Stocks Will Fall 37% or Gold Will Rally 60%

How’s this for a bubble?

In 1965 one in ten Americans owned stocks. In 1990, one in five Americans owned stocks. Put another way, it took 25 years for stock ownership to double in the US. And most of that growth came between 1983 and 1990 with the introduction of 401(k)s, IRAs and other stock-based retirement plans: suddenly anyone with a large scale employer could invest in stocks without having to open a brokerage account.

Thanks to the Internet and low fee online brokerage accounts, it only took seven more years for stock ownership to double AGAIN. Put another way, the rate at which new participants entered the stock market accelerated four fold between 1990 and 1999. By the end of the 20th century, 48% of US households owned stocks.

This is the one bubble no one talks about.

I’m talking about the bubble in “investing in stocks.” Never before have so many Americans done this. It gave us one of the biggest bull markets in stock history: a mega-18 years run from 1982 to 2000. But it also means that stocks have got a long ways to fall to get back in line with their historic relationships to other asset classes.

Particularly gold.

A lot of commentators talk about how gold is near an all-time high and that stocks have fallen 50%, making them cheap again. However from a long-term perspective, gold and stocks are nowhere near their normal relationship.

According to Dr Marc Faber, editor of the Gloom Boom Doom Report, gold and stocks move in distinctive long-term trends. Over the last 110 years, these trends has staged six major phases:

• 1900-1929: stocks outperform gold
• 1929-1932: gold outperforms stocks
• 1932-1966: stocks outperform gold
• 1966-1980: gold outperforms stocks
• 1980-2000: stocks outperform gold
• 2000-???: gold outperforms stocks

Overall, the median stock to gold ratio for the last 106 years is 5.4. In other words, throughout the 20th century, on average 5.4 ounces of gold would buy one unit of the DJIA.

Today, gold trades at $980. The DJIA trades at 8,500. This puts the ratio of gold to stocks at 8.6. Thus, the DJIA needs to fall to 5,292 (a 37% drop from today’s level), gold needs to rally to $1,574 (a 60% rally from today’s level), or some combination of the two, in order for gold to be appropriately priced relative to stocks again.

When exactly this will happen is anyone’s guess. The gold vs. stocks trends over the last 106 years have ranged in length from three years to 29 years. However, judging from the Fed’s money printing and the recent action in gold, it’s quite possible we’ll see a mammoth run in the precious metal sometime in the next 18 months.

During the last bull market in gold, the precious metal rose 2,329% from a low of $35 in 1970 to a high of $850 in 1980. However, during that time, there was a period of 18 months in which gold fell nearly 50%.

From mid-1971 to December 1974, gold rose 471%. It then fell 50%, from December ’74 to August ’76. After that, it began its next leg up, exploding 750% higher from August ’76 to January 1980.

Now, in its current bull market (2001 to March 2008), gold rose over 300% from $250 to a little over $1,000. And just like in the mid-70s, it began showing signs of weakness after its first big rally up to $1,014 in March ’08. At one point, it even fell to $700, a 30% retraction. Granted, it wasn’t a full 50% retraction like the one that occurred from 1974-76. But we are experiencing a financial crisis. And gold is the most common catastrophe insurance.

If we were to go by the historic pattern of the gold market in the ‘70s, gold should experience upwards resistance for 19 months after its first peak today. Gold’s recent peak was $1,014 in March ’08 (roughly 14 months before the writing of this report). If this bull market parallels the last one, then gold should renew its upward momentum in a very serious way starting in October 2009. And this next leg up should be a major one (the biggest gains came during the second rally in gold’s bull market in the ‘70s).

In fact, it’s already happening…

According to Capital Gold, a precious metals dealer, the demand for gold from self-directed IRAs has more than doubled since January 1, 2009. The World Gold Council notices similar spikes in demand for the gold ETF, writing “Inflows into gold ETFs continued to grow throughout the quarter, with investors buying a record 469 tonnes of gold, dwarfing the previous quarterly record of 145 tonnes, set in the third quarter of last year.”

Globally, entire gold markets that didn’t exist in 1980 are now beginning to buy the precious metal. Vietnam started trading gold futures in June 2007. Already the exchange trades around $100 million in gold futures a day. China’s Shanghai Futures Index started trading gold futures just a few months ago. The latter country has already surpassed the U.S. as the second largest consumer of gold behind India.

Bottom line: don’t let the talking heads fool you. Stocks are not cheap, especially compared to gold. And the bull market in gold is nowhere near over. Over the last 35 years, more Americans began investing than at ANY other period in history. As stocks collapse later this year, they’ll either pull out their money pushing the DJIA lower OR they’ll shift their money into alternate investment classes like gold. When they do, the DJIA will fall further and gold will erupt higher.

Comments

[sdavid0419:]

In order for GOLD to bubble Obama would have to STOP printing worthless money and immediately balance the budget. The floated plan going around is for a value added tax of 28% we already pay 17% income tax 7% soc sec tx 8% st inc tx 4% local inc tx 6.5% st sales tx 4.4% property tx alcohol, gas, licensing, util user fees etc. 5%. What a great incentive to get people to work. Let them keep less than 20% of what they make.

Jun 02 07:37 AM

[andypandy:]

Nice article, I liked this analysis. I haven't seen one like it yet and I follow all those gold bugs.

Jun 02 08:48 AM

[HATEFEEBAY:]

Gold would fly if the media started being truthful and calling Obama to the mat! They will not becuase they would then be labeled racist-lol. Our country is SOOOOOO SCREWED!

owns: SLW, AGQ, PTR, AA and C

Jun 02 09:02 AM

[mrrcke 2aol...:]

we must completely scrap all our current taxes ,state and federal . start over with a consumption tax with a peggyback for each state seperatly. this would stop the cheaters and tax manipulaters personal and government.

Jun 02 09:24 AM

[H. T. Love:]

Good article. However I noticed that the stocks outperformed gold in more years than gold outperformed stocks, 86 to 29 (before you holler about the math, I included the starting year for each period in the duration and included 2009 for the last period).

