While Wall Street pundits extol the virtues of the stock market, and its promise of assured riches, they consistently denigrate gold, and its value as an investment alternative. Gold, they chide, is an arcane relic, as out of fashion as the leisure suits worn during the decade they naively perceive as the metal’s last hurrah.
However, as fashions come and go, gold is once again back in style. This week gold’s successive run of eighteen-year highs occurred in sharp contrast to a slumping stock market. Since the Dow ‘s 11,722 peak (which at the time equaled 41.3 ounces of gold) reached on January 14, 2000, the index has now lost almost half of its value relative to gold. As I write this the Dow Jones is currently worth about 21.6 ounces of gold. If we go back to the peak of the preceding bull market, in which the Dow topped out at 1,000 in 1966 (which at the time was 28.6 ounces of gold,) the index has actually declined in value by 25% when priced in gold. Finally, if we go all the way back the peak of the bull market prior to that one, when the Dow Jones stood at 381.2 in 1929 (19.06 ounces of gold) the Dow has only managed a 13.3% gain. Not much considering it’s taken almost seventy years!
However, this is only part of the story. The current bear market in stocks and bull market in gold are relatively new. If history is any guide, before these cycles turn, the Dow will lose a far greater percentage of its value relative to gold. For example, at its low in 1932, the Dow Jones was worth just 2.06 ounces of gold. (The Dow was 41.20 and gold was $20 per ounce) However, as Roosevelt confiscated gold and devalued the dollar the following year, using a $35 gold price, the 1932 low actually represented just 1.18 ounces of gold.
In 1966, with Gemini astronauts reaching toward the moon, and stock prices headed there as well, no one would have imagined that the Dow’s 1932 gold-price low would ever be taken out. However, by January of 1980, when gold traded at its all-time high price of $870 per ounce, eclipsing the value of the Dow, that is precisely what happened. That year marked the all-time record low for the Dow priced in gold, 96.5% below its 1966 peak and 95% below its 1929 peak reached 50 years earlier!
Twice during the last century the Dow lost over 90% of its value relative to gold. If such declines could occur in an America with a strong industrial economy, ample domestic savings, and a favorable balance of payments, imagine what could happen today. History clearly demonstrates the danger inherent in over-paying for stocks, both relatively to their intrinsic values and the price of gold. Those who bought into the new era nonsense of the 1990’s will fare no better than those who judgments were similarly impaired during the 1920’s and the 1960’s.
My guess is that in the years ahead the Dow will once again retest its gold-price lows. If we can put in a solid, long-term triple bottom at approximately 1 to 1, (which might be Dow 4,000, gold $4,000 per ounce) stocks would likely be a great buy. Until then the smart money is increasingly moving to gold.