Dow / Gold
Yesterday, the Dow closed above the 12,000 for the first time.
For some further perspective into the current rally, Chart of the Day presents the Dow divided by the price of one ounce of gold:
This results in what is referred to as the Dow/Gold ratio or the cost of the Dow in ounces of gold. For example, it currently takes 20.1 ounces of gold to “buy the Dow.”
This is considerably less that the 44.8 ounces back in the year 1999. When priced in gold, the current stock market rally hasn't amounted to much. In fact, the longer-term trend is actually down!
Source: Chart of the Day
Friday, October 20, 2006 | 11:15 AM | Permalink
| Comments (69)
| TrackBack (0)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00d834bf371d53ef
Listed below are links to weblogs that reference Dow / Gold:
Comments
Or you could plot the Dow versus the price of computer megaFLOPS! C'mon, I see this one all the time and it is a curiosity at best. The DJIA is a terrible index: it is price-weighted, for the love of mike, to say nothing of representing an ad-hoc crumble of just a few stocks. Gold hasn't been real currency since FDR, and today is consumed mostly in the form of jewelry.
Posted by: wcw | Oct 20, 2006 11:34:09 AM
"Gold hasn't been real currency since FDR"
No, you can't walk into a car dealer and buy a car with it. It is not a medium of exchange. On the other hand, USD is not really a store of value anymore ;)
We all make our own investment decisions with our own money. My belief is that gold will continue to appreciate relative to Dow, NASD, etc, etc:
http://www.sharelynx.com/chartstemp/DowGoldRatio.php
Good luck with your fiat.
Posted by: Mike | Oct 20, 2006 12:00:47 PM
To paraphrase Warren Buffett:
Dig a hole, pull the metal out, haul it to be refined, dig a second hole, transport it to hole #2 to be stored, insure it, hire a bunch of guys to guard it.
Posted by: S | Oct 20, 2006 12:15:17 PM
Nice graph. The common refrain that gold has lost monetary status is basically meaningless, and has nothing to do with the reason it is useful to divide things like the DOW by the corresponding value of gold. Because what you are ULTIMATELY demonstrating is no so much anything to do with the DOW, but rather the real performance of gold. Let me put it this way... because ALL national currencies tend to lose value over time, a simple observation of a rising domestic price of gold fails to tell us whether or not gold is outperforming inflation -- i.e., whether or not the gains reflect more than the dollar's loss of purchasing power. Therefore, to compare apples with apples, we find the need to compare the price performance of gold to the price performance other real things. And since the DOW ought to, at least crudely, stand as a reasonable representation of inflation-impacted market prices of real things, an assessment of the DOW/gold ratio helps to give us a confirmation that the rising gold price is not only compensating for the depreciation of the dollar, it is gains are outpacing inflation as generically represented by the DOW. (And to be sure, one should want to think that the trading values of these dynamic corporations ought themselves to be outpacing inflationary effects. Therefore, a rising value of gold as measured against the DOW should seem all the more impressive.) --Randy Strauss
Posted by: Randy Strauss | Oct 20, 2006 12:39:11 PM
So, wcw you're saying that the appreciation in gold over the past 5-6 years is due to increased consumption of the metal for jewelery?
Let's say that gold hasn't been a currency in the USA since 1933. That means we have had 73 years of fiat currency. How does that balance against the 2000+ years prior in which gold was very much a common currency the world over?
There are some good reasons why gold was used as a means of exchange for all those years. The supply is limited, and it's relatively easy to test for purity. The latter may be true with fiat money, but the former is clearly not.
It may be a barbaric metal, but there is truth to the notion that it is also a refuge in times of crisis.
Posted by: jjr | Oct 20, 2006 12:51:19 PM
The DOW against a trade-weighted dollar might be more meaningful. Saying the true value went down because speculation in gold increased is little spurious.
If someone wants a hedge against a fall in the dollar, check out the Rydex Dynamic Weakening Dollar Fund (RYWBX). For each 1% fall in the dollar, it goes up 2%. Of course, for each 1% rise in the dollar, it falls 2%. ;-)
Posted by: Bob_in_ma | Oct 20, 2006 12:52:01 PM
According to US government inflation calculator DOW 12,000 in 2006 is equivalent to DOW $10,184.33
How come we do not hear about this statistic on News Alert from CNBC?
News Alert! News Alert! DOW has reached 10, 184.33!
http://data.bls.gov/cgi-bin/cpicalc.pl
Posted by: V L | Oct 20, 2006 1:12:59 PM
Addendum:
According to US government inflation calculator DOW 12,000 in 2006 is equivalent to DOW 10,184.33 in 2000
Or DOW 12,000 in 2000 would be equivalent to DOW 14,139.37 in 2006
http://data.bls.gov/cgi-bin/cpicalc.pl
Posted by: V L | Oct 20, 2006 1:20:53 PM
Barry, are u trying to get us "gold bugs" riled-up? LOL
I believe the ratio is meanignful because it provides a reading on societies faith in paper based assets. Or it simply represents the movement of vast amounts of "wealth" from one asset class to the other.
