order to do this, you have to buy when no one else is interested with an eye towards the future.

Gold is in a secular bull market that is not close to being over. Those that talk about a Gold "bubble" after Gold has only increased 300% from its lows are idiots or have an agenda and should never be trusted for their financial opinion again. Try 1329% for the recent oil bubble (1999-2008), 1489% for the S&P 500 (1980-2000) stock bubble, and 2328% for the 1970s Gold (1970-1980) bubble.

The easy money has already been made in Gold, but there is plenty of upside potential left in Gold relative to other asset classes like general stocks, corporate bonds, commodities and real estate. And once the Dow to Gold ratio hits 2 again (which it will and it may well go below one this cycle), it will be time to sell Gold and look around for the next secular bull market. Perhaps Japan's ongoing 20 year economic depression and secular stock bear market will be coming to an end by that time...

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