DJIA – Dow Jones Industrial Average (index) pre- and post- Gold
Click for full chart

Source: Peter Williams, Advisor Perspectives


Interesting look at long term Dow but using the Gold Standard as a dividing line.

To be blunt, I am really not sure what to make of it. Was going off of the Gold Standard inevitable, and therefore unimportant? Or was the shift away from Gold the start of an era of great inflation? Or some combination of the two?





Category: Digital Media, Gold & Precious Metals, Inflation, Investing

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.

26 Responses to “A General Theory of Dow Cycles – “History Repeats””

  1. rd says:

    Before the world went off the gold standard, wars were largely fought over physical land (agriculture etc.) and portable wealth in the form of gold and silver. WW I was kind of a transition period as this was the first global war that was really starting to be industrialized, although the US Civil War was a harbinger of it.

    Since the Great Depression, wars have largely been fought over oil and indirect influence, since finance is now a more amorphous thing than just who has the most gold and silver. Since gold is quite portable, easier to store, harder to find, and you don’t use it for fuel it is still a valuable store of wealth as it is something that can be easily converted into just about any currency in the world.

    The past century has seen great inflation in paper wealth but much less inflation when comparing the value of real assets against each other, such as land, gold, and oil. The more debasement of the fiat currency that goes on, the more the value of physical assets rises. However, during periods of turmoil we have seen one global deflation (the Great Depression) and another of global inflation (the 1960s-70s). Individual countries have been rocked by both at various other times (e.g. Weimar Republic in 1920s).

    So the big question is, do we end with a period of deflation and global war like the 1930s or inflation and local country/region turmoil liek in the 1960s-70s? The jury is still out.

  2. b_thunder says:

    I’m sure the GoldBugs will note the “Dow/Gold ratio target 4.0 – 5.0″ in the top right hand corner, meaning either gold’s projected to go to $2800-3500, or Dow to 6400-8000.

  3. Petey Wheatstraw says:

    In a sense, it was a combination of the two.

    Also, in a sense, we went off the gold standard twice — once, in 1936, when gold was confiscated from private interests and relegated to international settlements, and again, in ’71 when Bretton Woods ended and our currency became backed by the etherial “full faith and credit” of the US.

    It is interesting to note that both instances in the change of the status of gold as money were necessary because of the inherent weakness (inflationary tendencies and fractional reserve dishonesties) of printable currencies — backed by gold, or not. I believe the changes in status were panic moves designed to mask those weaknesses. Going forward there isn’t any wiggle room left for fiat currency — we have already gone full retard, so to speak.

    My argument for gold as real and honest money is, and always will be, that Central Banks still hold it. The reason they hold it can only be that they don’t trust their own damned dishonest fiat currencies. If they don’t have full faith in their own scrip, why should anyone else?

    Are we going into another bull market run? Who knows? We certainly haven’t fixed any of the structural or legal problems in our economy. We have never been a situation resembling where we currently find ourselves, so there is no reliable roadmap to follow. Of course, one can always throw in with the criminals, as they seem to be in full control — just don’t be foolish enough to believe that if you go along, that you are a member of the gang.

  4. BenGraham says:

    “It is interesting to note that both instances in the change of the status of gold as money were necessary because of the inherent weakness (inflationary tendencies and fractional reserve dishonesties) of printable currencies — backed by gold, or not.”

    Gold will not be “real money” when the authorities that manipulate can always manipulate. It will always be a pawn, which makes moving to gold ridiculous since it just replaces one evil with a new one. Even when gold was actually money in the 1800′s, it was no panacea- we had deflation, inflation and plenty of epic booms and busts along the way. In other words, it really wasn’t any better, only different. The majority of people prefer the devil they know, the rest are gold bugs preferring the devil we once knew.

  5. Global Eyes says:

    Even the prospect that creditors would demand a physical gold payment was enough to prompt President Nixon to renage on our gold promises. The ongoing Vietnam War made the printing of money a necessity. It was easier to remove the gold promise than to extract 500,000 Americans from halfway around the world. The war was at its height. Inflation became a future reality. LBOs were about to become the next big thing and I was prefecting my best “disco moves”.