Don't worry about the 1st 20% or the last 20 %...
Posted by: tjofpa | Oct 20, 2006 1:28:08 PM
Ok. You gold bugs are nuts.
And here is why:
Gold developed as a store of value and medium of exchange in the ancient world because it was rare, stable, malleable and pretty. But at the end of the day, it is still just bits of metal. The fact that you'd give me 4 cows in exchange for bits of metal is actually pretty laughable. The exchange worked because the bits of metal could be then transferred to others and so on. As long as the entire population felt it was a store of value, it was. It is as by 'fiat', someone had said that we'll settle all transactions in gold.
Gold also had another property -- its rarity effectively kept a lid on the growth of the money supply.
'Fiat' money is exactly the same as gold -- in that we have all agreed to settle our transactions in it. Where it differs is that the money can be created and destroyed at will. It cannot be traded across borders easily. You can't hide it under your mattress for 500 years. It suffers from a whole array of problems.
BUT -- that doesn't make paper currency worse than gold. Gold's rarity effectively clamps down on money supply growth. This is NOT a good thing. Goldbugs like to site the drop in a dollar's value since the creation of the Fed by something like 90%. Big f--ing deal.
Since the creation of the Fed, world economies have grown exponentially. Standards of living have grown exponentially. Material wealth as measured by an abudance of food, lifespan, intellectual and leisure activities have all advanced. This would NOT have been possible had we been tied down to a slowly increasing gold-linked money supply.
So to you goldbugs -- get over it. Unless the entire world is destabilized as the result of mass calamity and most of the world's governments have failed, we will never, ever, ever, never return to a gold standard.
Posted by: MrBeach | Oct 20, 2006 2:05:19 PM
Mr Beach, I can see that u must have pd for a University Indoctrination, er, I mean Education, as u equate money supply growth w/ wealth creation.
Posted by: tjofpa | Oct 20, 2006 2:19:59 PM
I have an idea, let's graph gold along with the median house price in West LA where I live. Does that mean that houses in West LA are a better store of value? Can't make 'em anymore 'cause there's no open land....
Posted by: Michael Carne | Oct 20, 2006 2:29:22 PM
sounds to me like MrBeach works at the Fed. LOL.
Posted by: lurker | Oct 20, 2006 2:29:40 PM
Gold is just a pretty industrial and commercial metal that still has a cultlike following who hold an emotional attachment to conditions unseen for generations.
Everybody drives. Everybody heats or uses electricty. How about a chart covering BTUs per Dow?
Posted by: Robert Cote | Oct 20, 2006 2:55:01 PM
Mr. Beach:
So printing little pieces of paper generates wealth? I say you present your plan to third world nations. Start with Zimbabwe, since they seem to be willing to test out such a strategy.
Posted by: KingofNewport | Oct 20, 2006 3:17:54 PM
It is precisely the passing of those generations that causes the "Faith Cycle" to occur. Those who survived the 1930's would never have pulled "equity" out of their homes for anything but the direst circumstances. It seems the generation of today has faith in their bankers => at least "faith" that inflation will continue to drive the "value' of their homes ever higher.
Posted by: tjofpa | Oct 20, 2006 3:36:52 PM
"No, you can't walk into a car dealer and buy a car with it."
So in other words, you can't buy a car with gold, but you can buy gold with a fiat? I'm so confused.
Posted by: John | Oct 20, 2006 3:58:19 PM
It is outside the scope of the comments on Barry's blog for me to detail the history and problems with a gold standard. So allow me to suggest an excellent book:
The Power of Gold, History of an Obsession by Peter Bernstein
Addressing one of the points: Actually, on the surface, it is a lot worse than owning bits of paper. Most wealth is now represented as bits on spinning hard drives.
What this demonstrates is that our store of value is really only one thing: confidence. Zimbabwe's government does not inspire confidence. Neither did Argentina a few years ago. So the relative value of their currency dropped like a rock.
What goldbugs seem to ignore is that the gold standard was built on the same confidence: on the belief that bits of shiny metal could be traded for food, shelter, etc.
If you are so disillusioned with your 'paper fiat money', I'd be happy to take it off your hands.
Posted by: MrBeach | Oct 20, 2006 5:04:44 PM
Mr Beach is correct. The reason gold was an ideal store of vale in the ancient world was that in was not as readily available to the common man. Gold was not a surface metal that could easily be picked up by a commoner. It required someone who had established wealth and power to be able to gather an organization and industrialization powerful enough to excavated it smelt it to its purest form possible, store it and distribute it.
The power and wealth was already established before the gold was extracted from the ground. The gold was only a physical representation of that power.