Being the curious type, and noticing some apparent correlation to certain historic event periods, I wonder if you can provide any historical economic or world-events context.

From that we might be able to apply this information to our current situation.

Of course, with the instant communication of world events, electronic trading, vastly increased retail trading on electronic platforms, etc., it might be difficult. But at least we could make a SWAG (Scientific Wild-Assed Guesse) about what might really will happen, rather than what happened in the (numerical only) past.

Thanks,
HardToLove

Jun 02 10:19 AM

[TonyCinTX:]

Why use the MEDIAN stock to gold ratio, especially the median over 106 years?

How about telling us when was the last time the gold to stock ratio actually WAS 5.4, or less than that?

World finances changed fundamentally after WW II, and there is no reason on EARTH to include any financial data from before 1945 in any analysis of any kind, at least not without more justification than just because you say so, or just because it gives you the number you want. Essentially you are telling people that data from 1903, before World War One, is an essential part of this analysis; because it certainly contributes to which ratio will be the median.

Let's take a look at the last 64 years, since 1945, and see what the median ratio is there. Or perhaps we will look at the linear trend, or robust regression. I see no reason to believe the median ratio is the best predictor (or even a good predictor) of where we should be, when the world is changing.

For example, would anybody believe us if we used IBM's median revenue since inception to predict its revenue next year? I think not. Why then should we believe the ratio of DJIA to Gold should be a constant?

Jun 02 10:24 AM

[muskokajpm:]

Sdavid, I don't like taxes any better than you do, but you can't just add up those percentages and say that we only keep 20% of what we earn-you would make a better point with better maths.


On Jun 02 07:37 AM sdavid0419 wrote:

> In order for GOLD to bubble Obama would have to STOP printing worthless
> money and immediately balance the budget. The floated plan going
> around is for a value added tax of 28% we already pay 17% income
> tax 7% soc sec tx 8% st inc tx 4% local inc tx 6.5% st sales tx 4.4%
> property tx alcohol, gas, licensing, util user fees etc. 5%. What
> a great incentive to get people to work. Let them keep less than
> 20% of what they make.

Jun 02 10:59 AM

[History Buf...:]

Gold is not the bubble, the bubble is the USD. And the sound of gold rising is the sound of air escaping from the dollar bubble.


On Jun 02 05:40 AM Chandragupta wrote:

> The next BUBBLE may very well be in Gold.

Jun 02 11:08 AM

[MarkitWacha:]

I'd like to see this same comparison done with a basket of commodities. It may be better still. You could re-title it to

Stocks Will Fall 37% or Scarce Resources Will Rally 60%

Jun 02 11:14 AM

[OldFordTruck:]

Gold may be the next bubble as mentioned above....if so go with Silver. If the world economy recovers, industrial silver demand will increase also. The fact silver has a duel use as an inflation hedge and an industrial metal makes it much more appealing and useful.

Jun 02 11:27 AM

[Gtarras:]

just one more angle on why gold will run. pretty poor one at it, IMO. why take MEDIAN ratio of S&P to gold, not MEAN??? and what does it all mean, anyway? where the data is coming from? this is one very poor analysis. just another example of "we take a thesis and fit the numbers around it".

Jun 02 11:34 AM

[williamwu:]

What can you do with gold? can you eat it? can you sleep in it? can you wear it? does it take you from point a to point b? I don't think buying gold is a good idea. People have abandoned this thing long time ago and substituted with paper bills. Look at history. don't let yourself be fooled.

Jun 02 11:35 AM

[20smoney:]

Good article. Gold has plenty room to run. The fundamentals are incredibly supportive.

Jun 02 11:39 AM

[TradingHelp...:]

I think suggesting the acceleration in stock ownership as a reason for a imminent stockmarket decline is not robust. The same could have been said for cars, TV's, vacations. Just because the demand for a new product increases quickly, that doesn't mean it has to fall back. The world is changing and the appetite for risky assets, non cash instruments, will not necessarily structurally decline just because the number of participants increased quickly.

Jun 02 12:31 PM

[The Recusant:]

Much of the gold ETFs however are in derivatives rather than actual bullion, that in itself is a kind of artificial bubble not unlike the real estate bubble that just popped. What happens when the market collapses, the ETFs are pressured to prove their bullion holdings only to discover that their vast amounts of bullion are only paper? If you suggest holding gold as a hedge, suggest holding it in bullion. Better still, suggest holding silver bullion.

Jun 02 12:40 PM

[Maxe Paul:]

"When they do, the DJIA will fall further and gold will erupt higher"

I dont mean to burst your bubble, but gold goes up in bull markets and falls in bear markets.

Gold is not a good insurance against stocks falling. To use one of your quotes, dont let the talking heads fool you.

It is far more likely that gold and stocks fall at the same time and rise at the same time, any arbitrage will slowly fix over time, if applicable.

Jun 02 12:45 PM

[The Recusant:]

Good analysis, but suggesting investing in gold ETFs could be a problem. Derivatives that make up much of the paper bullion reserves for the EFTs and paper bullion has been creating its own artificially supported bubble, not unlike the real estate bubble that just popped. If we are to invest in precious metals to save our investments, then let it be in the miners or actual bullion, and be sure to include a load of silver with that, please.

Jun 02 12:48 PM

[nobby73:]

How can you compare the ratio of the DJIA and an ounce of gold? The DJIA is merely the arithmetic sum of the prices of the composite members and is subject to periodic changes, as we saw with GM and Citi, with no constant conversion factor for economic value.

However, I do agree that gold is "undervalued" relative to US equities and $1,600 per ounce is a reasonable price target.

Jun 02 01:21 PM

[5142152-337:]

Nice article!

I'll take 60%...maybe more! The Dow will see 5000 again VERY SOON! Gold will see 2500 VERY SOON. Take your pick. BUT, the most incredible RISE will be SILVER: Three digits VERY SOON!

