Gold Fever

A look at the Dow/Gold trade, history's best store of value and the road to $2,000/oz...

(Source: Getty Images)

[Ed. Note: A few readers wrote in yesterday to inquire about our friend Porter Stansberry’s latest venture. He shared a link with us, in case you wish to follow along and see what he’s up to. Full disclosure: we have no official or commercial deal with Porter & Co. He’s just an old friend and an interesting guy… and our readers wanted to know more. So here’s the link.]

Bill Bonner, reckoning today from Normandy, France...

We’re leaving France, on our way back to Ireland. This time, the weather is supposed to be less violent. So, we’re taking our chances on the high seas. That is, we’re driving up to Cherbourg and taking the ferry around England and across the Irish Sea to Dublin.

The trip is a delight in the summertime. But not when the sea is rough.

Meanwhile…

Here at Bonner Private Research we measure our wealth in gold. It’s not a perfect measure. Speculators often drive the price, either up or down. But it always comes back to a reasonable level.  

Some investors expect to make money by catching gold in an upswing. We do not.  Gold produces nothing. It makes no profit. It adds not a penny to the world’s wealth. Gold is a speculation, not an investment.

Or…it is a store of value, which is how we use it.

The Midas Multiplier

From the 3^rd of November, 2022, until today, gold has risen $300 – an 18% increase. This has gotten speculators excited. And it has piqued our interest too. It looks as though the yellow metal is poised to hit $2,000, for the first time ever.

“There’s no fever like gold fever,” said our old friend Richard Russell.

But if you measure your wealth in gold itself, a rise – or a drop – in the price is (almost) meaningless. Your wealth is unchanged. Because your ounces of gold only multiply if you sell them.  

Here’s what we mean…

Getting comes from giving. Real wealth comes from providing real wealth – goods and services – to others. All honest people do it that way, whether selling their time or lending their property. An investor has an asset (money) that other people can use. He lends it out for interest, or he participates in the profits. Those profits are the difference between the time and resources that go into providing a good or a service and what it is worth on the open market once it is ready for sale. That profit is the measure by which the business owners get richer…and also the measure by which the society itself is enriched.

Gold is merely a form of ‘money,’ the best form. But even the best money is worthless, in itself. It is only valuable inasmuch as it can be either turned into goods and services and consumed… or used to produce more wealth. Warren Buffett is right; holding gold itself is a barren exercise. Gold yields nothing.

Long, Broad Patterns

But there’s a time for everything…even for barren exercises. There’s a time to sow and a time to reap. And a time to do nothing. Wouldn’t the world have been a better place if Adolf Hitler had decided to write a novel – even a bad novel – rather  than attacking France? Las Vegas may be barren, but in 1942 it was a much nicer place to be than Stalingrad.

And as we’ve seen, markets move in long, broad patterns. Stocks are not always going up. Sometimes they go down for long periods of time. After 1929, it was 25 years before stocks recovered. After 1966, (inflation-adjusted) prices took 30 years to bounce back. And now, as of January 2022, the primary trend is down again.

The numbers are misleading; the patterns are confusing. Prices go up and down, in nominal terms. But the only way to know if you’re gaining wealth, or losing it, is to look at prices in terms of gold. Then, you can see more clearly (but not perfectly) what is going on.

In 1966, the Dow hit a major high. It took 25 ounces of gold to buy all the 30 Dow stocks. Then, the Dow/Gold ratio turned down. An investor knew perfectly well that companies still produced profits. He knew too that if he wanted to add real wealth, he would stick with the businesses that produced real wealth, that is, the businesses that made profits. And he knew that gold was as inert and lifeless as a joint session of Congress…smooth, glittery…but ultimately unproductive. An ‘investment’ in gold would be barren.

At that point, Dow stocks were expensive. In gold (real money) terms, they would fall in value for the next 16 years (until 1982) and would not fully recover until 1996. So, putting aside dividends, there was no point in holding stocks (and certainly not stocks that paid no dividends) during that whole period. 

Wealth You Can Touch

But if you had cashed out of the Dow in 1966, you would have gotten as many as 27 ounces of gold. And if you’d merely held your gold, you’d still have 27 ounces of gold. But, knowing that the real money is made by providing real goods and services, you should have kept an eye on the Dow. And when the Dow/Gold ratio fell to an all-time low in 1980, you would have had the chance of a lifetime.

(In the interest of full disclosure, our target – for buying back into the stock market – is a Dow/Gold ratio below 5. Colleague Tom Dyson has explained the whole strategy in a report appropriately called The Gold Report.)

So, if you’d taken the opportunity to trade your gold coins at 5 ounces-to-the-Dow in 1978, you could have then enjoyed the great bull market that followed… taking you all the way to 1999, when you might have traded out of Dow stocks at 40 ounces/Dow. (Again, our model hedges our risk a bit by getting out earlier. See Tom’s report…)  

And here we see the bumptious power of 1) a bull market in stocks…2) companies that add to our wealth…and 3) the primary trend. Our real wealth, measured in ounces of gold, would have increased by as much as 20 times from 1966 to 1999 (or by 8 times, if you had followed our safer Dow/Gold trading rule).  

So, let us try to condense this ramble into several key points.

1. Gold is real money. Measuring your wealth in gold ounces is more reliable than doing so in dollars.

2. But gold is barren; holding gold forever gets you nowhere…your wealth doesn’t grow.

3. Stocks – representing ownership in profit-making companies – are the way to make money.

4. But holding stocks alone won’t increase your wealth either. Measured in gold, they go up and they go down; today, they are no more valuable than they were 98 years ago.

5. Over time, all you earn from stocks, broadly, is what you get from dividends.  

6. You can do better, at least theoretically, if you buy stocks when they are historically cheap (using the Dow/Gold ratio as a metric) and sell them when they are expensive. Stick to gold during periods when the primary trend for stocks is down.

Stay tuned…     

Regards,

Bill Bonner