If people do some research into economics systems used through the ages they will realize that gold is not the currency of last resort. Barter is. It was in effect long before written history was established. The inefficiency of barter was its downfall. Value could not be accurately fixed to an object and peoples opinions of value varied wildly. Not a way to make a steady living. Measurements were also substandard when objects were equated to how many hands high a horse was. Try ordering a 20 hand high horse form a midget. You may not get what you expect.
There was a need to have a fixed system of value. Before gold it was craft items. Objects that required a lot of skill and labor to develop. That is why people were often buried with tools and crafts. They were physical representations of labor and time. If you had in your possession a set of finely crafted beads and axes you showed that you were very skilled or had enough power to have obtained that quality of goods.
In fact that kind of monetary system was inexistence all the way up to the 1600s. Native Americans in New England found greater value in the quality of the beads and crafts of Europeans than thy did in the silver they tried to trade with. Reason being is that There was already an established monetary policy in effect amongst the tribes of the Eastern Americas. A group of Manhattan\New Jersey tribes had developed an economy on the transaction of sand dollars off the coast. Since they were the only producers of these goods and the demand was so high the native tribes of Eastern America began to use them as a defacto money supply. Those tribes that produced the sand dollars actively regulated monetary policy long before Europeans arrived with silver and gold systems. So powerful where these native monetary systems to the original Americans that eventually European colonists started to favor the native systems over silver and gold currency because the bead and trinket system was so influential in their day to day lives.
Gold has it’s place as a store of value but it is not any more accurate a store of value as fiat currency, sand dollars, or virtual credits. Value is what you make of it and everyone has their own opinion of value. After all on a deserted island who has more stored value. The man who controls the pile of coconuts or the man who controls the pile of gold? How many gold bars is one coconut work to a starving man?
Posted by: anderl | Oct 20, 2006 5:24:20 PM
What is needed is unversal concensus on a currency against which all else can be measured, forever. Said currency should be finite, fungible, immutable, and all those other ibbles that translate to "only this much of it, never more, never less, can't change, all alike, can't be created nor destroyed, counterfeited, or copied."
Absent that, everything is relative and subject to interpretation -- house of Jello built on sand. Which is why so much of these "market statistics" seem like "sports statistics" to me. Interesting, fun even, but of what use (beyond faking out the competition)?
Seems we've found ourselves back in the Zero Sum Game argument again.
Have a nice weekend, everyone!
Posted by: Jim Bergsten | Oct 20, 2006 5:32:00 PM
This discussion began by making a very straightforward point -- essentially a simple and uncluttered comparison of the recent performances between the DOW and gold as investment classes. And the chart shows beyond refute that gold has been the better choice for the past six years.
Why, then, do some folks, such as MrBeach, interject spurious and unrelated elements such as the shortcomings of monetary systems based on a gold standard? This adds absolutely nothing of value regarding the fact that gold has been the better asset for the past 6 years, with that trend looking likely to continue.
When he's done wasting our time regarding the failed workings of monetary systems based on a gold standard, will he at least be consistent enough to waste our time with the matching observation that a monetary system based on a DOW standard is bogus, too?
Why are these folks always so inexplicably one-sided with their unwarranted and ill-conceived pot-shots against gold? Is it because a very small subset of people who invest in gold are certifiably nutty? Well here's a newsflash... for each and every certifiable nutter who owns gold, there are probably 100 who don't own a gram. Look at folks like Charles Manson. I'll bet he didn't have a single gold coin tucked away anywhere. By an extension of that tired old logic, I guess this makes all the paper-minded folks of the world some sort of homicidal lunatics. Is MrBeach to be counted among their ranks?
Posted by: Randy Strauss | Oct 20, 2006 5:44:44 PM
My father and his mother were on the last civilian train out of Poland in 1944, so I have a good deal of sympathy for the idea that you should always have a roll of small, easily-concealed gold coins with which to flee if need be.
What that roll of coins has to do with your stock certificates eludes me.
Posted by: wcw | Oct 20, 2006 5:50:15 PM
Yes, we're on a deserted island, except instead of the coconuts falling from the tree, we have appointed one special person to climb the tree and throw the coconuts to his buddies. Then the rest of us get the remnants. We have created "first user" privledge.
Posted by: tjofpa | Oct 20, 2006 6:00:20 PM
Randy Strauss does have a point. We can argue all day long about gold being regarded as a currency reserve, tradable assest, or not.
But all that arguing won't post any profits to your account.
Gold has been on a upward trend for the last few years even with the recent correction. With regards to the long term technicals, it looks to keep going that way.
Posted by: Junebug | Oct 20, 2006 6:09:29 PM
Anderl wins "best post in thread" award imo.
If history is written by the victors, i suppose it's safe to say that they also get to create the dominant fiat monetary systems. Wampum, Confederate dollars, Rubles, notched sticks of wood......Da Benjamins? This too shall pass....
Posted by: brion | Oct 20, 2006 7:10:32 PM