  6. PrahaPartizan says:

    The inherent flaw in using the gold standard as the index for all currencies is that the concept presumes a static price in the cost to produce gold with an infinite supply of the product. Neither element exists in the real world. If one has a world in which population does increase, then gold must be produced at some rate to maintain the amount of gold on a per person basis globally, otherwise, the global economy sees a delfationary effect automatically. The same effect occurs if the price of gold production increases because the available sources decline in quality, because a rise in the mine-mouth price of gold automatically causes a decline in the value of currencies. When the gold bugs inform the world how it can maintain gold production prices and per capita availabilty, then they might be worth listening to. Else, they’re just angling for a payoff and should be ignored.

  7. MayorQuimby says:

    Here’s my thought – looking at yesterday’s weather to discern tomorrow’s is not going to work. The USA has structural problems and monetizations have not changed a thing other than the temporary price of paper assets.

    Gold, money – all irrelevant. Ownership of working humans is not.

  8. mad97123 says:

    Going off the gold standard may have been the start of a permanent inflation where we never see historical “value” again – 2009 may have been it.

    On the other hand, a trip down to test the lower channel line would make things very interesting. All that empty space below 5% trend line should act as vacuum, pulling that chart back to trend. Doesn’t seem very likely now that we’re on the QE standard, worldwide.

    If God really is a mathematician maybe he can work with Mr Market to keep things in line, we wouldn’t want a messy chart just because some Central Banksters think they control the universe.

  9. willie says:

    In 1933 the US no longer backed its paper currency with gold, but continued to settle international claims in gold until 1971. The creation of Select Drawing Rights in the Bretton Woods II agreement, allowed governments to settle accounts with paper gold SDRs. This decoupled the US Congress from the real world restraint gold provided against unlimited spending.

    Gold should not be, however, the basis of an economy’s monetary system, unless you believe that an economy should only be allowed to grow at the same rate that gold production increases. The question is: how can Congress be constrained from spending so much that, effectively, it expropriates private economic holdings rather than stimulating private economic production.

  10. bonzo says:

    The gold standard is something of a myth, because countries simply drop off the gold standard any time there is a war or other national emergency that requires inflation. Britain, for example, had plenty of inflation during the Napoleonic wars, followed by deflation afterwards, the US had inflation during the Civil war, then deflation, everyone had inflation during WWI then deflation afterwards for the victors and hyperinflation for the losers. Saying that gold standard prevents inflation when the rulers want inflation, but doesn’t prevent inflation when the rulers do want inflation, is equivalent to saying the gold standard accomplishes nothing.

    Deflation or very low inflation best serves the interests of the rentier class, so whenever the rentier class is powerful, the government will somehow arrange for deflation. That is the situation now in all of the developed world, for example.

    During warfare or other national emergencies, inflation best serves all classes, since it is better to lose a small amount to the inflation tax than to lose everything. Hyperinflation only occurs when the government is weak, such as after losing a war or suffering some other disaster.

    The period of WWII to 1975 was one of those exceptional moments in human history when the proletariat (people who earn a salary, as opposed to owning a business or living off passive investments) actually had power in the developed world. This was because the rich were terrified that the proletariat would go communist, and so were forced to give them a much bigger slice of the pie, and that led to inflation. By 1975, it was clear than communism was a spent force, and so the rich slowly but surely began taking back what they had granted to proletariat during and after WWII. I expect this process to continue, so that we return to the normal state of affairs, with a small class of rich rulers at the top, a ruthless military elite defending the rich, and everyone else pushed down into misery. Since debt is how the rich control the masses, I would expect mostly deflation or low-inflation in the future.

    However, getting from where we are now to the slave state may require a burst of high inflation in order to wipe out the middle class savers in fixed income. Protecting yourself from inflation may be difficult, since CEO fraud may also be legalized, which is a way to wipe out all by insider stockholders. I’m not sure about gold in physical form. However, if fraud by the rich becomes widely legalized, then owning a large amount of gold in physical form will merely be an invitation to trumped up legal charges, unless you have some form of power to defend the gold. Ditto for owning too much real-estate. The path to the slave state is via crony capitalism aka fascism, and in this system the law is a tool used by the rich to defraud the poor.

  11. My view is that the Gold Standard was simply one component of something much bigger: Credit markets. The gold standard was a credit constraint. It was simply a very influential component for a period of decades, just as securitization has been a very influential component of credit markets since its invention.

  12. I see a third phase developing that could put an end to the current secular bear market.

    If Freegold as advocated by blogger Fofoa (and now making inroads in the mainstream) comes to fruition, then we should expect a x20 revaluation of gold in constant USD terms. Sould this event occur, the stock market could start a huge secular leg up.

