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!

20061020

Source:  Chart of the Day

Category: Commodities, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

66 Responses to “Dow / Gold”

  1. wcw says:

    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.

  2. Mike says:

    “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.

  3. S says:

    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.

  4. Randy Strauss says:

    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

  5. jjr says:

    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.

  6. Bob_in_ma says:

    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%. ;-)

  7. V L says:

    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

  8. V L says:

    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

  9. tjofpa says:

    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 %…

  10. MrBeach says:

    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.

  11. tjofpa says:

    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.

  12. Michael Carne says:

    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….

  13. lurker says:

    sounds to me like MrBeach works at the Fed. LOL.

  14. Robert Cote says:

    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?

  15. KingofNewport says:

    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.

  16. tjofpa says:

    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.

  17. John says:

    “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.

  18. MrBeach says:

    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.

  19. anderl says:

    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?

  20. Jim Bergsten says:

    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!

  21. Randy Strauss says:

    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?

  22. wcw says:

    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.

  23. tjofpa says:

    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.

  24. Junebug says:

    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.

  25. brion says:

    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….

  26. kingofnewport says:

    Mr. Beach:

    Pieces of paper or bits on the computer — it’s your choice. They are merely money substitutes. The real question is: does printing paper money (or creating computer bits) reduce the scarcity of resources in society? It should be pretty clear: there’s no direct relationship between printing money and reducing scarcity.

    Is there an indirect relationship? I welcome any attempt to justify one but I don’t think you have much hope. I wouldn’t advocate a “gold standard” — I would advocate a free market in the production of money, so I need not fear an obsession with gold. Let the market decide value and medium of exchange.

    As far as it relates to the blog post, why does the market appear to still like gold if paper is far superior?

  27. MrBeach says:

    Anderl — thanks for the thoughtful message. I have been curious about the usage of manufactured items (beads, pottery) as monetary store in older times. Do you have any books to recommend about money between Native Americans?

    Randy Strauss: Owning gold vs. believing in its faith as the monetary standard of mankind are clearly different. But it doesn’t take much perusing of goldbug sites to recognize that charts demonstrating the purchasing power of an oz of gold are the baseline for the next statement demonstrating gold’s superiority as a store of wealth.

    As for wasting your collective time. Puhleaze — this is the Internet. If the worst waste of your time today was reading the comments section of Barry’s blog, you’re doing okay. I’m personally upset at the sleeping kitten videos on youtube. Those posters are really wasting my time.

    Gold as an asset class: Sure. The ticker does not lie. Apparently there have some rumors about the Chinese Central Bank diversifying? There are clearly fears about further drops in the dollar.

    Market based monetary systems: We have them. Global forex markets and hedge funds are doing continuous 24/7 arbitrage.

  28. Aaron says:

    As I read the comments, the thought struck, what would give me bargaining power post nuclear or pandemic holocost? Probably gold. But I’m stocking up Raman noodles too.

  29. anderl says:

    Mr. Beach, some links for you…

    A good amount of free information at these two sites…

    http://szabo.best.vwh.net/shell.html
    http://www.exeter.ac.uk/~RDavies/arian/llyfr.html
    http://www.ex.ac.uk/~RDavies/arian/northamerica.html

    Most of Ludwig von Mises’s work. You can find is on mises.org. Focuses on Austrian Economics. Not exactly Native American money systems but I think you might find some of it interesting. Be forewarned that they do not take kindly to present day policies.
    http://www.mises.org/web/2692

  30. brion says:

    Top Ramen. Mrs. Smith (& Wesson heh) & Jim Beam baby!

  31. donna says:

    OK, I’m going to print some paper and see how well that works out for me!

    Ya know, there’s gotta be somethin’ there to back the money, and right now, there ain’t, people….

  32. ryan says:

    Interesting that this post is right after the critique of the WSJ position “sure actual defense spending is up a lot but as a percent of GDP it’s not all that bad.”
    So, now this post is “sure the Dow is up a lot, but when compared to gold it’s not all that good.”
    seems pretty similar to me.

  33. Eclectic says:

    Donna… it’s power you’re referring to.

