There’s now plenty of confirmation that inflation is here and getting worse. Which brings me to a far less noticed consequence of U.S. dollar debasement practices—asset inflation. Think of asset inflation as the pie and ice cream you get in your portfolio when the Federal Reserve conjures trillions of fake dollars to fund government spending binges.
Rivers of these fake “currency units” end up like a huge mud flow—and all that financial “sludge” has to go somewhere. When these fake dollars are conjured up in large numbers, it creates a sloshy liquidity that quietly “bids up” the nominal value of stocks.
The answer lies in the astonishing financial stability of gold. A very nice suit cost you an ounce of gold 150 years ago and that same ounce would get you an excellent custom tailored suit today (gold is currently $1,795.80 per ounce).
In ancient Menes, Egypt, 3,200 BC, it took 2.5 ounces of silver to acquire an ounce of gold. In Egypt 2,700 BC, it took 9 ounces of silver to acquire an ounce of gold. At the same time, in Mesopotamia (since markets were not global), traders exchanged 6 ounces of silver for 1 ounce of gold.
In Plato’s time, 550 BC, it took 12 ounces of silver to obtain an ounce of gold.
My point is that all governments and all currencies come and go, but gold is the one constant that outlasts all governments and all currencies.
Gold’s unrelenting and unchanging value is what makes it such a great barometer to measure the true value of stocks today.
Merely divide the current DOW’s 30-stock index by the cost of an ounce of gold and that gives you the DOW IN GOLD DOLLARS (DOW/34,738.75 divided by gold/1,795.80 = 19.34 ounces of gold to buy a share of the DOW). This simple calculation of how many ounces of gold it takes to buy a share of the DOW helps to chart an important trend… whether to keep your assets in gold or the stock market.
So let’s go back 22 years to determine how history-proven gold stacks up against the DOW Industrial over time.
In December 1999, the DOW was 11,479 and the price of gold was $290.30 per ounce. So by dividing the DOW’s 11,479 by $290.30, we have the DOW IN GOLD DOLLARS, you determine that back then it took 39.5 ounces of gold to buy a share of the DOW.
Today, the DOW is about 34,738.75 and gold is roughly $1,795.80 an ounce. Divide today’s DOW by $1,795.80 and you discover a significant shift in favor of gold’s purchasing power as compared to the dollar denominated DOW. In just 22 years, the number of gold ounces it took to buy a share of the DOW has dropped from 39.5 ounces to just 19.3 ounces. Put another way, that very same ounce of gold that got you one share of the Dow in 1999 now essentially gets you two shares—a gain in gold’s purchasing power of 104 percent!
But is this 104 percent gain actually a gain in gold’s value? NO, it simply means that you may calculate asset inflation on the DOW Industrial Index since 1999 at 104 percent.
Since 1999, gold has gained a stunning 518.6 percent as compared to the DOW’s 202 percent gain. These simple calculations also show that since 1999, the top investment choice of Egypt’s ancient Pharaohs handily beat the S&P 500’s gain of 263.8 percent and the NASDAQ’s gain of 267.5 percent.
In case your broker asks, this entire analysis is based on universally accepted public numbers. No smoke, no mirrors, no Federal Reserve estimates. All universally accepted, 100 percent verifiable, non-manipulated public data.
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