Jun 02 01:26 PM

[Graham and ...:]

Over a long period of time (say 100 years), gold and U.S. blue chip stocks, such as those of the Dow, should track, because they are both inflation fighters. (In the Dow, 97% of your return comes from dividends, only 3% from capital gains after inflation, with the remianing "capital gains" being inflation fighting.) But the ratio of the Dow to gold has ranged from about 800 to 800 or 1 to 1 in 1980 (too low), to not quite 12,000 to not quite 300, or 40 to 1 in 2000 (too high).

The 5.4 to 1 ratio sounds about right (actually we use 5 to 1 to make things simple). To get there from a ratio of 8.6 (and it used to be much higher, even a year ago), gold needs to rise and/or the Dow needs to fall. Long gold/ short Dow is the right "pair trade."
.

Jun 02 01:39 PM

[tc1:]

I enjoyed your article but i think we need to be VERY careful about thinking such "historical relationships" as between gold and stocks are etched in stone.

By your own statement, the Internet and people's retirement plans have ENTIRELY ALTERED THE HISTORICAL SITUATION, so how, then, can the "HISTORICAL RELATIONSHIP" between gold and stocks still possibly pertain based on data going back to include decades and decades before the internet and IRAs, etc.?

For stocks to lose 37% would put the Dow down to 5400-range and S&P down to 592 range. You'd find only a few alarmist Armageddonites and Obama-haters who think that is going to happen or who want it to happen.

There are simply too many strong companies (and sectors) with healthy earnings, low/no debt, and mountains of cash for this general plunge in stocks to happen.

And too many big investors are putting money into gold right now with a weaker dollar on the horizon...

SO-- the historical avg ratio (and NOTE that it is ONLY AN AVERAGE, with possibilities for big divergences) --this ratio looks like it does NOT APPLY to these especially altered times.

I agree with the commentors here that it is gold that could wind up being the big bubble, especially since, as we all know, its price can be easily manipulated by the "big boys" for the sake of propping up the US and other currencies --and they have every right to do that to keep a bit more stability for the international financial scene during these rocky times.

So i don't accept your thesis. But a big THANK YOU for taking the time and care to lay it out for us.

Jun 02 02:17 PM

[OstrichHater:]

at first glance, this sounds like an analysis but it ignores some simple economics...

1) gold does not create value and companies do.
2) dividends / share count changes are not accounted for in this analysis

so over time, the DJIA / gold price ratio should rise as those companies add value and gold does not. also, if companies in the DJIA issue dividends the DJIA / gold price ratio should fall. similarly, if the if companies in the DJIA issue shares the DJIA / gold price ratio should fall. so the argument that the price of gold should rise or shares should fall, is not supported by the data provided in this article.

Jun 02 02:31 PM

[Jasper M:]

I think it is more likely that we see Both those numbers, but displaced:
Stocks fall 60%
Gold falls 37%
(and what a time to buy That will be!)

Jun 02 03:11 PM

[Fighting Yoda:]

Gold valuation/price is difficult to predict – dependent on dollar which could go any which way.

But the stock market is definitely overpriced a forward PE of 21 on operating earnings. That is way too high for any market, especially for a bear market.

Jun 02 03:11 PM

[RSAAKS:]

"throughout the 20th century, on average 5.4 ounces of gold would buy one unit of the DJIA.

Today, gold trades at $980. The DJIA trades at 8,500. This puts the ratio of gold to stocks at 8.6."

What if Gold goes to 2000 and Dow to 12,000?? With impending inflation, I think that is more likley. In other words both go up. Possible?

Jun 02 03:13 PM

[jeandit75:]

I got something aver more realistic, what if god goes to $370 while the Dow Jones x 5.4 = 2'000? You think I'm crazy? Well, just think about a glogal depression caused by a massive delevraging. That's still a possibility.

Jun 02 03:37 PM

[jeandit75:]

meant Gold ovbviously althuogh God may help us not get there on my targets


On Jun 02 03:37 PM jeandit75 wrote:

> I got something aver more realistic, what if god goes to $370 while
> the Dow Jones x 5.4 = 2'000? You think I'm crazy? Well, just think
> about a glogal depression caused by a massive delevraging. That's
> still a possibility.

Jun 02 03:38 PM

[andypandy:]

you are the one who is fooled!


On Jun 02 11:35 AM williamwu wrote:

> What can you do with gold? can you eat it? can you sleep in it?
> can you wear it? does it take you from point a to point b? I don't
> think buying gold is a good idea. People have abandoned this thing
> long time ago and substituted with paper bills. Look at history.
> don't let yourself be fooled.

Jun 02 03:41 PM

[Fighting Yoda:]

There has never been any relationship between gold and stocks. They can go any which way independent of the other.

Jun 02 04:39 PM

[User 424477:]

This article is interesting, butquite meaningless. The time frames and lack of macroeconomic/monetary framework renders it without context. The dates and timeframes have to be put into context of the macroeconomic and monetary conditions of the times cited. The facts are that the stock market has - through its low point of beow 6,500- priced in the current and future economic situation, but the gold price has not priced in the monetary and fiscal response. The DJIA will not trade again to 6,500, but will trade between 7,500-8,500 for at least a couple of years( it is a sell at current levels) and with the money supply running at is current pace inflation will increase and the price ( value) of meniey decline- this is good for gold and with markets always overshooting) not mentioned in the article) will see gold at least at $3,000 within 2 years. This will be helped by the weak US$ which is in the process of moving from "reserve" currency to just important currency. Rod Jones

Jun 02 06:25 PM

[Real 427 Man:]

Mostly all BS, where are the people going to get the money to buy gold that buys or makes nothing, big money is made by COMPOUND INTEREST, not gold, you can live off interest not gold. Most people will lose their $$ to some scammer no matter what it is or bad investment advice. I mined gold & just sold at a good profit, now it earns interest, I am very happy no matter what.

Jun 02 08:36 PM

[The Geoffster:]

Can you do any of those things with paper? Put another way, would you rather own $1000.00 of paper or $1000.00 of gold? Gold is money. Paper is a promise.


On Jun 02 11:35 AM williamwu wrote:

> What can you do with gold? can you eat it? can you sleep in it?
> can you wear it? does it take you from point a to point b? I don't
> think buying gold is a good idea. People have abandoned this thing
> long time ago and substituted with paper bills. Look at history.
> don't let yourself be fooled.

Jun 02 08:54 PM

[The Geoffster:]

P.S. If we had faith in the U.S. dollar, we wouldn't be having this conversation.

Jun 02 08:57 PM

[Old Trader:]

As Freya mentions above, I think that silver might actually be the better play, because its what I call a "two fer", meaning there are 2 supportive factors involved. If/as the economy improves, silver has more industrial uses than gold, which should support the price and it still acts as a "hard asset" store of value in turbulent times.

Jun 02 09:06 PM

[Dean M:]

Great info in the article but one point you made kind of undermines your conclusion. The amazing growth in the breadth of stock ownership may explain why stocks will not revert to their historic baseline levels in terms of PE or relationship to the price of gold.

Jun 02 09:09 PM

[capt Brian:]

Negative on this article, ratios are a great way for looking at the past. Economics are a great way of looking at the future. Just because economics look weak, now gold looks strong, THAT is the normal relationship. It will continue, it just so happens, [in my opinion], that the stocks are ready for a fall because the economics of the general run of companies are not good, this should cause the general market to fall, and the normal factors that cause precious metals to rise are strengthening. Too simple, well then you tell me what to do in a confusing way. HUH?

Capt Brian.

Head for a nice quiet cove til the storm passes

Jun 02 10:33 PM

[Donald Ingram:]

Great article. Thoroughly enjoyed it!
Agree. What we are seeing in the market these days is a six month "dead cat bounce". The trap door will open sometime this Fall - Sept., Oct., Nov., and the market will fall! Worse than the March lows.
Gold will go to the Moon in price. There will be a "last gasp" rally in the market - post Christmas season, before it totally capitulates at DOW 1450. Long, slow, drawn out recovery begins. GOLD WILL RULE.

Jun 02 10:42 PM

[psig:]

Heres sort of a commodies comparison to consider and it is a lot simpler. Throughout history 1 oz of gold has always been able to purchase about 600 loaves of bread. It was true 2000 yrs ago as it is today. If a loaf of Wonder bread ever goes for $5 then gold will be around 3000. Is that what everyone wants? Be careful what you ask for. Although in this case no one is really asking for it but with the treasury printing presses on high speed its gonna happen anyway within a few years. Keep your eye on the price of a loaf of bread. Basically its all about inflation.

Jun 02 11:26 PM

[badScooter:]

Yes. Inflation. That. Somebody wake me up when I can sell 5 ounces and pay off my mortgage with the cap gains.

Jun 03 12:31 AM

[Peter Cooper:]

You are right, and for maximum leverage to the gold price you should be buying the gold junior explorers, see:
arabianmoney.net/2009/.../

Jun 03 02:34 AM

[Chandragupta:]

Gold is currency. It is a store of value. What can you do with Gold? You can buy things to eat, sleep, or wear. It is the only currency which is accepted all over the world.

Jun 03 07:10 AM

[Vuke:]

Gold, William, can preserve your wealth.

Paper can light a fire under it.

Did you skip those episodes of history? Or are you kidding?


On Jun 02 11:35 AM williamwu wrote:
> What can you do with gold? can you eat it? can you sleep in it? canyou wear it? does it take you from point a to point b? I don't think
> buying gold is a good idea. People have abandoned this thing long
> time ago and substituted with paper bills. Look at history. don't
> let yourself be fooled.

Jun 03 07:35 AM

[TonyCinTX:]

Actually gold has several industrial uses; it is a great conductor and the only metal that does not oxidize. It doesn't rust, period. Not only that, but gold in general is highly resistant to corrosives and acids; and highly reflective of electromagnetic radiation. It is used as a very thin layer of shielding on satellites, effective but weighing almost nothing. Gold is the most malleable and ductile pure metal known. It is used inside billions of electronic chips as the connecting wires to the outside world, and as a coating on sliding connectors that must be reliable.

Jun 03 08:01 AM

[Danny Furman:]

The argument is pretty good and the presentation is great. Like the author touched on, during times of potential inflation gold demand goes up. With such a limited supply, inflation becomes a secondary, albeit potentially much stronger force. We are only seeing the beginning of dollars running for gold and it will continue progressively as the news gets worse (aka the truth comes out). There are other hyper-leveraged economies in Europe, as well as Russia, and those with cash there will be just as gold-hungry. I see less downside for silver and it is more readily available (at a discount, see blog), so my physical holdings are there while I own shares of miners for gold exposure. The media is transitioning from pumping stocks to revealing the truth about inflation and precious metals demand: Don't be the last to act.

Thanks for the article.

Jun 03 09:34 AM

[Louis Scatigna:]

Well thought out article. Gold has been and still is undervalued relative to both stocks and U.S. dollar.
It is my opinion that Gold is going to rise and the stock market will fall and one day it will take only 1 ounce of Gold to buy the Dow.

thefinancialphysician....

Jun 03 10:55 AM

[Maxe Paul:]

There has ALWAYS been a relationship between gold and stocks, when stocks go up gold goes up, when stocks go down gold goes down. Amazing how many people think the opposite.


On Jun 02 04:39 PM Fighting Yoda wrote:

> There has never been any relationship between gold and stocks. They
> can go any which way independent of the other.

Jun 03 02:21 PM

[Tombstone:]

Embryonically, a good idea. Was it M. Huckabee who asserted he would hang an "Out of Business" sign on the IRS bldg? Seeing that before I pass is on my "bucket list"! Oh! The word is sep-a-rate-ly. (Sorry, English Major!)


On Jun 02 09:24 AM mrrcke 2aol.com wrote:

> we must completely scrap all our current taxes ,state and federal
> . start over with a consumption tax with a peggyback for each state
> seperatly. this would stop the cheaters and tax manipulaters personal
> and government.

Jun 03 06:21 PM

[Tombstone:]

I figure quality coins such as the Rand, Maple Leaf, etc. may be a better idea. How would you buy a new bass boat with a bar(s) of bullion? Or a gallon of... uh...milk?


