Everyone once in awhile I’ll run across someone who thinks they know it all and will say something like, “The DOW has outperformed gold since the year 1900 and has not been a good store of value.”
There are blatant problems with this kind of statement as the following comments will show.
The Price Of Gold Was Fixed From 1913 to 1971
How does one account in their calculations comparing gold to the DOW the fact that the price of gold was fixed from 1913 to 1971? How can this be a fair comparison when a U.S. citizen could not even buy more than $100 worth of gold until 1975? The main reason modern day critics of gold don’t use these known facts is they are never taught them. Financial advisor books they give you to study for the CFP exam don’t address the history of gold. They don’t even mention silver.
In doing comparisons with the DOW, one must use either 1971 or 1975 as their starting reference point to compare apples to apples. But one must keep in mind that the early portion of this starting reference point, stocks were paying much higher dividends than they are today they pay less than half of that era.
The DOW in 1975 averaged about 840. Gold averaged $161. The ratio was 5.21. Today the DOW is 12,479. Gold is trading around $1,480, a ratio of 8.42. If we were to compare value in 1975 to value today, it cost you more ounces of gold to buy the DOW (keep in mind the DOW changes from year to year with some companies dropping out and others added in). Comparatively speaking, the DOW is more expensive priced in gold than it was in 1975. One can conclude from this that gold is undervalued and the DOW overvalued in 1975 dollars.
But I know the value of stocks in a well diversified portfolio. In my book, “Buy Gold and Silver Safely,” I critique the industry as to their adherence to Modern Portfolio Theory and the “risk free” asset (Treasuries and the U.S. dollar). They are not risk free at all. But no one in their right mind says to put all your money into gold and silver like they think gold dealers do. Well, at least reputable gold dealers….but you really don’t find too many of them. I leave a full 80% for financial advisors to play with. I just want my 20% diversified into gold and silver and I can make the case for it as I have with almost every article I write.
Using A Product To Illustrate the Value Of Gold Today
To contemplate true value, price it in how many ounces of gold it will cost you to buy.
A 1975 Camaro would cost you $3,540-$4,057 or 22-25 ounces of gold if you bought it in 1975. Today, with more competition from foreign countries, and better production facilities, the cost of a 2011 Camaro is around $23,000 to $27,000 or 15 – 18 ounces of gold.
How can people come to the conclusion that gold is not a store of value?
Taking this analysis one step further, can the price of gold show you whether another asset is of value or not?
Corn vs. Gold
Pricing things in gold can tell you whether or not something is of value as the following excerpt from my book shows utilizing corn as an example.
At the time of the writing of that section of my book, July 3, 2010, Corn was priced about 350 a bushel. Today, as you can see from the chart below, corn has risen in price to 754 a bushel.
Corn has gone up 115% and gold up 22.5% in that time frame. The number of bushels to buy an ounce of gold has fallen from 350 to 196. Somewhere around 140 bushels or below, gold becomes the better asset to own comparatively speaking.
Of course there are supply and demand, government subsidies, weather and other things to consider. But using this type of analysis shows the value of one asset by using gold as your barometer.
Conclusion
So not only is gold a store of value, as the Camaro example shows, it is the asset to place value for all other assets as the corn example shows. Does this make me a “gold bug” like the naysayers like to label anyone who is pro gold. I would call me a gold realist. I say this because I understand value. I also understand economics and can do simple math, which is the reason why you own gold and silver in your portfolio. The gold and silver prices falling are nothing to panic about.
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About Doug EberhardtDoug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
Disclosure:
Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with capital you can’t afford to lose. This is neither a solicitation nor an offer to Purchase/Sell futures or options. No representation is being made that any account will or is likely to achieve gains or losses similar to those discussed in this outlook. The past track record of any trading system or methodology is not necessarily indicative of future results.
All trades, patterns, charts, systems, etc. discussed in this outlook and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author.