    Fiat money is backed by power, and to the extent it is, that backing is as good as if it were backed by gold or any other semi-scarce commodity.

    I’ll tell you why, but it’s partly a philosophical answer. The first concept that you must accept is that money is the abstract representation of labor, either physical or intellectual.

    All money = labor.

    -Money is the coercive or compelling force that ordinarily facilitates the cooperative exchanges of goods or services in any combination, because l-a-b-o-r is its vehicle of execution.

    By saying ‘force’ I don’t mean a kinetic force in the sense of physics, but rather a metaphysical force; money is an intangible thing. Yes, it is true that commodities are tangible, but only when used or consumed. In every sense that commodities are used as money currency, they become an intangible force… a coercive or compelling force. To be sure, fiat money can never be used exclusively as one might use real commodity money, except purely as a pittance (I suppose you could pile some up and burn it for heat, but it would bear no relationship to its monetary equivalent value).

    I’ll repeat some items I’ve posted here on other related topics and add some more as well for clarification and reference:

    -Power, in the sense of being a controlling influence, is a greatly dissimilar and more efficient force that is yet a further abstraction of money and drives money’s uncooperative exchanges. In this sense the relationship of money to power is analogous to the relationship of matter to energy. In each of these relationships, the two elements are both expressions of the same philosophical entity (of course, the same physical entity in the case of matter and energy).

    -The conventional nominal money used in modern societies is for the most part fiat money, and it exists in its static condition entirely as a derived element of power. Fiat money therefore derives its value from its representation of power, not from some other representational value marked-to-market against other commodities that have real value independent of power. Gold, silver, corn and many other commodities used as money do not require power to have value, either real or monetary. Fiat money must be supported with power in order to have any monetary value. It can have no real intrinsic value beyond the mere pittance of its compositional material cost.

    -All economic exchanges that utilize fiat money impart to the value of the exchanges some proportional quantity of power that necessarily must be greater than zero. It is commonly assumed that every exchange of fiat money must involve some element of trust. This is an erroneous assumption. Placing trust in real commodity money, though it fluctuates in marked-to-market value against other commodities, is rational; placing trust in fiat money is irrational, if only understood subconsciously. Trust is not the power element of fiat money.

    Instead, the power element is Monetary Obedience. This obedience exists as the point of equilibrium established between two needs; the very rational need to conduct all economic exchanges that only fiat monetary obedience can facilitate, versus the ordinary human philosophical need to nullify an irrational concept.

    When the associated power of the issuing authority of fiat money is high (it’s never in the world before been higher than that expressed currently by the United States), then monetary obedience tends to be high. If associated power declines slowly (Victorian Great Britain), monetary obedience will still tend to remain relatively high. But, if associated power drops low enough (Weimar Republic and in a similar fashion the Soviet Union), then the need to nullify an irrational concept will increase until it rises from the subconscious to the conscious and begins to cause significant changes in the equilibrium of monetary obedience. The equilibrium can ultimately change sufficiently so that fiat money marginally ceases to exist and all cooperative and uncooperative exchanges shift marginally to barter.

  34. my1ambition says:

    None of this refutes the fact that Gold has and shall remain the only true international currency that is traded and excepted the world over, regardless of economic strength or geopolitical stability.

    As for the argument: Economies change, gold hasen’t.

  35. tjofpa says:

    Yes, the external projection of power, one country over another, gives fiat currency its RELATIVE value. But it Is the internal power, the state over its subjects, that gives fiat its only “INTRINSIC” value. And that is the power to extract TAXES.

    Who would have exchanged their goods for TALLY STICKS during the crusades if they had not needed to produce some at tax time or face harse punishment?

  36. Eclectic says:

    my1,

    You make very good point, but let’s look deeper.

    Many currencies are universally accepted internationally and traded daily:

    -oil and its byproducts
    -wheat, corn and other food commodities
    -lumber, non-precious ores and other non-foods
    -semi-precious ores like iron ore, coal, talc and even gravel… even bulk cardboard, fiberboard and wood pulp.

    You may reply that those items are not so easily divisible as money, and you would be correct… but what if you’re out of gas on the perimeter in Atlanta on a Sunday?… Could you stop and buy gasoline with gold?… Would they accept it, and, even if they would, would you use it that way?

