I think the discussion in my last gold post was rather heated, so let me address this problem once more. Here is 104-year chart of Dow Jones vs. Gold (please click for full image, picture taken from http://www.chartsrus.com/):
I think the conclusion is pretty simple:
- The ratio makes wild but periodic swings, pretty well synchronized with Kondratieff wave
- In general stocks outperform gold, but the counter-trend moves are wild and can kill you
- Stocks also pay dividends that are not reflected on this chart, so it’s clear that on the long run gold doesn’t makes any sense as an investment, only as a swing speculation
- If you account for dividends Gold was outperforming Dow for only 20 years during the last 107 years, i.e. time statistics is also strongly against a gold investor
- Right now we are in the counter-trend move, when gold is doing better than stocks
- Just looking at the chart the counter-trend moves down take from 3 years back in 1930s to 15 years 1965-1980
- The current move is 7 years old and is at 16 (the chart ends in 2004)
Those were indisputable facts. Now will be my opinion:
- I don’t think the current move will take 15 years, more likely 10, i.e. Dow/Gold ratio will bottom in 2010
- I don’t think it will bottom all the way at 3 like in previous times, I would say around 6-8 is more realistic
- I think the bulk of this move will be done by Dow decline, not gold increase
- If Dow will bottom around 7,000-8,000 then Gold will top between $900 and $1300. In this scenario shorting Dow is much more profitable than going long Gold
- At the extreme case, to get to the ration of 3 the Dow will need to get down to 6,000 and gold to $2000, but I consider this very, very unlikely
Disclaimer: I have no position in Dow nor in Gold, I have tons of better ways to invest my money
December 27, 2007 at 7:49 pm
Once again roxy, you are 100% right and the goldbug automatons aren’t. They say things like “all fiat currencies return to their intrinsic value of 0″ which is technically true, but is outside of the discussion of gold as an investment. One cannot assume that you would actually bury gold and dig it up 100 years from now and that during that time you would also get 0% return on your paper dollars. That is ludicrous.
There are many different angles here. If the discussion is “gold as an investment” then many well-known and successful investors (Buffett, et. al) think it is a terrible one because gold has no cash flow and is not really an investment, per se, and one can get a better return on just about ANYTHING, including index investing. Sometimes gold actually is a good investment, but you really need to time it correctly and few have the wherewithal to pull that off.
If the discussion is gold as a preservation of wealth then that makes sense, as we know gold holds it’s value forever and buys the same amount of hard goods today as it did 100 years ago. I won’t argue that gold isn’t superior to fiat currencies in some ways, except that it is heavy, isn’t very portable, and most people won’t take it as payment for anything.
There’s a couple of old sayings I like:
1.) If you think you need gold, you’re going to need a lot more.
2.) Gold is what you keep when you are concerned about return OF capital vs. return ON capital.
I like gold in a Mad Max scenario where the world is burning and nobody takes greenbacks and they need something real and this possibility is why I keep SOME gold on hand. But most of the goldbugs out there don’t even have the actual metal on hand, and that is just bizarre because that is all it’s really good for (doomsday scenario.) Gold at $2000 is a farce.
December 27, 2007 at 7:57 pm
BTW, when you buy something with the intention of selling it later for a higher price, that is called speculating. When you buy something with some cash flow (stock dividends, rental properties, etc.) than you are investing.
Nothing inherently wrong with speculating (I do it all the time with various puts), except it’s harder to do than investing and most people lose money speculating. Today’s retail goldbug is a speculator that will lose his ass, imho.
December 27, 2007 at 11:27 pm
Darth Toll, thanks. You know how to say/nail it, compared with my clumsy posts
December 28, 2007 at 11:06 am
Like I said in the other post, I think gold is great to weather a rapidly deflating currency. I would never buy gold thinking “Hahaha, in 50 years I’m going to bank!” I completely agree that it’s not an investment, I use it as a failsafe. Like Darth Toll said in Mad max, currencies will and have failed.
December 28, 2007 at 11:06 am
By the way this is Kris, I just logged into the blog this time.
December 28, 2007 at 11:30 am
Kris, welcome.
Darth Toll, I think the border between investing and speculating is blurry. There are plenty of S&P500 stocks that do not pay any dividends, but they have profit and re-invest it, i.e. book value per share is growing. I consider that kind of stocks as investing, even without dividends.
When all this mess finally hits the fan and stock market plunges I will find an ETF that is composed from stocks that still make profit during the bad times and go long.
December 28, 2007 at 11:44 am
Kris: Thanks, I like this blog, it delves a little deeper than your typical money.cnn.com article. My blog is comepletely unrelated, I run it with my fiancee, but I love economics, investing, etc.
January 30, 2008 at 12:19 am
great post and thanks Darth for the interesting comment