I have been hearing a lot about the Dow Jones flirting with the 20,000 level this week. In fact, on Friday it hit 19,999.63 during the day, but fell back to close at 19,963.80. I'm pretty confident we will eventually see this benchmark reached and surpassed, as we have seen many others in the past: 1,000 in 1972, 5,000 in 1995, 10,000 in 1999, 15,000 in 2013, and so on. The problem with all these "magic levels", and indeed with all USD prices in general, is that they do not use a consistent unit of measure. $1 in 1972 bought a whole lot more gold, silver, oil, gasoline, bread, eggs, taxi fare, or almost anything than $1 did in 1999 or $1 does today. The "Five and Dime" that I grew up with is now the "Dollar Store".
This blog is about gold as a standard of value. Not because gold is perfect, but because it has stood the test of time, both as cash money and as a measure of value, for thousands of years – while hundreds of other currency systems have come and gone. And until 1971, it still underpinned the US Dollar itself, and through the Bretton Woods agreements, it indirectly underpinned all other government-issued currencies as well. After that point, all currencies were cut loose from gold and floated freely against one another, but more importantly, the last tie between money and real stuff was cut, and governments and central banks were finally free to create as much currency as they wanted – without ever having to worry about how they would redeem it for something real.
Certainly the years leading up to 1972 and the Dow breaking the 1,000 barrier were full of ups and downs, but they were real booms and crashes. From 64 in 1921 to 381 in 1929, and back down again into the depths of the Great Depression, for example. Not until 1954 was the 1929 high seen again. And due to the 40% devaluation of the Dollar in 1933, the Dow would not recover its 1929 gold value peak until 1959.
Breaking the 1,000 barrier in November of 1972 was an emotional moment for traders on the floor and investors around the world. It seemed to mark a new era of prosperity, even as, behind the scenes, inflation and recession were preparing to set in. At that time, Dow 1,000 USD meant Dow 482 grams of gold, and through the rest of 1972, the Dow traded between 480 and 500 grams. But early in 1973, things started to come unglued: stock values were falling, but the Dollars used to quote those prices were falling as well (gold prices were rising) eventually pushing the Dow down to an all-time low of 37 grams in 1980. Stocks recovered their value much faster than did the depreciated Dollars. By the time the Dow had regained the 1,000 USD level in 1982, it was still worth only 80 grams of gold.
But stocks, and the economy in general, were on the march… in fact, from those lows in 1980, the largest bull market ever seen was underway. When the Dow hit 5,000 USD in 1995, it was trading for 408 grams – still not recovered to its 1972 value of 482, but more than 10 times its value at the lows of 1980. And by late 1996, it had passed the 500 gram level and was heading for the sky.
And despite a few stumbles, it crossed the 10,000 USD threshold in March of 1999, at 1110 grams of gold, and went on the peak at 11,326 USD, or 1393 grams of gold in August of 1999. As the tech bubble popped, and the plunge protection team pulled out all the monetary stops, stocks once again were falling just as Dollars were also losing value. And all the way down, even when the Dow was rising in USD terms, the value of the USD was falling even faster: the Dow peak of 14,165 in 2007 was worth 600 grams, and at the bottom, in August of 2011, the Dow was worth only 180 grams, and trading for 10,855 USD.
From there, we have been in an amazing bull market, both in stocks, and in the US Dollar. This has pushed the Dow to almost 20,000, and brought its gold value back to about 530 grams – far above the 2011 low, but only 10% above its gold value when it first crossed the 1,000 USD threshold in 1972.
An important question going forward is whether we are now following the trajectory of the early 1980s (on our way to the moon again) or if we are instead channeling the spirit of 1974 to 1977 (a major bear market rally, on our way to a retest of all-time lows). Keep reading these pages to see how this story turns out! But keep in mind that despite today's sky high USD valuation, the gold value of the Dow is roughly the same as it was back in 1972, when it was quoted at 1,000 Dollars for the first time.