    Suppose you would use it, and it were to be quickly and easily accepted… who would have the greatest cost of then rendering that payment in like manner forward?… Would it be the receiver of gold or of fiat dollars?

    Fiat money as an exchange mechanism of currency money is superior in every way to the use of gold or other precious metals or stones… except in one way.

    That way is that gold will always have ‘some’ value when fiat at some time may have zero value, but even that value of gold may be so widely variable over time that gold’s royal reputation as a storehouse of value might not glitter so much.

    I think the only true universally accepted and traded currency today… is t-h-e true currency that all money is an abstract form of, and that is l-a-b-o-r.

    All currencies, whether gold, Yen, Dollars or non-gold commodities will follow labor and become denominated within the price of labor: wages.

    I’ll illustrate these points with a parable of my own construction:

    Assume there are these 3 men, and they only possess whatever is described along with them, and that they represent all of humanity.

    You must make these assumptions:

    All men are fair and honest. Nobody has money (any form of currency), except for gold and only one man has gold.

    Man 1 has a hungry family to feed and will do any work necessary to feed them. Let’s name him, Labor.

    Man 2 has all the mechanical equipment, food and other stores and resources he needs, but doesn’t have any family or workers to run his operations. He can’t even feed himself without workers. His name is, Capital.

    Man 3 only has sacks filled with gold (the representative currency) but no other resource and no other family or associates. His name is, Wealth.

    This is what will happen to begin with:

    Labor will work for Capital at fair wages (the wage being a bartered exchange of work for resources) and derive the economic benefit of operations (production of food, clothing, etc.) for all 3 men, and…

    Capital will be fed and his other needs attended to by temporarily depleting his productive resources in the form of bartered wages, and…

    Wealth will be fed and his other needs attended to by exchanging his gold at very high rates for food and services (maybe, say… a big, big nugget for a slice of bread from Capital, or another big nugget for a haircut from Labor or his family… etc., all to begin with of course).

    But then it changes:
    (you’ll ultimately see what it changes to as the punchline of this parable begins to unfold to you)

    Once Capital has been fed sufficiently, he will increase the exchange rates, versus Labor’s bartered wages, for food, clothing, etc. Labor will now work longer for the same exchange of goods and services as before.

    Labor, who used to work for Capital (at fair bartered wages for himself) and for Wealth (at favorable wages for himself in gold) will now do the same work for Capital at less fair bartered wages to himself, and he will do the same work for Wealth at less fair exchange rates to himself in gold. Labor’s wages in either case will decline.

    Finally: (unless there is political upheaval)

    Capital will have all the gold (and all currency) because of all the food, clothing, etc. he’s sold to Labor for low wage exchange rates or high gold exchange rates, and because he’s sold the same to Wealth, also for high gold exchange rates.

    Capital’s ultimate replenishment of the resources he’s bartered away will actually come from the very productivity of Labor he’s bartered against, and, subsequently, it will come from Labor’s family as well, and that magnified economic power will allow Capital to take possession of all the gold (all currency), no matter the exchange rates of gold for goods or services.

    Now, from everything I’ve written, you should realize that the 3 men I’ve discussed here are represented by their actual metaphorical names and in this fashion:

    Capital – and he is rapidly moving to China and other points in the Third World, where…

    Labor – and his (new) family represent a near-bottomless pit of productivity just waiting for the taking, and…

    Wealth – (of the US and the West) can do nothing but watch as his storehouse of gold (and currency) departs for the newly developing economies of the Third World.

  37. DavidB says:

    Gold hasn’t been real currency since FDR, and today is consumed mostly in the form of jewelry.

    What you fail to understand about that myth is that most jewelry that is not bought in North America is not bought on the basis of esthetics but on the basis of gold weight. The reason for this is because most developing countries, until recently, have outlawed the owning of gold in monetary forms because it was empowering to the people and threatening to the state financial systems.

    The only way the Mr. and Mrs. developing world could store wealth was in the form of jewelry hung around their necks.

    One of the main reasons gold has moved up and will continue to move up(until average North Americans ‘get it’ and are, once again the last ones on the bandwagon) is because China has just recently allowed their 1+ billion citizens to own and trade gold again. And the Chinese absolutely LOVE their gold!