On Jun 02 12:40 PM The Recusant wrote:

> Much of the gold ETFs however are in derivatives rather than actual
> bullion, that in itself is a kind of artificial bubble not unlike
> the real estate bubble that just popped. What happens when the market
> collapses, the ETFs are pressured to prove their bullion holdings
> only to discover that their vast amounts of bullion are only paper?
> If you suggest holding gold as a hedge, suggest holding it in bullion.
> Better still, suggest holding silver bullion.

Jun 03 06:32 PM

[Tombstone:]

Does anyone know of the historical ratio between gold and oil? Is it something like 1 oz. of gold to buy 16 bbls. of oil, or am I wrong? Let's see... With oil at $100/bbl, gold would have to be about $1600/oz. Or, with oil at $50, gold would be about $800. Or is this fuzzy math? You know, the kind the GAO uses.

Jun 03 06:54 PM

[commoinsens...:]

It has nothing to do with being called racist, it's the media that is primarily controlled by large corporate interests that dont want to spoil the party.


On Jun 02 09:02 AM HATEFEEBAY wrote:

> Gold would fly if the media started being truthful and calling Obama
> to the mat! They will not becuase they would then be labeled racist-lol.
> Our country is SOOOOOO SCREWED!
>
> owns: SLW, AGQ, PTR, AA and C

Jun 03 10:25 PM

[punk_ash:]

Most people can not think clearly since they have never seen sanity. Our grandfathers and their fathers know what the value of money was. This insanity of the past 30 years have made a fool out of the careful and the savers.

The sane people will have their say, and the world must come to sanity. Indian stock index has doubled in 6 months, and already into a bubble.

The reset may happen in the next 6-12 months or in another 5-10-20 years, but that sanity will come.

USD is one thing that is holding the world together, be careful for what you wish for. Keep some of them USD with you in cash.

Jun 04 01:08 AM

[Ellito:]

The world today is very different from back to 40 some years ago.
Can't really compare so far back. To do so is unreal.
Oil will get higher, we need it no matter what.
Gold, maybe, people don't really need it.
Simple as that !!

Jun 04 04:56 AM

[Michaelsfamily:]

Actually. You can eat 24K gold.


On Jun 02 11:35 AM williamwu wrote:

> What can you do with gold? can you eat it? can you sleep in it?
> can you wear it? does it take you from point a to point b? I don't
> think buying gold is a good idea. People have abandoned this thing
> long time ago and substituted with paper bills. Look at history.
> don't let yourself be fooled.

Jun 04 07:08 AM

[Erik B.:]

When gold crashes, it crashes much harder than stocks. Any improvement in economic fundamentals and people will leave it in flocks for stocks. If you're totally bearish on the market and inflation go for gold but a continual bear market is not a certainty. It's an alternative but I'd recommend a more balanced approach than running for gold. Buy a low priced home, keep some $ in stocks, pay off your car, buy some commodity funds, buy some gold, etc.

Signed,

No Gimmicks

Jun 04 11:21 AM

[Forgo:]

Very skewed argument. Seems like cherry picking time frames. Unmentioned is the fact that 1929 to 1932 was an extraordinary period for stocks. Gold was not even legally traded during most of the period between 1932 and 1966. Further, the composition of the DJIA has morphed over time. What would the DJIA be if the composition of the DOW had not changed since 1900? Appreciate solid arguments supporting the future value of gold. This is not one of them.

Jun 04 12:12 PM

[Erik B.:]

When gold crashes, it crashes much harder than stocks. Any improvement in economic fundamentals and people will leave it in flocks for stocks. If you're totally bearish on the market and inflation go for gold but a continual bear market is not a certainty. It's an alternative but I'd recommend a more balanced approach than running for gold. Buy a low priced home, keep some $ in stocks, pay off your car, buy some commodity funds, buy some gold, etc.

Signed,

No Gimmicks

Jun 04 02:51 PM

[Living4Divi...:]

"I’m talking about the bubble in “investing in stocks.” Never before have so many Americans done this. It gave us one of the biggest bull markets in stock history: a mega-18 years run from 1982 to 2000. "

I agree with the above. The stock market has definitly gone up because the average American is "investing in stocks." That period also had a run up because it was a good time for the US Economy.

"But it also means that stocks have got a long ways to fall to get back in line with their historic relationships to other asset classes."

I am not sure I quite agree with your logic there. Stocks have historically outperformed the other asset classes. And you have failed to provide any metric to show that stocks are indeed overpriced.

Jun 04 05:01 PM

[nport:]

It's a question of how you view the future. I bought Homestake Mining in 2000 when Gold was at $275-300. Paid $15 - the company was acquired by Barrick Gold. So I'm long ABX as a hedge on my portfolio. I won't sell unless I get big bucks. Don't speculate on the price of Gold or Art. That depends on Mr. Market and you know how how manic-depressive he/she can get. Just find great companies to buy that have competitive advantages; stay long, keep the faith. It isn't either or; stocks can and will be the core of the long run portfolio; however, hedge when precious metals are out of favor. For they will forever find a way to keep pace with inflation. And inflation..is coming.

Jun 04 05:25 PM

[No Free Cake:]

Two Points

1) Gold is a speculative asset like any other. Why a particular ratio between it an any other, like DJIA, should be maintained is a suspect assumption. History shows one thing - stuff changes.

2) The point about the number of US investors is silly. Just because people used to have a large pension institution, insurance company, or whatnot invest for their future (counting as 1 investor) rather than doing it themselves in 401Ks and IRAs means nothing in terms of market value or direction.