    So we could see three phases: (a) One stock market under gold standard (b) stock market post gold standard but no freegold; and (c) stock market under freegold and fiat money.

    Fofoa is a must read in order to understand what is likely to happen with gold (and its side effects on bonds and stocks):

    Jim Sinclair is also quietly evolving into accepting free gold tenets.


  13. willid3 says:

    not sure that FIAT currencies are the source of inflation, unless it can be proved that there wasn’t any inflation before we moved off the gold standard. and we do know that the was inflation before we go toff it. i think it was inevitable, but not so sure that it is really the source of inflation. suspect that inflation is caused by the fact that companies have a choice grow, or die. they can’t survive long treading water.

  14. danm says:

    If I want to give a massage in exchange for a haircut, why should there be gold backing this?

    The Gold Standard does not protect us from printing and inflation… One of the many reasons why we got off of it was because there were so may cheats… England was one of them, printing while maintaining the peg.

  15. Angryman1 says:

    The Gold Standard created the the “crisis of capitalism”. We really didn’t ‘grow’ to the gold standard was abolished in 1933.

    US GDP per capita was still below little and decaying Brits(outside the bubble fueled 20′s for a couple of years). Rediculous. A country this size with such pathetic growth. You have to remember, central banks only job is to satisfy the money demand that the market demands. This for people that are “pro-gold” is a bit of a problem. It was what Greenspan meant when he said how his world crashed around him………..who wanted the capital was quite understanding.

    The gold standard did nothing to stop inflation and in the end, caused huge, horrible deflations. This confiscated wealth from the people who don’t have wealth and put it into bankers, politicians and all the people with the savings. This created a huge resentment. Thus socialism was born.

    It was also impossible to install correctly. Fraud and counterfeiting were a huge huge racket. As the Brits would a test too.

  16. Ingolf Eide says:

    The facts seem pretty clear on the inflation question. Based on a long-term composite index put together by Officer and Williamson, in 1812 the CPI was 12.89, in 1912 it had fallen to 9.40 while at the end of last year it stood at 229.59.

    As to whether going off the gold standard was inevitable, it probably was. Not because of any inherent structural flaw but because of politics and, perhaps, human nature. Effective though it is, a true gold standard is pretty unforgiving and the very notion of being subject to its strictures offends an awful lot of people.

  17. Fred C Dobbs says:

    This sort of conjecture is fascinating. If the conditions were the same everywhere during the period under review and we have knowledge of all relevant facts, then the gold standard did/didn’t or going off the gold standard did/didn’t cause this or that. But the conditions were the same, and we don’t have knowledge of all relevant facts. Yet people can’t wait to speculate over how things would have turned out better or worse etc. Why not speculate over how much better we would be if we hadn’t discovered how to make fire or iron or nuclear energy. The possibilities are endless.

  18. [...] A General Theory of Dow Cycles – History Repeats (The Big Picture) [...]

  19. Mattw says:

    I think it would be helpful to abstract out this problem. In particular, was going off gold inevitable, or was it inevitable that we would make bad decisions? Notice how during a crisis period a decision was made that seemed to be good at the time, but over a long period of time started to cause problems. Only in retrospect can we see the problems.

    There is an interesting book about the cycles of history:

    The Fourth Turning: An American Prophecy – What the Cycles of History Tell Us About America’s Next Rendezvous with Destiny (9780767900461): William Strauss, Neil Howe: Books


    First, the next rendezvous with destiny occurs between 2005 and 2025. The authors told us this in 1997 when the book was written. That period represents a 20 year crisis period comparable to 1925 to 1945. The general idea is that as the people alive during the last crisis period die out, then the remaining population becomes susceptible to another crisis about 80 to 100 years after the start of the last crisis period (1925.)

  20. kaleberg says:

    If you look at the last 900 or 1,000 years of European history, you’ll see alternating patterns of inflation and stability. Late medieval economists distinguished two types of price increases: fames, based on local short term shortages, and cares, based on larger and harder to isolate societal trends. Typically, the cares would show up as the rising cost of land rent, flour and firewood, while the prices of labor and manufactured goods would fall. During most of this time, Europe was on a gold standard, so we know a gold standard cannot maintain a stable economy over any long period. According to Hackett-Fisher’s The Great Wave, this pattern of inflation and stability has long been studied by European economists, and there is evidence it is linked to patterns of rising and falling population with respect to available resources, but there is more to it than that.