    As for why gold has value it is very simple:

    Take 200K worth of:

    cars
    houses
    gold
    wheat
    paper money
    iron

    Wait 100 years and what do you have

    dust
    dust(though you still have some land)
    gold
    dust
    dust(or useless paper)
    rust (or possibly iron)

    Sure you can have 200K of iron but where would you put it? In the closet?

    You can make an effort to preserve all the above items but the cost would not be worth the effort. You might argue the house but with today’s building standards I doubt it.

    That is not the same with gold. I have heard that only the power of the sun can destroy your gold. It may not hold up exceedingly well in today’s economic environment(and the reason why is a BIG argument for another day) but you can be reasonably sure that if you were to acquire it today with the stipulation that your great, great, great grandson were to have it(all other things being equal), he would get it in the exact same form you are getting it today. There is no longer any ‘work’ involved to preserve it’s ‘value’

    Ironically, the only reason it is so expensive to store gold is because everyone in the world is aware that it has value and they are willing to risk personal injury to get it.

  38. Eclectic says:

    Gold:

    You have to buy it and then store it… protect it… insure it… assay it (more than once)… divide it… negotiate it… transport it (probably more than once)… remember where it is and locate it… recover it… (and possibly repeat all these steps again and again) and if you’ve got the slightest sense of survivalism that you placate somehow by owning gold bullion, then you have one other tiny problem…

    …you have to manage to be in perfect contact with it and in possession of it at a-l-l times, particularly at that one magical moment that you’ll need it for survival.

    If you’re on a Carnival Cruise in the middle of the Gulf of Mexico and the world flips upside down… it won’t do you much good to have your back yard in Topeka buried full of paint cans with gold coins in them.

  39. DavidB says:

    You have to buy it and then store it… protect it… insure it… assay it (more than once)… divide it… negotiate it… transport it (probably more than once)… remember where it is and locate it… recover it… (and possibly repeat all these steps again and again)

    Good thing you don’t have to do that with any other asset huh?….especially the tangible ones. Based on your argument people shouldn’t own homes

    If you’re on a Carnival Cruise in the middle of the Gulf of Mexico and the world flips upside down… it won’t do you much good to have your back yard in Topeka buried full of paint cans with gold coins in them.

    Do you have to do that with insurance policies too?

    You need to learn to put more of it around your wife’s neck(diamonds are good too). Not only will you always have some of your wealth with you but you’ll probably get some more often. It’s called synergy

    The one thing you don’t have to do with gold is manage it just to keep you at par with the world. Maybe that’s why the financial world hates it so much. It eliminates a lot of trading fees. The problem with the money system is that a certain amount of people will be guaranteed to be cut out of it. Those who cannot manage money(and not everyone can) will always be forced to the bottom of the financial food chain. A sort of guaranteed financial underclass.

    Because the system is like a walking race where you have to perform above inflation just to keep your finances at par there are going to be more people going under than what a stable money system would dictate. That keeps prices down and profits up for those who are able to excel at this current system.

    Coincidently those who excel at this system built this system(and perpetuate it), thus the blood is on their hands

  40. Eclectic says:

    I certainly can’t argue with your best points (and those of others) about gold.

    My only position on gold is that it’s not a very good money currency. When mankind specialized his labor, industrialized and urbanized, gold lost its former excellent utility as a monetary exchange.

    In every other way it may still be an excellent storehouse of value.

    –Eclectic out–

  41. ari5000 says:

    Gold is poor currency because it’s hard to transport / exchange. But it’s good at insuring value. That’s why the dollar was always a ‘gold certificate’ — always exchangeable for gold.

    Fiat currency works extremely well as long as governments don’t take advantage of the system and

    1) run up huge debts,
    2) print large amounts of the paper to pay bills
    3) ignore slowing growth in the economy which will inevitably make paying back those debts difficult, if not impossible
    4) allow inflation to destroy purchasing power

    Under what circumstance could gold’s value plummet by 50% or more tomorrow? I can not think of a single event except obvious manipulation and the price cut wouldn’t last more than a day.