Jun 04 09:48 PM

[Elitemaster:]

Ok, first of all, gold is just metal from the earth and money is just paper, so they are both just devices/vehicles for currency exchange. Yes, gold has industrial uses but if eventually the only value to humans became its industrial uses (and of course back to the stone age when humans valued it because of its shine), then we will be already in a worst case scenario (time to head for the mountains with your shotgun and canned foods); moot argument.
Now, the 'ratio' argument in the article seems to forget one major problem with the use of statistics - the spread/deviation/beta of the metrics used. For a given time interval (lets say 5 years), we have an unknown ratio in a box and until we open it to see how the metrics compare, we have to attribute a variance to it (beta); the reason it is unknown at any given time interval is because of a crucial point - there is no meaningful to make correlations between metrics from events/configurations of matter and/or minds and the macro/micro-games that were played decades ago versus now or any other time interval. So if you were to compare the ratio btw 1919-1924 for instance to what the ratio is going to be in 50 years (to 55 years) from then (if you were living in that time frame), you would have to multiply the beta with the ratio; further, you would have to take this multiplier (which also changes) and apply it to all of the future 5 year intervals up until the point in time which you are discussing (now). The problem is over decades and decades, the beta*ratio begins to grow and grow until you have a meaningless range of possible ratios which denote NO correlation (for instance a small beta of -2 to +2 and the given ratio of 5.4 for the very next interval, say from 1925-1930 would be -7.4 to +7.4 then from 1930-1935 it would already be -9.4 to +9.4 and that is assuming a linear relationship with the multiplier - it could be and probably is more like logarithmic); by the time you reach the present, you are dealing with a statement like --> "oh, the ratio may be any number between -37.4 to +37.4".. wow, great man, that really tells us a lot about the correlation btw gold and stock metrics. <-- sarcastic
Not to mention the fact that looking at numbers only, every separate game period must be given a brand new range of probable outcomes which are in no way dependent on the outcomes of the past (flipping a coin once and lands on heads does not mean that the next flip will be tails just because the math dictates a 50:50). Last point is you can look at the situation in these terms: gold is a form of backup ammunition, paper currency is a newer modern laser (greater advantage) weapon in the modern battlefield (game/market space), you use the laser because it is based on a greater number of more complex sub game systems and so provides a greater advantage and you use the more simple (gold) ammunition as a backup in case the more complex system breaks down, but you don't begin forcing your commander to put more energy in creating more rocks to throw at the enemy just because you lose some (or even most) of the energy you need to power your laser. Only if the laser completely breaks, you start throwing rocks at the enemy.. make sense? But if we are both on the battlefield trying to make gains, please, by all means, go ahead and stop putting energy into fixing your laser and start throwing rocks at me, by the time you have built up a huge mountain of rocks to throw at me, I have my laser back up and functioning at full power against you. Good luck!

Jun 04 10:09 PM

[radicall:]

compare ratios of Gold and Oil instead , or Gold and silver

or you can measure the ratio of apples to oranges grown each year,,,

Jun 04 11:59 PM

[Market Holiday:]

I like this analysis on gold: Shows where demand is coming from now.

www.debtorsprisonblog....

Jun 05 12:04 AM

[Danny Furman:]

Does anyone here realize that Asians don't "waste" their money on stocks? Gold is how they invest, save, measure wealth.... I don't like shiny things but I appreciate the value of something as rare and treasured as gold.

Jun 05 12:24 AM

[Living4Divi...:]

I risk drawing the ire of Gold bugs with this post. I am sure I will get hammered for my anti-Gold sentiment.

To follow up my point: No one has shown a ironclad correlation between the price of gold and stocks. Even if such a correlation could be "proved" through data-mining, it wouldn't mean much. At one time bonds used to be inversely correlated to stocks and when stocks went up, bonds fell. That relationship changes over time, and currently is no longer true. As others have pointed out "relationships change."

From 1801 to 2003, $1 worth of Gold has appreciated and is worth $1.39 in inflation adjusted terms. Cash has done alot worse, $1 in cash is now worth $0.07 in inflation-adjusted terms. So, Gold has beaten cash mightily. But, this fact doesn't make Gold a superb investment. Stocks, Bonds, Real Estate and even interest-paying Bills have clearly beaten Gold over the same time period.

I suppose one could say "yes, but those were during times of low inflation, when the currency was backed by Gold. What about these modern times when the Dollar is a fiat currency, backed by nothing?"

In 1934, the U.S. went off the gold standard to limit private citizens' access to gold. But it took decades for the Dollar to be fully delinked from Gold. 1934 is a great starting point because it marks a period of successive devaluations of the US Dollar vis-a-vis the price of Gold.

Taking 1934 as the starting point, Stocks, Bonds, and Real Estate have clearly beaten Gold over the period. Treasury Bills are a wash.

Is Gold better than cash? You bet. Mostly anything is better than cash. Is Gold a great investment? We could very well be on the verge of a global Gold rally. Gold could go to $500 or it could go to $5000. Gold is a speculation, not an investment. And it is very volatile. I prefer to be an investor, not a speculator and that's why Gold (or other PMEs) are not in my portfolio.

Jun 05 07:03 AM

[Baboon:]

I am not sure I understand your point: Why gold is better than cash if gold is not investment and cash is ( sort of short-term bond) ?

On Jun 05 07:03 AM Living4Dividends wrote:
> Is Gold better than cash? You bet. Mostly anything is better than
> cash. Is Gold a great investment? We could very well be on the verge
> of a global Gold rally. Gold could go to $500 or it could go to $5000.
> Gold is a speculation, not an investment. And it is very volatile.
> I prefer to be an investor, not a speculator and that's why Gold
> (or other PMEs) are not in my portfolio.

Jun 05 07:20 AM

[Skjellifetti:]

I would go further and say that any data before August 15, 1971 is meaningless when attempting to draw conclusions about the long-term value of the gold/stock price ratio.

en.wikipedia.org/wiki/...

On Jun 02 10:24 AM TonyCinTX wrote:

> Why use the MEDIAN stock to gold ratio, especially the median over
> 106 years?
>
> How about telling us when was the last time the gold to stock ratio
> actually WAS 5.4, or less than that?
>
> World finances changed fundamentally after WW II, and there is no
> reason on EARTH to include any financial data from before 1945 in
> any analysis of any kind, at least not without more justification
> than just because you say so, or just because it gives you the number
> you want. Essentially you are telling people that data from 1903,
> before World War One, is an essential part of this analysis; because
> it certainly contributes to which ratio will be the median.
>
> Let's take a look at the last 64 years, since 1945, and see what
> the median ratio is there. Or perhaps we will look at the linear
> trend, or robust regression. I see no reason to believe the median
> ratio is the best predictor (or even a good predictor) of where we
> should be, when the world is changing.
>
> For example, would anybody believe us if we used IBM's median revenue
> since inception to predict its revenue next year? I think not. Why
> then should we believe the ratio of DJIA to Gold should be a constant?

