Thanks to Alan Greenspan and Ben Bernanke’s pro-inflationary policies, the dollar has lost nearly half of its value since 2002. Please take a moment to consider that ... you and I have become roughly 50% poorer in the last six years through no action of our own.
The wealth destruction is simply incredible. And it’s made us the laughing stock of the world. Europeans and Brits now see the US as a tourist trap where they can come to feel rich. Oil exporting nations have seen their profits explode as the weaker dollar pushed oil through the roof.
Simply put, the dollar is no longer a great store of value. True, it has rallied recently due to the belief that the Fed won’t cut interest rates again—and that other countries will soon start cutting rates to deal with their own financial issues—but until the Fed turns off the liquidity faucet, any rally in the dollar will be brief.
Investors should find a new currency to plunk their money into. And that currency is gold.
The pundits have made a big deal of stocks’ recent rally and gold’s plunge. However, if you look at the big picture between these two asset classes, it’s clear that stocks are still expensive while gold is quite cheap.
According to Dr Marc Faber, editor of the Gloom Boom Doom report, gold and financial assets move in distinctive long-term trends. Over the last 110 years, this trend 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.
Most recently, gold has completely trounced stocks. In fact, based on “real” terms—i.e. the price of gold—stocks actually peaked in 2000 and have since fallen 72%!
And they’re still expensive.
The median stock (as measured by the Dow Jones Industrial Average) to gold ratio over the last 106 years was 5.4. In other words, during the 20th century, on average 5.4 ounces of gold would buy one unit of the DJIA.
Today, it takes more than 12 ounces of gold to buy one unit of the DJIA. So in spite of gold’s mammoth rise from $250 to $860, the precious metal is still quite cheap relative to stocks.
So while the mainstream financial media and the Federal Reserve might be proclaiming an end to the commodity boom and the beginning of a new bull market in stocks, I don’t buy it. In real terms, stocks are anything but cheap. Gold on the other hand, is clearly undervalued.
And thanks to this recent dip, it’s gotten even cheaper.