The Gold Digger – Gold vs. Equities
Imagine a casino full of slot machines that all guarantee a constant high return. All you need to do is to put in a bit of money and you will get an incredible income stream for life. Well, this is exactly what the stock market is, namely a remarkable slot machine with a continuous flow of guaranteed payouts. No skill is required, and relatively little money. And the wonderful thing is that you don’t even need to be lucky since the machine just continues to spew out money without the need for either a strategy or dexterity.
As an example...
Why should we time the stock market when it works so well for us? Let’s take the example of a stock market investor called Frank who was born at the end of WWII and is now 74 years old. At his birth, his grandparents gave him $100 of stocks in the Dow Jones index and between the parents and grandparents $10 was saved monthly to buy stocks for Frank. All the money went into Dow stocks and dividends were reinvested. By the time Frank was 24, in 1969, he started working and earned a good salary since he had an excellent education. Now he could save $250 per month. Ten years later Frank had done well in his career and could save $2,000 per month until his retirement at 65 in 2010. His investment account had by that time grown to $6.7 million. He continued to be fully invested in the market from 2010 and saved $1,000 per month of his pension until today. Today, Frank has amassed a stock portfolio worth $14 million. Frank had excellent tax advisors so he could avoid capital gains taxes or other taxes on his investments.
The total savings of Frank’s parents, grandparents and his own amounted to around $1 million over a 74-year period which all went into stocks. Most of it was Frank’s own savings from his work. The stock market looked after Frank and his savings very well so that he managed to grow the money invested 14x from $1 million to $14 million. Frank naturally considered himself to be a very talented stock investor, but his luck was that no talent was required nor market timing since Frank only bought the Dow Jones Index.
Staying steady
So far so good. Frank has done extremely well in the stock market in spite of some hair-raising market falls. During this period Frank had to suffer some major paper losses like in 1973-4 when the market lost 40% or in 1987 when the market had a similar fall of 40%. But Frank was never worried since his experience was that stocks always go up.
In 2000-2 Frank suffered a 40% fall and then in 2008-9 came the Great Financial Crisis and Frank had a 60% paper loss. But since markets always go up, Frank had no reason to worry. And again, he was right since the market continued to go to new highs.
Frank is now 74 and he has, thanks to his Grandparents’ and Parents’ wisdom, which was passed onto him, amassed a considerable fortune of $14 million. Frank knows that he is not going to spend all that money so that wealth will transfer over to his children and grandchildren.
Foolproof
Frank has had such a good run so should he now be concerned that he and his family will lose it all? Has he just been lucky or is he a very shrewd investor? He realizes that it is not really his clever investment skills that have got him where he is today. He has never selected a single stock in his life since he has just invested in the index. Nor has he ever analyzed a company or the state of the market. As Frank says: “After all, investing is so simple, you just buy and hold and the market will do all the work for you.” And who can argue with Frank. He started with $100 and now has $14 million.
So Frank will hold on to his wealth in the stock market whatever happens. Frank is not concerned about all the risks in the market. His 74 year old investment career has included many downturns but the market has always recovered.
Frank has never asked himself if he has just been lucky to live during an extraordinary bull market cycle, fueled by credit expansion and money printing.
What Frank doesn’t realize is that the stock market already turned down in real terms in 1999. Between 1999 and 2011, the Dow fell 87% against gold. Since then we have seen a correction up in the ratio and the Dow is now “only” down 55% since 1999. This means that since 1999, gold has outperformed stocks by almost 100%.
But the correction up of the Dow/Gold ratio is likely to finish in 2021-22. In 1980 this ratio was 1 to 1 which means that 1 Dow unit was equal to 1 ounce of gold. They were both around 800 at the time.
The catch...
The next decline of the Dow/Gold ratio is likely to reach 1/2 which means a further fall of 98% from here. If that is correct, Frank will lose 98% of his stock portfolio in real terms which is against gold. Thus 74 years of substantial savings could all disappear in the next 4-6 years. This forecast might seem dramatic, but we must remember (as the graph shows) that since the Fiat money era started in 1913, there have been three major declines between 87% and 96%. And this was during times when the preceding credit expansion was much smaller than today. So a 98% fall from here is certainly not unrealistic.
In summary
It is important to remember that physical gold will not just be substantially revalued as the paper gold market fails and inflation rises, but that it will remain the ultimate form of wealth preservation.
Investors who ignore the importance of gold will see their paper assets decline by up to 98% in real terms. The seemingly unending rise in equities is completely and utterly due to money printing. Just $8 trillion since Covid. Now the Federal reserve is attempting to tighten the belt and raise interest rates. As GMRgold has reported before, many analysts believe this to be an extremely risky proposition at this time as the symptoms of this economic calamity do not match those that were previously treated with monetary tightening.
What will happen is out of the control of the American People. What is not out of the hands of the American People is the ability to take matters into their own hands. The Central Banks globally consider gold a mainstay asset in their portfolios. Be your own central bank and add Gold and Silver Bullion and Numismatic Coins with all urgency to protect yourself from the coming New World Order in World Finance. hare this: