Friday, 26 August 2011

A Barbarous Relic

(Gold as referred to by King of Economic buffoons - John Maynard Keynes in 1924)

The stock market and real estate spruikers are calling gold as a bubble.

Lets go back to 1980.

Dow Jones (INDU): 875 (today 11,149), a gain of 8.55% per annum over 31 years.

GOLD: $704 (today $1765), a gain of 3.00% per annum over 31 years.

(click on chart to enlargen)

The first few years of the 1980s were characterised by high inflation globally (10%+).

In Australia inflation has averaged 4.4% pa over 31 years (you can check historical inflation here). Which is about right globally.

Based on 4.4% inflation, a fair price today for GOLD from 1980 mega peak is $2674, call it bubbly then (maybe!).


I'll get bubble conscious when the Dow:Gold ratio is <2.0 (eg $2500Gold,5000DJIA).

The current global overleveraged debt situation makes the 1920s look benign. Maybe even go 1:1?

Dow:Gold chart.

Lets face facts, over the last 10 years if you were exposed to the broader share market index (such as High Growth superannuation) you've had a lost decade, you haven't made a razoo. Zero. Nix. Nada.*

If you bought Gold 10 years ago you made around 20% pa in USD and around 13% pa in AUD.

Current DowGold ratio is around 6.2. On its path to <2.0 is Dow going to fall, Gold rise, or both? I'd say the latter and it could take up to another 10 years of grinding lower stocks and rising gold.

*Aussie Stocks (All Ordinaries index) have risen at the dizzy average return of 2.2%pa (thats two decimal two - less than inflation) over the last 10 years.

Back to Keynes. In the modern era, his most voiciferous acolyte, is mega-fuckup Paul Krugman, advisor to governments. He won the Nobel prize for economics in 2008. His most famous quote is below. With bone smokers like that being taken seriously where do you think the barbarous relic is headed?

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