Monday, July 5, 2010

Gold's Value Chart ?

A common complaint about investing in gold is that you can't gauge any real value or use for it. As Warren Buffet said - they pay men to dig it up, then they put it back into a hole and pay men to stand around and guard it (paraphrasing). If you look at a stock, you can see its net income and dividend payout and, as a telling chart in one of John Bogle's books on mutual funds shows, this is a very good gauge of its rightful value. The chart goes back over the last 120 years or so and plots the sum of the constituent companies' eps and dividend vs the major stock index. The two curves form a DNA-like spiral and wind up at virtually the same destination after over 100 years of market turbulence ! Oh, would it be that we had such a gauge for the value of gold.

But wait a minute. Maybe we do. If you look at gold as having the purpose of being an alternative currency, you can compare the government printed monetary base with the government backing of that paper with gold. This is something that you can chart historically just as in the above chart for stocks. If you do, you see the following from an array of fascinating graphs at

Here we see something like the DNA spiral for stocks around eps + dividend payout. Only the spiral seems to be around the confidence level in government printed money. There was a loss of faith in government in the 30s and gold wound up climbing to and overshooting the 100% backing level. There was a loss in confidence in the dollar in the late 70s, and gold again went to and beyond 100% backing. Now we are having a humdinger of a currency confidence crisis, and gold is extremely cheap on this value gauge - not even starting its trek to the other end of the range.

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