Dow Breaks Through 11,000

The news media is full of articles touting the Dow Jones Industrial Average close above 11,000 today. The chart below shows the index price in USD from 2006 to April of 2010.

In summary, prices had been rising since 2003, and began 2006 around the 11,000 level. They continued a relatively steady march to a new all-time high around 14,000 in the fall of 2007. The credit implosion of 2008 rapidly forced the index to a low around 6,500 in March of 2009, but since then it has been recovering strongly, returning to the 11,000 level today.

This is the conventional story… but what is the truth?

The problem is that the Dow Index is measured in US Dollars, a highly volatile currency. As a result of the credit crisis, there has been tremendous creation of new money by the Federal Reserve to keep the monetary system afloat, causing a drastic reduction in value of the USD. In spite of this, there have been moments when the urgent need for US Dollars, to pay off debts and de-leverage, has forced the dollar's value higher, in a kind of "short squeeze", and occasionally problems in other countries have become so severe that the USD was seen as safe by comparison, increasing demand for it, and temporarily boosting it's value. (As Doug Casey recently observed, the US Dollar may be toilet paper, but at least it's three-ply!)

So when we remove the roller-coaster value of the USD from the picture, by pricing the Dow Jones Industrial Average in gold, what do we see?

From 2006 to fall of 2007, instead of rising 27% from 11,000 to 14,000 the index actually went sideways, hovering around 600 gold grams. Instead of falling 53%, from 14,000 to about 6,500, it actually fell 63%, from 600 grams to 220 grams. From this low it quickly rebounded to the 300 gram level, where it has been for the last year.

Although it's dollar value has returned to the level seen in 2006 and mid-2008, it's true value, measured in gold, is half of it's 2006 level, and three-quarters of it's 2008 level. Stock prices have not risen at all for the last year. The US Dollar, and most other fiat currencies, have simply fallen in value due to central bank manipulations, creating the appearance – but not the substance – of recovery and growth.

So don't be fooled… Keep an eye on what your investments are really doing, by pricing them in gold!