Jun 05 10:10 AM

[Skjellifetti:]

Buying gold is not investing. Investing involves buying new capital goods that can create new products. Buying gold is equivalent to putting your wealth under your mattress.


On Jun 05 12:24 AM Danny Furman wrote:

> Does anyone here realize that Asians don't "waste" their money on
> stocks? Gold is how they invest, save, measure wealth.... I don't
> like shiny things but I appreciate the value of something as rare
> and treasured as gold.

Jun 05 10:15 AM

[Danny Furman:]

No argument here. My portfolio is over 90% long stocks. With levels of inflation many have never seen on the horizon, one has to think outside what has worked in most times and look to similar times in the past. Maybe stocks will outpace gold, but cash will be trash for some period of time. Gold is speculating, and gold under your mattress may get really comfortable soon.


On Jun 05 10:15 AM Skjellifetti wrote:

> Buying gold is not investing. Investing involves buying new capital
> goods that can create new products. Buying gold is equivalent to
> putting your wealth under your mattress.

Jun 05 10:38 AM

[Living4Divi...:]

Cash is money under the mattress. You are correct - bills are short term treasuries. Many people think of cash and bills as one in the same. They practically are right now, because of the low interest rates on bills (mostly demand accounts) - then cash and bills both pay about the same currently - very little interest. Cash is the worst investment. Bills the second worse. Gold, despite its high volatility is better than the two, because at least it keeps up with inflation. Because Gold is better than cash and bills doesn't mean you should go out and buy Gold. There are far better alternatives to Gold, like TIPS, which are alot less volatile.


On Jun 05 07:20 AM Baboon wrote:

> I am not sure I understand your point: Why gold is better than cash
> if gold is not investment and cash is ( sort of short-term bond)
> ?
>
> On Jun 05 07:03 AM Living4Dividends wrote:

Jun 05 12:15 PM

[bricki:]

Gold is fine as a long term store of value, and should be part of any portfolio above a certain size.

But it has little or no real value appreciation. The reason a stock market to gold valuation ratio might decrease is that if the risk premium of stocks doesn't justify their purchase.

Jun 05 01:56 PM

[Sheik Rattl...:]

The fact that a large number of investors are holding gold I take to be a bad sign. If that money flows out of gold and into stocks or other commodities there will be a huge gold crash.

If non investment gold demand was increasing I'd take that to be a much more bullish sign.

Jun 05 02:14 PM

[Random Idea:]

bad analysis

If you are gonna run a comparison like this, you need to use total returns on the DJIA (S&P would actually be better) and total returns on Gold.

Actually, you are running actual returns on Gold (you receive no interest or dividend on gold) but you are ignoring roughly 1/3 of the return in stocks that comes from dividends.

Over time Gold should be consistent in its purchasing power (i.e. grow at the rate of inflation). Stocks, on the other hand have grown 5-6% faster than inflation (roughly 6% capital gains, 3% dividend). This ratio you talk about then will not be consistent over time but will be declining.

Jun 05 02:43 PM

[illuminati:]

I agree gold is the perhaps ultimate store of value. The issue that gold bugs do not acknowledge is the increasing confidence in alternate asset classes. In 2008 the consensus was that a US Treasury note was 100% safe ground. In 1929 the same degree of trust would not have been placed in any paper asset.
I believe gold's rise is muted because gold has competition from other asset classes in a flight to safety that it has not historically faced.

Jun 05 02:46 PM

[VP of Commo...:]

The barrier to entry to invest in stocks has eroded signficantly over time, frankly it is probably harder to invest in gold than equities at this point in time. I think this is more relevent than the simplistic single variable analysis put forth by the author.

Jun 06 12:22 AM

[nova:]

Freya wrote:
" My short term Dow/Spx expectation from these levels over the Next 6-12 months Vs Gold.
Dow 11,000+, SPX 1,200, Gold $1,300."

Now-day, the US stock markets remind me a casino:
- There are no real values up there
- The timing is everything

However, gold did/does have value for the last 3,000+ years.

And finally, the last 110 years are not the entire world financial history. There were many major events prior to the last 110 years which we about to repeat in some new shape and form.

Jun 06 01:25 AM

[H. T. Love:]

Presuming you mean after taxes, maybe never!

Sad to say, but I've seen (historically speaking) no restraints on government growth and the current congress seems bent on accelerating it. So I expect that as the new tax increases continue to move down the income ladder (originally income tax increases were to affect only those making $250K/yr or more, then $235K, then other forms of taxation were added that gets into the whole income spectrum) one can never make enough in capital gains to do what you suggest.

An exaggeration? Probably, but when moods are so dour, it really is hard to avoid.

HardToLove


On Jun 03 12:31 AM badScooter wrote:

> Yes. Inflation. That. Somebody wake me up when I can sell 5 ounces
> and pay off my mortgage with the cap gains.

Jun 06 07:35 AM

[H. T. Love:]

On Jun 04 09:48 PM No Free Cake wrote:

> Two Points
>
><snip>
> 2) The point about the number of US investors is silly. Just because
> people used to have a large pension institution, insurance company,
> or whatnot invest for their future (counting as 1 investor) rather
> than doing it themselves in 401Ks and IRAs means nothing in terms
> of market value or direction.

I would disagree on this one point for the following reasons.

Compared to a typical retail investor, professional investors have a different education/experience background, set of goals, emotional response to market events, set of available tools, amount of time to do the investing job, and are probably aware of the market manipulation that makes for an uneven playing field.

This gives them an inherent advantage initially. And may help moderate volatility in the market when it is to their advantage. We can't be sure of that though.

The retail investor is more likely than the average professional to either "hang in there too long" and then "crash out" of the market in a state of panic, taking big losses.

