Tags: gold | Dow | inflation | stocks

Gold: Avoiding Unfair Comparisons With Stocks

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Friday, 13 Feb 2015 10:51 AM Current | Bio | Archive

Comparing the long-term value of the price of gold with the Dow Jones Industrial Average is misleading, confusing and perhaps even deceptive. An ounce of gold is an ounce of gold, but the components of the Dow have changed more than 50 times since its inception in 1896 and intentionally manipulated about a dozen times just since 1999 to remove lower-priced stocks and replace them with higher-priced stocks.

Yet, major news organizations, such as USA Today, The Wall Street Journal and Barron's often use the deliberately skewed Dow index as a yardstick to measure gold. Worse, some news media often arbitrarily use 1980, a peak bubble year for gold, as the comparison starting point simply to show gold in a negative light. If they picked a more neutral starting point, say 10 years ago, 50 years ago, gold would have been the clear winner in a comparison with the stock market or with the cost of living (inflation).

For example, U.S. gold exchange-traded funds (ETFs) are now more than 10 years old. The leading gold ETF (GLD) was launched on Nov. 18, 2004, when gold was $442 an ounce. On the same day, the Dow was 10,572. Since then, the Dow is up about 65 percent and gold is up more than 190 percent (through late-January 2015)

My award-winning Metals Report began weekly publication almost 10 years ago, in August of 2005. Since then, we have compared gold with stock prices from 2000 and 2005. At the time, 10 years ago, we didn't know that gold would explode in price from around $450 a decade ago to $1,900 in 2011 or around $1,300 today. Gold has clearly beaten every major stock market index since either 2000 or 2005.

In the 15 years since the dawn of Y2K, gold is up 347 percent, but the Dow Jones Industrial Average has gained just 52 percent and the broader S&P 500 index has risen by only 37 percent.

Here are the raw numbers for gold, Dow stocks and inflation for the last five, 10, 15, 25, 50 and 100 years:

Year-End Gold Price Dow CPI*
1914 $20.67 54.58 10.1
1939 $35.00 151.43 14.0
1964 $35.00 874.13 31.2
1989 $398.60 2,573.20 126.1
1999 $290.25 11,497.12 168.3
2004 $435.60 10,783.01 190.3
2009 $1,087.50 10,428.05 215.9
2014 $1,199.25 17,823.07 234.8
*Consumer Price Index at year's end

This table gives us the raw materials to construct long-term price comparisons. Gold has clearly beaten inflation (as reflected by the monthly Consumer Price Index) in every time period during the last century.

Gold vs. Inflation
Time Span Gold CPI Who Wins
100 years +58-fold +23-fold Gold
75 years +34-fold +17-fold Gold
50 years +34-fold +7.5-fold Gold
25 years +201 percent +86 percent Gold
15 years +313 percent +39 percent Gold
10 years +175 percent +23 percent Gold
5 years +10.3 percent +8.8 percent Gold

The comparison between gold and the stock market is not so clear-cut, since the Dow is the only comprehensive index we can use that goes back a full century. As mentioned earlier, the Dow has changed dramatically from decade to decade. General Electric (GE) is the only stock that remains from the Dow index of 1914.

An ounce of gold is still an ounce of gold, so we would be comparing apples to oranges by using the 1914 Dow. Therefore, we'll limit the comparison to the last 50 years, when gold compares favorably with the Dow during most of the last 50 years:

Gold vs. the Dow
Time Span Gold Dow Who Wins
50 years +34-fold +20-fold Gold
25 years +201 percent +593 percent Stocks
15 years +313 percent +55 percent Gold
10 years +175 percent +65 percent Gold
5 years +10.3 percent +71 percent Stocks

In conclusion: A fair comparison shows that gold beats inflation over any long-term time horizon in the last 100 years or more. As for stocks, gold and stocks are both good long-term investments, so it pays to hold meaningful positions in both stocks and gold.

The next time your see anyone use a negative chart about gold's performance, remember that if you control the "end points" of any chart you can control which way the "trend points." Any fair analysis of gold's performance for the long term shows that it beats any paper currency ever printed, and it often beats the stock market, too.

About the Author: Mike Fuljenz
Mike Fuljenz is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. Mike's books, media appearances and newsletters about gold and rare coins have won Best of the Year awards from the Numismatic Literary Guild and the Press Club of Southeast Texas, and he received the NLG's coveted top honor in 2013, "The Clemy Award."

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MikeFuljenz
Comparing the long-term value of the price of gold with the Dow Jones Industrial Average is misleading, confusing and perhaps even deceptive.
gold, Dow, inflation, stocks
793
2015-51-13
Friday, 13 Feb 2015 10:51 AM
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