A Dow and Gold Chart to Blow Your Mind

by JDH on December 21, 2013

Today, as we pause to enter the holiday season, I will let the charts to the talking (click on any of them to enlarge):


Since the crash in 2008/2009, the Dow has done fantastically well.  It took a while, but even the highs back in 2007 (the green horizontal line) were finally eclipsed this year.  The chart proves that the economy has recovered, everyone is working, all is good.  The threat of war, inflation, and everything else has diminished, as proven by the chart of gold:


Since gold’s peak in the summer of 2011 it has dropped, and the speed of the drop accelerated in 2013.  From $1,800 to $1,200.  Boom.

So, if you really want to blow your mind, let’s put the two charts together, over a five year period, and express the Dow in units of gold:


In the summer of 2011 the Dow had fallen to almost 10,000, and gold was peaking at almost $1,900, so it took around 5.25 ounces of gold to buy one unit of the Dow.

(Yes, I understand you can’t just go buy a unit of the Dow, and I understand that gold is measured in dollars, while the Dow is an index, but play along; let’s pretend this is an apples to apples comparison).

Today you would need 13.48 ounces of gold to buy a unit of the Dow, because gold has fallen, and the Dow is at record highs.

In hindsight, the correct strategy in the summer of 2011 was to sell all of your gold, and invest the proceeds in the Dow stocks (or S&P 500 stocks; the charts are similar).  Looking back, you would assume that that was the correct strategy because the economy has recovered, debt is under control, and all is good, because, as we all know, the stock market is a forward looking indicator.  The stock market is predicting a glorious future.

I believe the technical term for that explanation is bull$h!t.

The Fed has printed gobs of money, much of which has found it’s way to the stock market.  If instead the Fed had decided to print money and force us all to invest real estate, real estate would be at new highs.  (Oh wait, that already happened, pre-2008).

If they had told us to buy tulips, the price of tulips would be through the roof.  We would have a tulip bubble, instead of a stock market bubble.

And yes, I realize a “tulip bubble” is a stupid example; no-one in their right mind would invest in tulips; I’m just using it as a silly, crazy example to illustrate my point.

My point, my friends, is that it is all an illusion.  The economy is not on solid footing.

We are crowding the malls to buy crap made in China that we don’t need, and we pay for it with credit.  Unemployment, if counted accurately, is at depression levels.  Personal and public debt is at record highs.  Fundamentals are terrible.  The stock market is only high because it is artificially inflated.

Of course it may remain artificially inflated for years to come.  I have no idea what to do from here.

I really don’t.

If you know, let me know.

Thanks, and talk to you next week.