Thursday, April 29, 2010

Gold and Gold Stock Relative Outperformance

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The concept of relative outperformance is an important one in a fiat paper world, where meaningless debt tickets that are constantly depreciating in value make it difficult to appreciate the meaning of nominal gains. We calculate value in our heads related to what other things cost. A gallon of gas or a loaf of bread is a stable and meaningful unit of value in our world. A fiat debt paper ticket/currency unit has a constantly changing value, which is the main reason prices are always changing, albeit at different rates and directions depending on where we are in the cycle of inflation.

People who say there was no inflation during the 1990s are totally and completely wrong. The inflation was in financial asset prices! People have been hoodwinked into thinking the only meaningful inflation in terms of end effects is when the price of hard assets like commodities rises. This is because when you can't afford to eat, you're screwed. However, if a dotcom stock goes to infinity, only stock investors care. In other words, the threat to society is different depending on the asset class that is being inflated. Was the recent housing bubble "problematic" inflation?

Anyway, the point is that relative under- or outperformance of asset classes is an easy way to assess the significance of gains. Since we're all on the hamster debt wheel in a fiat paper-money-backed-by-nothing global system, we need to be constantly making our savings grow, otherwise they will evaporate. Not literally, but in terms of purchasing power. The reason our society is so focused on speculation is because the transactional currency we use has become very unstable. This breeds speculation and has throughout history. The end stages of a fiat system before the new dawn are always the darkest.

Even percentages gained are only meaningful when the rate of price increases is taken into account. For example, if you gain 50% in the stock market in one year but the price of food and gasoline increases by 100% in that same year, should you be proud of your financial achievement? The flat to declining stock market over the past 12 years or so has been a disaster when priced in real terms. This disaster is set to continue.

Investors who are bulls on the U.S. stock market should be experiencing intense cognitive dissonance now that the Chinese stock market has rolled over. For if China's economy is slowing, where is global corporate profit expansion going to come from? You can only fire so many people to keep the bottom line looking good!

Gold and Gold stocks are set to pick up the slack created by toppy stock markets. The relative outperformance by Gold and Gold stocks compared to global equities has been undeniable and impressive over the past decade. The secular financial pendulum slowly swings back and forth as it has over the past few centuries.

Here is a chart of Gold stocks, represented by the unhedged Gold Bugs Mining Index ($HUI), divided by the Dow Jones World Stock Index ($DJW) as a proxy for global equities (i.e. $HUI:$DJW ratio chart) using a weekly 12 year candlestick plot with a log scale:

And as sort of a global inverse of the Dow to Gold ratio, here's a chart of Gold divided by the Dow Jones World Stock Index ($GOLD:$DJW ratio chart):

The secular trend is your friend and that trend is set to resume in a MAJOR way.

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