50 Year Returns Higher for Gold Than The Dow Jones Industrial Average?

March 18, 2009

As of the close yesterday (and actually before then), the 50 year returns for holding physical gold are much higher than the 50 year returns for the Dow Jones Industrial Average. This is not a joke and has serious implications for any investor that is actually trying to turn a profit in this environment.

WARNING: The following analysis will not be seen on CNBC or Bloomberg and may cause headaches and chest pain.

Below is a table showing the 50 year returns for gold versus the Dow:

Now, these are not inflation-adjusted returns and these returns assume that you were nimble enough to jump in and out of companies as they entered and left the Dow Jones Industrial Index (before index investing became available) and ignores the tax consequences of such maneuvers. This point is made to counter those who argue the dividend yield may have been 4% or such nonsense (which still wouldn't even come close to beating gold as the table clearly shows).

So, why isn't this being broadcast on the daily news to make sure everyone has the information they need to make informed investment decisions? Gold seems to be as hated as Bernie Madoff by mainstream financial analysts. The theory is that gold has no growth prospects and no dividends. But if these things are important, why has gold outperformed stocks over the past 50 years? Hmmm. It would certainly seem that it isn't the bias of this author choosing too short of a time horizon to suit the needs of an article, although this is what mainstream analysts do when they look at gold from its peak in 1980 until now.

The theory espoused by many of these so-called analysts is that gold peaked at $850-$875/ounce in 1980 and it took 27-28 years to get back above this high. Of course, the same thing will be true in another 10-20 years when we look at U.S. stocks from their 2000 peak but no one could possibly be that bearish unless they were a freak or unpatriotic. If you want proof of how this is our pending reality, ask Japanese domestic stock investors what the past 28 years have felt like, since their stock market is at the same level it was at 28 years ago. That's right, there has been no net change in the value of the Nikkei stock index since 1981.

By the way, in terms of U.S. history, the 1929 peak in general stocks was not breached until 36 years later. The 1966 stock market peak was not breached in a meaningful way until 16 years later. These facts are conveniently omitted by mainstream analysts who disparage gold because of a 20 year bear market.

If the stock data presented above doesn't make you mad as hell and open your eyes wide with disbelief, then congratulations - you must already be informed about gold. But the past is the past, so how is this information useful for the future? Simple. The Dow to Gold ratio (the price of the Dow Jones Industrial Average divided by the price of one ounce of gold) will reach one before this secular (i.e. measured in decades) bear market in general stocks is over, meaning that the price of one ounce of gold will be equal to the Dow Jones Industrial Average "price" at some time in the future. I actually expect that we are headed a ratio less than one, but one is a reasonable, conservative target.

We have reached the 1-2 level in this ratio twice in the last century, both during the 1930s and in 1980. In other words, this ratio is valid in both inflationary secular bear markets and deflationary secular bear markets. With deflation, the stock market drops a lot and the price of gold rises moderately, while with heavy inflation, the stock market treads water in nominal terms while gold rockets higher.

Currently, the ratio is around 7 at the time I am writing this, which means stocks have further to fall and gold has further to rise. It is not too late to buy physical gold and ride the gold bull, as the most spectacular gains lie ahead of us in the current gold bull market, not behind us. For those who like to speculate, well-managed gold miners will leverage the price of gold for even greater gains.

Currently, gold and the gold stocks are in the midst of a correction that should end in the next week or two before another launch higher. Gold under $900/ounce reflects a tremendous value in a monetary storm and should be purchased for insurance as well as potential speculative gains. Most seasoned wealth managers recommend at least a 5-15% portfolio allocation for physical gold. This bear market in general equities and real estate is not over by a long shot and gold will weather the storm well, as it has for thousands of years. It is gold's turn to shine and the general stock market bulls' turn to whine.


Please visit my blog for additional information on gold and the general markets.



Adam Brochert

March 18, 2009

A one-ounce gold nugget is rarer than a five-carat diamond.