An analysis of the return on assets such as gold, stocks and other investment assets should be done over the long term . In this way, short-term trends are eliminated and predictions can be made about future dynamics based on what happened in the past.
But when we look at the data in retrospect, we can lose sight of the context. “Null” figures would hide, for example, previous regulations or the structure of the financial system. Or, we could think that, during certain periods of communism, there was no inflation. Thus, if we were to analyze only the prices , we would not know that they were controlled by the state, that there was a shortage of goods and their quality was often low .
The same thing happens when we compare different categories of investments. It is not fair to take them out of the context in which they appeared. A prime example is the chart below that compares changes in US stock market indices and the price of gold and silver over the past century.
The Price Of Gold In Financial Systems In The 20th Century.
We must not forget that, for the first two thirds of the 20th century, the US was either on the gold standard or on some variation of it. By 1933, a troy ounce of gold was worth $20.67. After President Franklin D. Roosevelt confiscated Americans’ gold, the US currency was instantly devalued by 70% , and a troy ounce of gold equaled $35.
After World War II, the Bretton Woods system was introduced – major Western currencies are pegged to the dollar, which remains at a constant rate of $35 per troy ounce against gold. The system lasted until August 15, 1971, when President Richard Nixon removed all ties between the US dollar and gold. In any case, until the early 1970s, the value of gold was fixed .
This means that, relative to the US currency, the value of the yellow metal cannot go up or down for administrative reasons. Since the value of an asset cannot change and stock indices can move freely, it is not fair to compare them. It would be like comparing apples with pears .
Gold And The Stock Market – Which Rises Higher?
After 1971, gold was free to move separately from the dollar. Therefore, it is correct to analyze in parallel their evolution from that time until now.
How has the price of gold and stock indices changed from then to today?
- The S&P 500 averaged 100 points in August 1971 and is up 3,856% since then
- Dow Jones – 850 points and up 624.2%
- Gold – $35 and up 4,777.1%
- Silver was at $1.6 a troy ounce, up 1,023.2%.
When we compare comparable categories, the picture changes a lot. Since its price was no longer pegged to the dollar, gold rose more than the two major stock indexes . If we index their values towards the end of 1970 (that is, at the end of December the considered categories are equal to 100 points), the picture will look like this:
The data shows that over the past 52 years, gold has generally outperformed stock indexes. Unsecured money sooner or later reaches the intrinsic value of 0. Given this and economic history, we can expect the price of gold to continue to rise in the future and serve as a very effective means of protecting our buying purchase power.
