Dow Jones Versus Gold: The Fight For Real Value

Posted at 2:40 AM (CST) by & filed under Trader Dan Norcini.

Dear Friends,

I thought it might be a good time for an examination of the Dow Jones Industrials over the last ten+ years in comparison to gold given the fact that the stock market has seemingly recovered all of its losses incurred since last week’s 1000 point intraday plunge.

While it may give the financial press something to cheer about, the sad truth that is lost on a good portion of the investing public is that the gains in the Dow are ephemeral at best; illusory is a more apt description.

Over the last decade the Dow has made an all time high in 2007. Sounds good but upon closer examination we can see that when compared to gold, a store of value, that same year it had already lost half of its value in REAL terms since 1999.

The current ratio is closer to 8.7, a loss of 60% or so within the last three years alone. The peak reached eleven years ago was nearly 45. That totals a staggering loss in REAL TERMS of 80% in eleven years..

Another way of saying this is that a rising gold price is basically the same thing as a loss of purchasing power in the currency in which gold is priced. Gold is not so much rising as the Dollar is losing value. For that matter, nearly all of the fiat world currencies are losing value against gold.

What this means is that while investors may be cheering the fact that the Dow is going higher (or it was until last week), those gains are not compensating them for the debauchery of the native currency. In REAL TERMS, stock market gains over the last decade, when compared to gold, have been as enduring as the morning mist.

This is why gold will never lose its allure. It truly is a store of value during times of economic and political uncertainty. Europe in particular is rediscovering this truth and it will be just a matter of time before the larger investing public here in the US does also.

Click chart to enlarge in PDF format

Dow Jones- Gold ratio