Stocks Vs. Gold

Here is an interesting chart from goldmoney.com.

The two most devestating financial crisises of the last 100 years have been the Great Depression and the hyper-inflation of the 70's.

In both cases, you could buy one share of the stock market for about 2 ounces of gold.

Today, with gold at $750/ounce and the Dow at 8,000, it would take you about 10 ounces of gold to buy one share of the Dow.

Assuming history repeats itself, as it always does (sooner or later), the stock market still has a long way to fall, or gold still has a long way to go up to make it back to these important historical milestones.

Most of the analysts I have read expect the Dow/Gold crossover point to be about 5,000 on the Dow and $2,500 an ounce for gold.

Although we should use history as a guide, we must not forget that the world is not static, so we should expect the general patterns of history to repeat themselves, but in the context of the present day realities.

For example, the Dow/Gold ratio bottomed out around 2 ounces/1 share of the Dow in the 30s. In the 70's, the ratio got down to 1 1/2.

Today, we find all of the world, not just the United States, printing currency at a much faster rate than in either of these previous two eras. Because of this, I personally expect this ratio to get down to at least 1 in the coming years. My expectation is Dow 5,000 and gold at $5,000/ounce.


On the other hand, if this current "crisis" becomes an "economic" crisis (ie. recession/depression), instead of a "financial" crisis, you could look for the Dow to go much lower, and the ratio drop well below 1.

In an article published in The New York Times on October 16th, Warren Buffet tells us that he has “been buying American stocks”.

Why?

“Today people who hold cash equivalents (banks accounts/bonds/cash) feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts. Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.”

In Mr. Buffet's mind, cash/dollars will not even keep up with inflation, while over the long run (5+ years) he expects stocks to do much better. Why? Because they are tangible businesses .... not paper backed by nothing.

So from the perspective of the dollar, stocks are the better choice.

Using that same logic, let's throw gold into the comparison and see how it fares.

James Turk, author of The Coming Collapse of the Dollar, made this observation in his commentary back in 2006:

"On November 5th I advised that the stock market was over-priced and that investors would be better off by waiting in cash, but not ‘dollar-cash’. I said that investors need to be holding ‘gold-cash’.

From November 4th to May 12th, the Dow Jones Industrial Average has climbed from 10,530.76 to 11,380.99, an increase of 8.1%. At first blush that looks like an exceptionally good 6-month return. But we get a very different result if we measure the price of the DJIA in terms of gold. During this same period, when measured in terms of goldgrams, the DJIA fell from 717.82 to 498.36, an incredible decline of -30.6%.

Clearly, gold’s rate of exchange to the dollar (what we usually call the gold ‘price’) is rising more rapidly than the DJIA’s appreciation in dollar terms. Thus, despite what one might be hearing in all the misguided hype being bandied about as the DJIA approaches its all-time record high, you have been much better off since November owning gold instead of the DJIA. But this same strategy has made sense not only since then. It has also been the more prudent strategy for the past few years."

So, question: If gold was the better choice when the market was going up and things were good, what should you be doing with your money today?

The choice is obvious.