    Under what circumstance could the dollar’s value plummet precipitously tomorrow? Well — China or Japan could start selling their $3 trillion in T-bonds and stop buying more. The US could default on the $8.6 trillion national debt which is increasing each day. Raising the debt ceiling every two years is hardly a viable solution to the problem.

    Gold, I feel, is for realists (dubbed pessimistics by the rest of the world. It is for atheists and skeptics.

    The US dollar is for optimistics. It is inherently — now that it is backed by nothing — by faith. As long as there are strongly religious people, true believers, and optimists the dollar will stay strong. But faith — true faith — is required, unlike gold.

    If everyone in the world hated gold — it would still hold its value for the most part.

    If everyone starts to hate the US dollar — our society is doomed.

    I think that’s why the goldbugs will never in a million years be swayed from their opinions.

  42. Eclectic says:

    “I can not think of a single event except obvious manipulation and the price cut wouldn’t last more than a day.”

    Looks like a pretty long couple of days:

    http://goldprice.org/gold-price-history.html#6_month_gold_price

    http://goldprice.org/30-year-gold-price-history.html

    Were you buying gold in 1981-1982?

    What would have been different (or was different) about your opinion of gold in 1981-1982?

  43. Eclectic says:

    Jim Bergsten,

    Quoting you:

    “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.’ ”
    – end quote

    That is a program for an economic catastrophe.

    Think of the economy as being similar to a ball game held in a stadium. There are only 50,000 tickets and each ticket entitles the participant to one attendance only. That’s fine for the attendance to one game, but what about the rest of humanity?

    Should that attendance instead be related in a similar way to: the opportunity to participate in a job, raise a family, purchase a house or a car… or groceries, and should the population be considered to grow (as it does), then the absolute finite supply of 50,000 tickets are not enough to facilitate everyone being able to play the game.

    You’ve spoken to the very reason that fiat was detached from the gold or silver standard. It’s because those commodities do not increase in tangible volume at a rate equivalent to the growth of population and the economy.

    You see… that theoretical and finite currency you propose, regardless of what it would be, could n-o-t be subdivided in a manner capable of yielding a functional money supply. There wouldn’t be enough of it and the economy would grind to a halt.

    The economy that used such a money would persist in a permanent state of depression.

    You’re confusing the very rational desire to maintain relative stability in the purchasing power of a currency with the irrational desire to keep its quantity finite. The first can be accomplished without the requirement for the second.

    Too, I have said here before and will repeat: the real core monetary exchange mechanism of mankind is l-a-b-o-r, not any commodity money or non-commodity money currencies used anywhere.

    With your criteria met, labor outside the stadium would not pick up a shovel… would not provide dental treatments… would not provide police protection, groceries or postage stamps. There’d be no currency to facilitate the exchange of the labor involved in those goods and services. The only mechanism that could exist would be the use of barter, and bartering, although useful and important, is an imperfect tool for macroeconomic health.

  44. my1ambition says:

    We are not advocating Gold as a necessary currency, but as a hedge for inflation when inevitable.

  45. Eclectic says:

    Gold is an inflation minimizer… and a deflation magnifier.

  46. bob says:

    Instead of Dow/Gold chart you can plot just Dow/inflation_adjusted_dollars.

    It will be pretty much the same chart. We are 6 years in secular bear market. Another 10-12 years to go.

  47. alexd says:

    It seems to me that all currency is fiat. Gold is close to it. In the sense that value is an agreed on thing between the parties involved in a transaction.Or we hear that something went for a certain price and we think that if it is in our control that we can figure out it’s worth to us based on that market quote.

    I think work and utility is the true basis for worth.

    Not saying that fiat is not the way it is but just looking at things. The concept of currency value being set buy the power of those backing it is interesting.

    There is a dome of a state capital in the midwest that was made of aluminum because at the time of it’s creation it was difficult to make it and it was worth more than gold. Been trying to sell them my old lawn furniture but they caught onto the situation long ago.

  48. DavidB says:

    Fiat money per se is not the problem.