    I wouldn’t put too much faith in a gold standard. It’s just an argument from the old class wars which date from time immemorial. Late medieval backers of the gold standard actually had crucifixes showing Jesus dying on the cross with a money purse strapped to his waist. Did He die rich or poor? What really mattered was who was paying the armed men who enforced things.

  21. dankatzman says:

    It is not apparent to me that the chart shows anything that is meaningfull. Half log charts are notorious for implying relationships that do not exist. I do not believe that there is any meaninful correlation (in a statistical sense and in a real world sense) between the elements shown. The channel bounderies shown are +/- 5x and are violated even so.

    I would also point out that the key drivers of gold’s value are 1) use as jewelery in India and 2) rampant speculation aided and abetted by ‘gold bugs’. Neither has a direct relationship to overall corporate profits.

  22. matt wilbert says:

    I think it was inevitable. The gold standard is in any case overrated. It did (to some extent, depending upon how many gold mines were discovered) limit long-term inflation, but at the cost of endless panics. The only way the very finite supply of gold could supply enough liquidity to run a world economy which has grown dramatically since the 30′s would be to massively lever up the gold through some kind of fractional reserve operations, and if you maintain full convertibility in the mix any imbalance is probably going to cause some kind of bank/currency run rapidly leading to the end of the gold standard.

    I also am unable to understand why the relatively low average rate of inflation since the 30′s is a problem requiring a solution as severe and (I believe) unworkable as the gold standard.

  23. bear_in_mind says:

    Some really fascinating comments!

    I lean toward the decoupling from the gold standard as being borne out of the inherent finite quantity of the metal itself. At some juncture, supply would become severely restrained and governments would lose the ability regulate currency valuation short of confiscation or declaration of war to correct asset imbalances.

    In contrast, I suspect fiat currency is subject to more cyclical (and secular) inflationary pressures due to the ease of increasingly monetary supply by sovereign nations.

  24. Richard W. Kline says:

    So Barry, the move off the Gold Standard by the US was a symptom not a cause of long-run inflation vectors. We have been in and remain near the long, wrong end, of a long-term inflation wave. And these do not end well.

    I have spent some long time (decade+ though not recently) studying long cycle phenomena. I have my own models, and have read much of the literature on this phenomena. Here are some remarks. First, one cannot look at long-term price movements in _national economies in isolation_. Finance is too interconnected globally. Unhelpfully, however, different regions internationally actually have discrete long-term cyclical profiles which considerably complicates comparisons. My point here is that the vector in _US stock prices on the Dow_ will have inputs from non-US pricing structures. This undercuts the importance of the US going off the Gold Standard in isolation. Britain going off gold in the 1930s was arguable more important in its effect on international prices; the US just followed on in time.

    Second, stock prices are, in effect, a derivative of prices generally in a national economy. Stocks are perhaps the least helpful or well-defined of price data to study for following long-term trends. Stocks are used for *cough* speculative purposes which introduces a layer of motivation beyond broader financial-population trends. And as mentioned above, publicly trade financial instruments are subject to international purchase-sale activity, which brings in non-US cyclical impetuses and muddies trends, without however obliterating those trends if a nationally defined data set (US Dow) is of sufficient magnitude. For instance, the rise in US prices is substantially influenced by the so-called Eurodollar (really petro-dollar) issues since the 1970s, and seperately influenced the other way by Chinese dollar purchases over the last fifteen years. How one isolates that effect on strock price trends is no simple matter. Thus, while there is a long-term inflationary vector, this cannot be linked 1:1 to price trends in the US alone, and accordingly one has to consider price trends globally in any analysis.

    Third, globally, we have been in a long inflationary wave since the _1750s_ or so. Yes, that’s a long time. There are of course peaks and plateaus within that. That’s one way of saying that your chart is too short to actually isolate the movements involved, so you _can’t_ draw a valid conclusion from the chart alone, only the back half of the current trend is represented there (if muddily because in stock prices). You’ll note that even the lefthand side of that time series is rising. The only difference in countries competitively going off the gold standard is that the trend deflected to an even more rapidly accelerating one.

