price of gold

A subscriber recently sent me link to an article in the Wall Street Journal by Brett Arends titled "Why I Don't Trust Gold". This is the second part of a three part series, but as I write this, the third installment has not yet been published.

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I realized yesterday that it is easy to calculate the price of an ounce of silver in gold grams if you know the gold-silver ratio (Duh!) You just divide the ratio into 31.1035 (the number of grams in an ounce.) And the ratio is well documented throughout much of history. For instance, the website Measuring Worth provides annual values for the gold-silver ratio going back to 1687. I've used this data to create a new long term chart showing the price of silver from 1700 to today, and added it to the Silver chart page.

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With the US Dollar making new lows, and the stock market in disarray, 2008 is off to a shaky start. The Fed is faced with few options, none of them very pretty. If they cut rates to try to soften the recession and prop up asset prices, they further lower the value of the currency those assets are priced in, hurting their true value. But the political consequences of doing the right thing – letting a recession wring the weakness out of the economy – are just too painful to seriously contemplate, especially in a presidential election year.

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Based on numbers from the St. Louis Fed, our newest addition to the Charts section of the website shows the US GDP in gold grams – billions of them! 

This series is similar in appearance to the long term DJIA, but with less volatility.  This makes sense, as stocks tend to follow in the footsteps of the overall economy.  But the Dow has it's own sense of timing, peaking about 4 years before the GDP in the 60s, and falling much further during the 70s, then rising over 36 times in value from 1980 to 1999, while the GDP rose a little over 9 times from it's low.  Once again, the Dow peaked first, in 1999, while the GDP kept climbing until 2001.

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The Charts section has been updated with a new chart of the Dow Jones Industrial Average, this one from 1900 to present.  The three big bull markets of this 107 year period, and the following bear markets, are easily seen.  It is clear that a lot of money can be made – and lost – investing in stocks over the long run.

From 1904 to 1929 the Dow grew 12 times in value from 47 to 568 gold grams, then gave up 89% of that gain, ending at 64 grams in 1933.  In the next phase, the Dow grew almost 14 times, to 893 grams in 1966.  This was followed by a long decline, losing almost 96% of it's value, finally bottoming around 37 grams in 1980.  Then the next bull market emerged, growing over 37 times to 1,393 gold grams in 1999.  The 8 years following this all time peak have been a downward march, representing a loss of almost 56% to the August 31, 2007 close of 618.262 gold grams.

What will the future hold?  I would love to hear comments from technicians on this topic… But if the last two market cycles are any guide, I suspect we will see the Dow trading below 200 gold grams sometime in the next 5 to 10 years, and it may not be until around 2035 that a new high is made.

There are many roads that could lead to the 200 gram level; the Dow could move sideways as the value of the dollar shrinks, or the Dow could keep making "new highs" in terms of a plummeting dollar, or the dollar could stabilize or even strengthen while the Dow collapses in nominal terms.

But if your goal is to build your real wealth, the key is to keep your eye on the ball: investing in assets that are growing in gold value, regardless of their price as viewed in the fun-house mirrors of fiat currencies.  The Custom Chart service can help you identify those opportunities, and we will be bringing more tools online in the future as well.

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