    How it is created and who controls it is where all the problems stem from. A gold standard would take that control away from those people. That is another reason why the financial system hates it and gold advocates want it

  49. samuel says:

    Gold is money outside the financial system and there has been a market for gold for 5,000 years. So it is a valuable hedge against extreme events. It is decentralized money that is not dependent on a central government to give it its value.

  50. tjofpa says:

    Ah yes, DavidB. U refer to the “Skimming Game”.

  51. Eclectic says:

    A few comments:

    On Alexd:

    “It seems to me that all currency is fiat. Gold is close to it. In the sense that value is an agreed on thing between the parties involved in a transaction.”

    …the fiat element you speak to is p-o-w-e-r in the case of gold and monetary obedience in the case of fiat paper currency, and to the extent that there are erroneous value assumptions by parties to transactions using either form of money (even if both parties are innocent of the error), then mankinds’ philosophical approach to infinity in human productivity is hampered.

    -because- then you say:

    “I think work and utility is the true basis for worth.”

    That is correct, but it’s only half of wealth creation. The engine of true wealth creation is human productivity which obviates labor and thus the monetary exchange that is its execution. I know this is very philosophical, but the limit of productivity gains is philosophical infinity in human productivity, where all wealth is stored as the subtotals of pure intellect and inherent commodities. At that point, all money exchange value is obviated.

    The real objective of all human economic endeavors is: ‘the reduction of costs marginally toward zero’ even if this objective is only understood subconsciously.

    Mankind misconceptualizes this objective to be the ‘attainment of philosophically infinite riches via profiting from economic exchanges.’ However, profit, in its commonly accepted definition can not exist without the misallocation of economic resources, because it hampers the marginal approach to philosophical infinity in human productivity.

    “There is a dome of a state capital in the midwest that was made of aluminum because at the time of it’s creation it was difficult to make it and it was worth more than gold.”

    I think I remember that story. At one time aluminum ingots were under consideration as being a storehouse of money in the manner of gold. Strange that man would conceive of such a form of money, when aluminum is the most abundant element on earth (I think). It wasn’t the scarcity of aluminum that fooled them to that extent… it was the incredible cost of providing the electrical power to smelt it.

    On comments of others:

    Samuel:

    Gold is not out of the financial system. Neither are corn, wheat, beans, lumber, hogs, pulp. You are free today to do one thing only that you couldn’t do when U.S. citizens were prevented from holding bullion; today you can take a lump of gold, some wheat or a couple of hogs on a leash down to get your Starbuck’s in the morning and try to negotiate their acceptance.

    DavidB:

    Are you an advocate of returning to the gold standard for U.S. currency?

    If so, can you tell me what you would do as a central banker if the economy moved into a recession and the cause was clearly known to be ‘for lack of circulating money supply?’

  52. silver_n_gold says:

    It doesn’t matter if some people on this board don’t appreciate precious metals.

    There are *plenty* of people in the world who view precious metals as the safest store of value. It’s always been that way.

    God created gold: it’s attractive and rare. Don’t like it? Enjoy your race against the printing press–it never sleeps.

  53. my1ambition says:

    Electic:
    It would appear that as of right now the interest for the Gold Standard would diminish the possibilty for a recession in real terms and bring the economy back to a state of its intrinsic value. True, it doesn’t HAVE to be gold, but the Standard does advocate the concept.

    In addition, it seems that many problems our nation faced was because of the timing of the Gold standard not the standard itself.

    Nevertheless, Gold remains the only thing that rich men have held onto in times of utter uncertainty, like when the P-O-W-E-R of the money is being transfered from one nation to another.

  54. tjofpa says:

    There wouldn’t be any “central bankers” under a Gold Standard. You’re missing the point entirely.

    Speculative excesses are wiped out and the economy contracts during a recession. Then begins to strengthen again from a stonger base. The whole process averaged 18 months during the 19th century.
    With no decade long depressions and no CBs.

  55. Eclectic says:

    Well, you both make some good points… but whether you could convince me that a gold standard would again be useful or not, there’s one thing for sure.

    No economy on earth will ever impose one again. Those days are gone forever with the passing of the 18th century, and mostly before it was over.

    But good luck with your gold holdings. I have no opinion of gold purely as an investment.

  56. tjofpa says:

    Sorry, but I must again take issue.

