Gold prices: Where's a leprechaun when you need one?
Dow鈥�3 ounces!
Our old friend Ronan McMahon has been keeping us up to date. Ireland is going broke, he says.
The Irish foolishly borrowed too much money during the boom years. The banks foolishly lent too much money. And then the government foolishly said it would bail them out鈥ven though the total exposure was four times Irish GDP. Yesterday, they foolishly took over Ireland鈥檚 biggest bank, Anglo Irish. And now they鈥檙e going broke. The losses are probably more than they can handle.
But it鈥檚 been worth it. What a ride the Irish have had! They were the poorest people in Western Europe鈥hen, they became the richest people in Western Europe. And now they鈥檙e back to being the poorest鈥�
It would have been better if they had had a better sense of architecture during the fat years鈥� They wouldn鈥檛 have blemished the island with so many ugly buildings. Alas, the Irish will have to live with the stain of their prosperous years for generations鈥�
Of course, the same could be said for the USA. All those wretched suburbs and condos鈥� All those shopping malls鈥� All those parking lots鈥�
Not to mention all that debt!
Yes, we will live with the bubble rubbish and residue for many years.
But Ronan said something interesting. We were discussing Irish property. There鈥檚 a lot of it for sale. Buyers can practically name their own prices. But the choice properties are still in the hands of the insiders. When they see something go down to where it is a bargain price鈥hey snap it up.
This signals to us that the whole process of debt destruction still has a long way to go. The assets still have appeal. Investors still think they can make money by buying low and selling high. In other words, they still think there is a bias towards the upside.
They haven鈥檛 given up. They鈥檙e still eager to buy 鈥� at the right price.
But just wait. When the end comes鈥hey won鈥檛 be interested at any price. Some of the finest properties will go 鈥渘o bid.鈥� Then, the players鈥he insiders鈥he smart money will all be convinced that property is a losing proposition鈥nd that you will never make money by buying real estate 鈥� because it always goes down. Then, when the insiders have given up. Then, and only then, can you expect to make any real money.
It鈥檚 no different in the stock market. What investors want now are bargains. They think that they can make money, by buying at the right price. Then, as the 鈥渞ecovery鈥� comes their stocks will go up. They think the bias of the stock market is still upwards.
Certain well-known investors 鈥� for whom we have an enormous lack of respect 鈥� claim that stock prices always go up 鈥渋n the long run.鈥� These super bulls are forever predicting 鈥淒ow 36,000鈥� or 鈥淒ow 100,000.鈥� And they鈥檒l probably be right. Someday, the Dow will probably hit 100,000. And you鈥檒l be able to read about it in your $50 newspaper while you鈥檙e drinking your $100 cup of coffee.
This week, Jeffrey Hirsch predicted a Dow over 38,000 by 2025 鈥� a gain of about 5% per annum, without dividends. Maybe he鈥檒l be right too.
But stocks don鈥檛 really always go up. Au contraire, every stock you buy will eventually go to zero. Your only hope is that you expire worthless before it does.
As for the lot of them, remember that most of their profits and share price growth is an illusion. Let鈥檚 say you 鈥渂uy the market.鈥� You just get an ETF representing the index鈥r simply buy the Dow stocks. The companies make money. Their share prices go up.
But wait. Where do their revenues come from? Where do their profits come from? Aren鈥檛 they just taking money from each other鈥nd from other businesses and consumers (who are also their employees鈥hat is, a cost center)? How can they ALL go up? They can鈥檛 really. They can only grow as fast as the economy itself. Competition keeps profit margins with a fairly narrow band. So, their share of the economy is limited. And since the economy is quoted in money鈥hey can鈥檛 really go up more than money itself.
In other words, if there were just $100 in a town, and the businesses in the town were worth half that amount, they would be worth $50. Total. No matter how much progress the town made, as long as the amount of money stayed constant, they would still only be worth $50 (though that money could be worth much, much more in terms of what it would buy).
Gold is stable money. It鈥檚 the closest thing we have to a fixed monetary unit. The supply increases, but only about as fast as the rest of the economy increases. So, over thousands of years its 鈥減rice鈥� 鈥� in terms of how much you could exchange in for 鈥� has been more or less constant.
If stocks were really becoming more valuable you鈥檇 expect that they would become more valuable against a fixed quantity of real money 鈥� gold. But look at what has happened. At the beginning of the 20th century, the Dow was 66 and an ounce of gold was about $20. 鈥淎 $20 gold piece鈥� was a unit of exchange. So it took a bit more than 3 ounces of gold to buy the Dow. Then, at the bottom of the bear market in stocks in the 鈥�30s, again it took about 3 ounces of gold to buy the Dow. And again, at the bottom of the bear market in 鈥�82 you could buy the Dow for less than 3 ounces. At one point, a single ounce would do it.
Currently, it takes a bit more than 8 ounces to buy the Dow. Hmm鈥� You could get the Dow for about 8 ounces of gold in the 鈥�10s鈥gain in the 鈥�20s鈥he 鈥�30s鈥he 鈥�40s鈥he 鈥�50s鈥︹��70s鈥︹��80s鈥nd now finally, once again, in 2010.
And that number is probably going down. The bear market in stocks still hasn鈥檛 reached its bottom. When it does, you鈥檒l almost certainly be able to buy the Dow for 3 ounces of gold.
Stocks for the long run? Ha ha鈥�.
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