    I’ll recommend two books on these issues (out of many). You may have read the one or the other, but they are both very useful studies of long-term modern price trends from and historical not an investing standpoint. David Hackett Fischer’s ‘The Great Wave’ is essential reading on this subject. He investigated long-run inflationary waves in prices and draws some grim conclusions. I think his analysis sound. His focus is essentially on secular trends, one reason he uses the term ‘waves’ rather than the term ‘cycles’ which are a bit of a different animal. His work suggests that long-run inflationary vectors rot out the lead economies which experience them/let them run riot, and that is a valid conclusion historically. The other text is Joshua Goldstein’s ‘Long Cycles.’ I am not endorsing everything in Goldstein’s methodology or conclusions by any means, and indeed I would take issue with some aspects of both. However, his text has one of the best compilations of long term price data available in a single book, and these are a gold mine, as it were, for considering the issue of long-term price trends.

    I’ll draw two conclusions here, which there isn’t remotely time to evidence so you’ll have to take them at face value if you choose. Long cycles are a substantive phenomenon in mass populations. They can be documented and timed, an issue which as I say I have researched and modeled extensively. But they are a background phenomena for short-term price movements in things like stocks. For instance the flattenings in the long-term price rise you see in that timeseries of Dow data can be mapped to a long cycle structure so that the distinct periods in that data can be shown to periodize (loosely but definitely) to an underlying long-term cyclical structure (which in this instance happens to be US specific). But the turning points can wobble by as much as five years, so try and financially time _that_.

    My second point from re: Fischer is that, distinct from a specific long cycle pattern whether American or otherwise, we are at a very high point in a long run inflationary wave/trend, both globally and particularly in the US. These tend to ‘stroke out’ in effect the principle economies in which they are active—but who could say when with precision. The trend patterns say it WILL happen, but whether this year or 2035 (or even then) is simply not determinable because not inherently defined in the trend. One reaches a level of instability or stagnation at which point many different kinds ot stimuli can precipitate a systemic change: it’s the instatility rather than the often incidental ‘defining event [sic]‘ which leads to a systemic reconfiguration. Most long-term changes are _threshold effects_ rather than billiard ball knock-on causation is the way to envision this. The acceleration in the vector over the last 40 years or so is worrying however. It is not a coincidence that we see acutal production (manufacturing and otherwise) in the US declining relatively and in comparison to the rest of the world. That decline isn’t exactly ’caused’ by the long run inflation, but more nearly co-incident with broader financial and cyclical factors attendant upon the long inflationary trend; that is my conclusion but also supported I think by the literature on the subject.

    I know you read US charts for a living (and a good one!), and one can make money from them without interpreting the broad structure. In fact, the broad structure of long cycles is not useful for investing purposes in my observation because trend turnings are quasiperiodic and too plastic for making financial moves in any kind of real time. The US went off the Gold Stanard because it was a choke-collar holding back inflationary financial vectors; in effect, it prevented us from ‘printing’ money fast enough to follow the vector up, so it got junked. That’s what I mean by a symptom, the inflationary trend _was already well underway_ by then.

    As a final note(s), I do often enjoy the charts your post, and have printed a number ot timeseries from TBP. They are good support for the background long cycle structure I would posit for the US, a body of research I yet hope to complete and publish. And I support your stance on comments. This here is by far the most substantive remark I have ever made in comments here, and if you had to ban all comments it wouldn’t really alter my user experience. However, along with the ‘horrible .ooo1%” there is also the golden “.01% of comments, and sometimes that is worth the hassle—as long as an intern gets the scut work of policing the queue!!! : )

  25. Willy2 says:

    The chart for me is an attempt to justify a return to the gold standard. It’s a distortion of the truth. And that’s why they use a logarithmic scale.

    1. The US didn’t go off the gold standard in 1933.
    – The US gov’t repriced gold from about $ 20 to $ 35 in 1933.
    – The US gov’t confiscated gold in order to recapitalize the Federal Reserve and made it illegal for citizens to own gold. Quite understandable. The gold was needed to maintain the credibility of the US financial system. But the US was still on a Gold Stadard.
    2. Bretton Woods is NOT a gold standard. It’s a “Gold Exchange” Standard. The USD was pegged to gold at $ 35. Foreign countries who couldn’t aquire gold held USDs in reserve and always could redeem (“Exchange”) those USDs in gold. Hence the name “gold exchange standard”.
    3. Bretton Woods died because of the US creating too much Credit, not money !
    4. A gold standard restrains a government from “printing” too much “money”. Creating “Credit” and it counterparty “Debt” is an entire different matter.
    5. What I see in the chart is the roughly the amount of oil produced. That allowed prices to rise and as a result of that the amount of CREDIT increased dramatically (think: Steve Keen). Hence the rising stockmarket.