Friday, 27 August 2010

The Dow Jones still hasn’t recovered from…the Great Depression.

Almost all financial advisers, when discussing about gold as an investment, will not fail to mention its infamous price in January 1980 of 800$ / oz, and how adjusted for inflation today, it would be a lousy investment.

The problem is that these comments underlines the lack of rigor of the commentators by cherry picking a price that existed only for a few days 30 years ago.

By the same measure, are financial advisers always mentioning to their clients when buying stocks that the DOJ still hasn’t recovered from the Great Depression of 1929?

Indeed, since in October 30th 1929, the DJI hit 380.33. 

In these days, $20.60 was defined as 1oz of gold (the US was more or less under the classical gold standard).  So that meant that the 20$ bills were redeemable at the US treasury for a 20$ gold coin containing .96750 troy oz of pure gold (20$ / 0.96750 oz happens to equate 20.6 $/oz).

So the DJI was worth 18.5 oz of gold.

Fast forward 80 years, the DJI is today (August 27th 2010) at 10078, which is worth (gold spot being currently 1241$/oz) … 8.1 oz of gold, which means $167.28 in 1929 dollars.

Basically, using the same unit of money that existed in 1929, the Dow Jones industrial index is worth today less than half (167 vs. 380) of what it was 80 years ago.

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In fact, in the graph above, we can see the variation of the DJI in terms of gold over the years (source: finance.yahoo.com, world gold council).

Note that the raise of the DJ/gold ratio in the 1960’s is mainly caused by the artificial pegging of the price of gold by the US government  at 35$/oz, while the run up in the 1990’s is partially caused by the mass selling and lending of bullion by American and European central banks.

Moral of this story?  By cherry picking dates, we can portrait an investment class in any light we want.

But financial advisers, who often are also stock brokers, or work for stock brokerage firms, align their advice with their interests, and recommend investment vehicles that fill their own pockets first.

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