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I hear advertisements for gold all the time. They always say it is beating the market and a great inflation hedge. How good is it? I think I'll take this opportunity to educate myself.
Here is what I found.
In 1980 gold was $850/oz. Gas was $1.25/gallon.
Today gold is $1645.24/oz. Gas is $3.50/gallon.
Gas has nearly tripled. Gold has doubled.
In 1980 the median home price was $76400.
Today a home costs is $155,000.
Looks like gold has held roughly even with housing.
In 1980 a stamp cost .15.
Today a stamp costs .45.
Looks like stamps have out paced gold.
In 1980 bread cost $1.19.
Today bread costs $2.50.
Looks like gold and bread are roughly even.
What is a 1980 dollar worth today? $3.57 (according to inflationdata.com)
How has the stock market done since 1980?
In January 1980 the DOW was at 824. Today it is at 13199. FYI: Before the recession it was at 10959 in 2006.
Bottomline: Gold has done a decent job of staying even with inflation since 1980. The stockmarket has handily outpaced it.
Thats great, Keim. What about a longer timeframe?
The DOW was 100 in 1906.
Gold was $18.90
Gold has increased less than 100 fold since then. The DOW has increased about 130 fold.
Bottomline: Over the last 100 years, a period of enormous upheaval, the Market beat gold hands down. Looks like the market outpaced gold in both short and intermediate terms. I can't find any data from biblical times to compare markets vs gold for longterm. I will concede that gold has proven a better investment for our progenitors than frankincense, myrrh and tulips. I'm willing to gamble we aren't experiencing any epochal events causing gold to seriously outpace the market in the remainder of my lifetime.
The fact gold had a pricing error back in 1980 and hit a price that never should have existed doesnt mean that error is a bench mark anymore than nasdaq at 5000 was during the dot coms.
things get out of whack every so ofton in all asset classes but then self adjust down to the proper levels in the near term. thats exactley what gold and the nasdaq did.
i can tell you this: if you had an equal mix of gold , long term treasuries,cash and equities and bought the gold in 1980 right at the peak and couldnt have timed it worse ,if you rebalanced yearly back to your equal percentages ,today your gold has surpassed the equities portion by a tad.
an asset doesnt stand by itself .it works in concert with other asset classes and that includes rebalancing and buying more when prices are down.
the combination of the 4 asset classes i mentioned above did better than any of the 4 individually.
gold is more a hyper inflation hedge than an inflation hedge.
as long as the dollar is healthy or other asset classes are doing well there is no reason for gold which is a competitor to the dollar to do much.
Last edited by mathjak107; 03-14-2012 at 11:53 AM..
FYI: Pricing error or bubble in 1980? I ask because a pricing error would lead to poor comparisons. But a bubble... Well we are likely in a gold bubble right now. Anyhow, you are correct 1980 was a bit anomalous. Picked the 1980 date randomly. Looks like the price settled around $375 in 1982, and held somewhat even there for a while.
I do agree with you that a diversified mix INCLUDING gold is probably best.
With that said, what about the longer term data going back to 1906, Mathjak?
How has the stock market done since 1980?
In January 1980 the DOW was at 824. Today it is at 13199. FYI: Before the recession it was at 10959 in 2006.
Bottomline: Gold has done a decent job of staying even with inflation since 1980. The stockmarket has handily outpaced it.
You looked at every metric but the right one. It's called the "Dow/Gold Ratio" and it topped out in 2000 at 43.7 oz of gold to buy a share of the Dow. It has plunged since then, until today it costs only 8 oz of gold to buy a share of the Dow:
I'm willing to gamble we aren't experiencing any epochal events causing gold to seriously outpace the market in the remainder of my lifetime.
I don't know how old you are...but I'm 64 and I definitely expect to see the Dow/Gold Ratio to fall much lower in MY lifetime! The Dow may go up as well, but the purchasing power of the currency unit it's priced in ($US) will continue to fall. They are printing like crazy, and continuing to hold the currency unit they are printing ($US) just guarantees that your purchasing power will fall, even as the nominal dollar amounts you accumulate will seem to grow. You need to think about this!
You looked at every metric but the right one. It's called the "Dow/Gold Ratio" and it topped out in 2000 at 43.7 oz of gold to buy a share of the Dow. It has plunged since then, until today it costs only 8 oz of gold to buy a share of the Dow:
I don't know how old you are...but I'm 64 and I definitely expect to see the Dow/Gold Ratio to fall much lower in MY lifetime! The Dow may go up as well, but the purchasing power of the currency unit it's priced in ($US) will continue to fall. They are printing like crazy, and continuing to hold the currency unit they are printing ($US) just guarantees that your purchasing power will fall, even as the nominal dollar amounts you accumulate will seem to grow. You need to think about this!
That top chart appears interesting, Nor'Eastah. But I'm not certain how to read it. If you have the time, would you explain a bit? I'd appreciate it.
FYI: Pricing error or bubble in 1980? I ask because a pricing error would lead to poor comparisons. But a bubble... Well we are likely in a gold bubble right now. Anyhow, you are correct 1980 was a bit anomalous. Picked the 1980 date randomly. Looks like the price settled around $375 in 1982, and held somewhat even there for a while.
I do agree with you that a diversified mix INCLUDING gold is probably best.
With that said, what about the longer term data going back to 1906, Mathjak?
cant tell you about as far back as 1906 ... my records for that mix only go back about 35 years.,..
markets are so different today the comparison wouldnt mean much . in fact according to studies by crsp the markets have changed drastically from 2000 on with volatility being far away from anything before.
That top chart appears interesting, Nor'Eastah. But I'm not certain how to read it. If you have the time, would you explain a bit? I'd appreciate it.
Sure. All it is, is a chart of the Dow divided by the POG (spot price of gold). If the Dow is, say, at 13,200 and gold is at say, $1650, dividing the Dow by gold will give you 8 exactly. And that's just about where we are today. The chart just gives a running line of where that number has been the last few years.
Sure. All it is, is a chart of the Dow divided by the POG (spot price of gold). If the Dow is, say, at 13,200 and gold is at say, $1650, dividing the Dow by gold will give you 8 exactly. And that's just about where we are today. The chart just gives a running line of where that number has been the last few years.
I'd say gold is doing just fine....
Not really sure the chart shows anything new, Nor'Eastah. In times of low stock prices gold tends to get more expensive (giving it a lower multiple vis a vis the market). Gold goes down when ppl are more confident in the market. Am I missing something?
Not really sure the chart shows anything new, Nor'Eastah. In times of low stock prices gold tends to get more expensive (giving it a lower multiple vis a vis the market). Gold goes down when ppl are more confident in the market. Am I missing something?
YES you are missing something, but not sure you're going to get it, anyway. Since the Federal Reserve (which is not federal, and has no reserves) began in 1913, the value of the $US has fallen to 4 cents. Stocks have gone up in nominal amounts (in numbers of dollars), but very little in real worth (purchasing power).
As the dollar goes down vis a vis other currencies, both gold and the Dow go UP. This has zero to do with ppl getting "confident in the market". It has everything to do with the inverse of the currency the Dow is denominated in. As one goes up, the other goes down, and vice versa, which is just a trade-off and you can see where no real value or wealth is being created in that scenario.
The chart does show something new. You were talking about which was a better hedge against inflation, were you not? If gold is beating the stuffing out of stocks (which it has been since 2000), then, ipso facto, it is the better inflation hedge. THAT is what the chart is telling you.
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