CNBC can cheer all they want about the DOW hitting 10,000 again by proclaiming it “DOW 10,000 (version) 2.0,” but is it really a better version, or even the same version as DOW 10,000 of 1999?
We’re Not Partying Like It’s 1999
What most don’t realize is that the DOW 10,000 of 3/12/99 was worth more in terms of purchasing power than DOW 10,000 10/14/09 by a whopping 23.8%. Why? Because the dollar index has fallen 23.8% since March of 1999.
Some people reading the above might be a little confused so let me break it down.
If you sold all your stocks in March of 1999, you could then take the proceeds and buy x amount of goods with them. But because of inflation, that same 1999 basket of goods would cost around 23.8% more with the same DOW 10,000 amount of stocks you sold today, October 2009.
Just ask yourself one simple question. Has the price of things gone up in the last 11 years? Of course they have. Many things much more than 23.8% (granted, the prices of some things are coming down during this current deflationary environment).
What would the DOW have to be at today to be the equivalent of DOW 10,000 on 3/12/99? Simple math tells us it needs to be 23.8% higher, or 12,380 to make up for the decline of the U.S. dollar’s purchasing power.
Does CNBC ever mention this fact? Of course not. They don’t even put the Dollar Index ticker at the top of their screen shot. Why is that? Isn’t the Dollar what everything else is priced in? Wouldn’t it be of concern to investors that the value of the medium of exchange they are purchasing things in is decreasing?
What about Real Estate?
The median price of American homes in March of 1999 was $157,300. As of the end of August 2009, it was $195,200, resulting in 19.4% growth. But despite the value of real estate being higher, the purchasing power of that $195,200 sale price, if one can get it, is less than it was in 1999 when the dollar had 23.8% more purchasing power.
Real Estate has kept up with the dollar decline better than the stock market during the last 11 years, but clearly because of this decline in the purchasing power of the U.S. dollar, one has not become wealthier. Add to this the fact that despite government gifts to some of $8,000 to purchase a new home, the trend for real estate is still down.
What Could Have Helped Stabilize Your Investments the Past 11 Years?
What could have helped stabilize your investments in the stock market and real estate and shield you from the devastating effect of a declining dollar since 1999? Answer: Gold.
Gold’s price in March of 1999 averaged $285.96. Today it’s hovering around $1,050 after hitting an all-time closing high of $1059.50 on January 14th (and an intra-day high of just over $1070).
I’ve continually challenged financial advisors as to why they don’t recommend their clients diversify into gold, but rather stick to the old ways of diversification.
Gold in the Short Term
I had cautioned short term investors in gold mining stocks that the precious metal could be topping out when it hit $1,058 just last week. It’s the first time I have made a short term forecast as I’m a complete believer in the long term secular gold market we’re presently experiencing for a multitude of reasons. We’re presently only in the second stage of this trend. We’ve had a nice run in gold and the mining stocks. Nothing goes straight up. During the second stage of the trend, there will be times when the golden horse tries to buck you off.
What I want to make clear to everyone reading this is that things have changed since around the year 2000, and especially since the year 2004 with the introduction of the first Gold ETF in the U.S.
Gold needs to be part of everyone’s portfolio to keep pace with a declining dollar. You wouldn’t have experienced this lost decade if you had been enlightened about gold as a hedge against a falling dollar. Now that you are enlightened, what will you do for the next 10 years?
If you’re confused about gold, you can read more about what I recommend in my book, “Buy Gold Safely.” Why do I mention the book? Because if I don’t, no one would know it exists.
Disclosure: I don’t sell gold. I only write about. Reprints of this article are permitted as long as the source is referenced.
Doug 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
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.