As could be expected, they will then stay out too long and finally come back in chasing the new bull. Of course, some/most professionals will also suffer this cycle, but we can hope (assume?) that it will be a smaller percentage than would be seen in the typical retail investor. Over the long run, that small percentage will have less effect as they have less and less money to use in their activities.

This should mean that the new paradigm tends to produce more volatility, on average. I don't really think it has much direct effect on market direction. But I do believe it has an indirect affect.

This effect is produced by the "big boys". They can manipulate/move markets. They have tools and data available that retail investors don't have. They have/can/do fleece the general population on a regular basis using this advantage.

This does not even consider the collusion with the Federal Reserve, Plunge Protection Team, their "important customers" around the world, etc.

My Humble Opinion,
HardToLove

Jun 06 08:06 AM

[H. T. Love:]

On Jun 05 12:04 AM Market Holiday wrote:

> I like this analysis on gold: Shows where demand is coming from
> now.
>
> www.debtorsprisonblog....

Hmm ... Looks like it's about time for the big guns to to start shorting and hammer and fleece the innocents. Maybe I'll wander on over to GATA and see what they know right now. For those who haven't visited, www.gata.org/node/7310 is a good starting point.

HardToLove

Jun 06 08:26 AM

[User 718:]

I think its funny how "pundits" continually refer to the Dow as "the market", as if these thirty securities accurately represent the 15,000+ publicly traded companies in the U.S.

You seem to ignore the fact that the only company left from the 1900 Dow Jones Industrial Average is General Electric. With such massive historical alteration of the Dow components, can you honestly suggest this is an appropriate theory to assess the current markets valuation?

Different industries, both secular and cyclical, are assigned valuations in the market based on an array of factors; economic, political, regulatory and otherwise. As such, the Dow itself should historically show significant variance in its valuation, given its continually evolving composition and low number of underlying companies.

As a previous user stated, "This article is interesting, but quite meaningless. The time frames and lack of macroeconomic/monetary framework renders it without context."

Jun 06 01:35 PM

[frosty:]

Sorry - this was pretty dumb. Over the last 106 years American mens' average height has been 5'7". For the last 10 years, it has averaged 5'9". In order to return to the long term average, one of two things must occur: we either need to increase immegration of shorter men or we have to develop a human de-growth hormone to treat tall men.

Anything quantative with a long enough history can be averaged over 106 years. That doesn't make the average meaningful, i.e., descriptive enough to guide current day actions. In fact it is likely a fallacy to believe that we're likely to return to the mean. A case in point is the Hunt brothers back in the late 70's. They calculated the historical relationship between silver and gold (I believe it was 20:1 at the time) and began buying silver as they claimed it was underpriced (actually they were attempting to corner the silver market). A number of reputable analysts agreed with their theory (you can't argue with averages, can you?) and silver rocketed eventually to $50 per ounce in 1980.

Also, the 'trends' the author suggests: 29 years of this, 3 years of that, 34 years of another thing, 14 years of something else, 20 years of whatever, and now, 2000 - ? what's going to happen? Well actually, the Dow hit an all time high in 2007, so the last 'trend' should cover 27 years rather than 20 and the new one begins 2008 - ? No matter these are arbitrary periods and have no predictive value whatsoever - if the Dow magically recovers and goes ever higher we are still in the 1980 - 2xxx 'trend'. To infer from this data that 2008 begins a new trend of gold outperforming the Dow is absurd.

Finally, it should be noted that DJIA today is not the DJIA of 106 years ago. For there to be a valid relationship of 5.4 ounces of gold to none unit of the DJIA requires that the Dow be the same throughout all its history. Let's see . . . Walt Disney, Microsoft, Home Depot . . . hmmm. Incidentally, I read an interesting tidbit (I can't recall who I should credit for this) that if the Dow were recalculated to include only its survivors and what they had become, without any multipliers, the DJIA would have peaked at 35,000 in 2007. That's a lot of gold!

I take this article to be typical piece of goldbug propaganda.

Jun 06 04:31 PM

[NG trader:]

A 37% drop in equities will correspond to a safe-haven bid in the USD and treasuries and will be accompanied by deflation and gold back to the 700 - 800 range or maybe lower. When will these gold bugs ever learn. LOL.... Where was gold last summer when the USD/EUR was 1.60, thats right, 900 - 1000, and we are failing here yet again. Go ahead gold bugs, get long here in the mid 900's and watch what happens, you'll be puking at 800.

Jun 06 08:12 PM

[Market Holiday:]

It seems to me that all these market mood swings will be the status quo for the next few years. It will be great for traders, but bad for the "buy and holders". Every six months or so, expect an inflation scare followed by the reality of deflation. The road will be very rocky. Don't expect your thesis to hold for more than a few months. Good luck all, especially all those with that "store of wealth" shiny metal.

Jun 07 01:58 AM

[ArtfulDodger:]

TonycinTx:

This says it all for me: "would anybody believe us if we used IBM's median revenue since inception to predict its revenue next year? I think not. Why then should we believe the ratio of DJIA to Gold should be a constant?"

Good comment!

Jun 07 02:26 AM

[Marco Hickey:]

I have been bullish on gold for some time. I don't think a $1500 price tag is out of the picture in the next 18 months. I am currently in a leap 11 GLD 80/120 option spread. I purchased the leap 11 GLD 80 in January, and waited for a 15% rally in the GLD and then completed the spread.

Jun 07 09:35 PM

[Mauiwalt:]

1849 how did the California gold miners buy a pair of Levi's. . A pinch of dust for a beer and a bigger pinch for those pants. Gold is gold and he that has it makes all the rules.
Roosevelt, in one day made owning gold coins illegal. Get a grinder and put it to use when Washington comes a calling for their American Eagles.


On Jun 03 06:32 PM Tombstone wrote:

> I figure quality coins such as the Rand, Maple Leaf, etc. may be
> a better idea. How would you buy a new bass boat with a bar(s) of
> bullion? Or a gallon of... uh...milk?

Jun 08 01:35 AM