Blessed are the Gold Bugs, for They Shall Inherit the Earth

As I write this, the Dow Jones Industrial Average costs about 8 ounces of gold.  You may wonder why I’m not using the value that it’s normally quoted in.  The reason why is very simple.  The DJIA is measured in US dollars, which are rapidly depreciating against just about everything.  Most people perceive this as rising prices and think that things are getting more expensive, but this assumes that the dollar is actually a stable store of value, it isn’t.  As I explained in “Harper’s Intellectual Implosion” it’s folly to look at the cost of things through the lens of a currency that can no longer be trusted.  Your purchasing power can be stolen away from you with the flick of a pen when you trust politicians to keep your currency safe.

This is why I like to price things in gold.  It’s great for determining the real value of items, including stocks, bonds and real estate.  That’s one reason why every time humanity has been given the choice it has always gravitated towards using gold as money.  It reveals the true nature of market cycles.  It clarifies and cuts through all the inflation-generated nonsense in the price system and allows you to know precisely what trades to make in order to maximize your return on investment.  Take, for instance, the chart below:

Dow Jones Industrial Average in Gold

When priced in gold, the DOW tells the economic story of the 20th century perfectly.  We can see the roaring 20’s followed by the crash of ’29.  We see the post-war economic boom and the stagflationary period that eventually brought down the Bretton-Woods system.  The incredible boom that was the dot-com bubble is clear as a bell, as is its bursting.  Furthermore, anyone watching the DOW through this lens would have been incredibly suspicious of the supposed housing boom.  Where is it?  It should be common knowledge by now that it was a manufactured illusion by government, but people would have known that a lot sooner had they been gauging the market with a stable measuring rod.

With every bubble the economy reached new heights because of the real progress and advancement made during those periods.  But the subsequent inflation-induced crashes caused the stock market participants to all but completely empty their portfolios in favour of other investments.  Ever higher highs have been followed with ever lower lows and we are in the same cycle now as has been the case for the last century.  It would be foolhardy to assume that this time will be different.  If history is any guide there will be a point sometime in the next 5-10 years where less than an ounce of gold will buy the entire DOW.

Some investors may look at the above chart and think “It’s near the bottom anyways, so I’ll just hold on to my stocks and ride through the chaos.”  But they forget that the last time the index was at 8 and on the way down, it took nearly 20 years before it was back to that level.  That’s a long time to wait to break even.  The economy doesn’t work according to our calendar, which is as much an arbitrary measure of time as fiat currency is of value.

The numbers also simply do not agree with that strategy either.  A drop in the DOW from 8 to 0.5 (which appears entirely within the realm of possibility) represents a 94% collapse in value.  An investor that sells their stocks today for gold would be able to repurchase 16 times the amount of stocks they previously held in a matter of years, for an annualized gain of 74%.  Someone that sold the DOW at 44 would multiply their wealth by a factor of 88 in less than a generation, equating to an annualized gain of 35%.  Things like this sound outright crazy on their face, but nonetheless it has happened twice in the last century and it is happening again at this very moment.  The biggest gains also happen in the final moments of these cycles and so it’s never too late to act.

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2 Responses to “Blessed are the Gold Bugs, for They Shall Inherit the Earth”

  1. scott horlacher says:

    Well, the highs got progressively higher and the lows got progressively lower… the swings tend to be getting more extreme as the economy's size (more market participants, monetary supply and financial instruments etc..)

  2. George Bragues says:

    Not sure why you picked 0.5 as the potential bottom — given previous bottoms , I'd guess somewhere between 1 and 2. In any case, a nice analysis.

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