    Today’s “John Law Society” will be replaced with a hard money system. But only after the general populace suffers severe pain will they “storm the Bastille”.

    …of course only time will tell. (that’s 19th C)

    P.S. I understand that it is pointless to try and convince the machines that the matrix exists. :)

  57. my1ambition says:

    Eclectic:

    Please tell us. What ARE you investing in nowadays? The Dow 12,000? The Housing Bubble? Bonds? Commodities? Chinese Travel Agents?

    What are we missing?

  58. ramrod says:

    Quite a complement to have one’s comments removed by a liberal evangelising the eternal salvation of the gold standard!

    And it is so telling to hear a gold-bug ranting about speculative excess while preaching that speculation in precious metals is the road to riches.

    As for the guy who wants to wear his wealth around his wife’s neck so as to have it close by in the event of economic disaster… well, if it gets that bad something tells me some person educated with the doctrine of Darwin and devoid of morality will be ever so thankful to take that necklace, if not the head that secures it.

    Mr. Censor, the scissors, please!

  59. notagoildbug says:

    Most of the posts here have missed the point of the DOW/gold ratio. Whether gold is the only true money or not is missing the point. The point of this chart is to compare the performance tow different asset classes, stocks to commodities. The chart clearly shows the price increase in the gold has been than the return of the DOW over the last 6 years. Other commodities could have been used to compare their price gain against the DOW such as oil, copper, orange juice or the CRB index. These commodities would have produced similar results. Other useful comparisons are DOW to the other investment classes of Bonds and the U.S. Dollar.

  60. wj says:

    If you want to get a real handle on what inflation has been over time, use the same method that economists use to fetermine what the “real” exchange rate between currencies: Purchasing Power Parity. First, pick a basket of goods and services. (For a minimalist example, see The Economist’s Big Mac index.) Price it in current dollars. Then check the prices fo the same basket of goods and services at some time in the past. Use the ratio to determine the exchange reate between past and current dollars — i.e. inflation.

    Money, after all, is simply a way of avoiding the trouble of hauling around whatever you produce to barter for whatever you want from someone else. How much it is “worth” is nothing more than how much someone will give you in exchange for it — operating on the assumption that someone else will give him what he wants for it in the future. That is the real problem with high inflation (or deflation): it makes it hard to figure out how much to charge for the things (or services) you sell, because the things you want to buy keeps changing.

  61. jl says:

    So much irrelevant talk here over a simple chart is fascinating and entertaining, but probably not real educational.

    Set your emotions aside, if you can, and simply ask a pertinent question:

    “What is the chart telling me about the Dow and Gold relationship over the last 28 years?”

    What’s your answer?

  62. average_investor says:

    The DOW/Gold chart is very troubling. Whether you take the Dow, S&P 500, or Nasdaq and plot it against gold or CRB commodity index, the result is the same. Robert Prechter of Elliot Wave International recently did a video newsletter on this. Even if you don’t believe in the major crash and deflation he’s predicting, the stock market index versus commodity correlation can affect you. For example, if you look at the stock market as your retirement savings and the commodity index as the price of goods, it means in order for the ratio to get back to historical norms, the stock market has to drop in value, the commodity index has to rise, or a combination of both. The bottom line is that your retirement savings is losing purchasing power.

  63. TraderBrian says:

    The best true valuation of anything is with REAL money – Thank you! Paper money is nothing more than an idea. Gold is real money and if you look at the real cost of goods, gold is a reliable indicator of the value of things going back to the days of Caesar.

  64. goldhorder says:

    Let’s see it is 2008 now….Is Gold still a dumb investment? LMAO…You US Government worshipers are hillarious! Faith in the leadership of man…or faith in Gold’s 3000 year history as a store of value. Ummmmmm…I think I’ll stick with the Gold. You people are clearly too smart for your own good. Too much schooling…not enough understanding.

  65. M.M. says:

    All “gold bugs” know this, but with the dow/gold ratio passing thru the 50% downside line in late 2007, one can only assume the ratio is going to 1, at least 3. What does that tell you about precious metals and the Dow?

  66. canadiangold says:

    I would love to get my hands on a giant 5 oz krugerrand.