The Dow in Gold Terms...where to from here...

I’m not making this up. “Pshiiit!” was a popular soft drink in France during the ‘60s. But it’s hard to find now. Probably out of business. And probably driven out of business by more powerfulbrands— like Coke.

The advantage of being the leading brand is even more significant with money. This is where Metcalf’s law applies. The more people who use one brand of currency, for example, the more valuable it becomes to the users. It is simply more widely and more readily usable. The dollar is the Coke of the currency markets.

Today, you can take a dollar and buy 1/258th of an ounce of gold. Or you can buy 1/10,793rd of the Dow index. As I explained to my assistant, Addison, there was a time within the memory of living Americans at which the ratios were about the same. A dollar would get you either 1/500 — more or less—of an ounce of gold, or 1/500th of the Dow. Measured in gold, both the dollar and the Dow have been investment success stories. The dollar has doubled. And the Dow—get this—has gone up 42 times. DR readers, however, are cautioned that this trend and this relationship are subject to change without notice.

A lot of things came together to create this trend. The collapse of communism, the restraint of Volcker…followed by the more generous habits of his successors and counterparts in America and Japan, the application of Metcalf’s law to the dollar. All of these things helped lower commodity prices—of which the gold price is one.

I have not done a statistical analysis on this. But I will bet that gold Now (usually) acts like any other commodity. Plotting the monthly price changes will produce a bell curve. (I throw this out to statisticians as a challenge.) But I will also bet that it is a bell curve similar to the Dow curve. It will have lumpy extremes.

Today’s WSJ has an article which takes up one of our themes—Canada would be better off going with a major brand currency…the dollar. It notes that there is precious little…or little precious…backing up the Loonie. “…the gold supply, which just 18 years ago made up 80% of foreign reserves, now comprises only 5%.” Like governments almost everywhere, Canada has sold gold and bought paper. And now that the Dow has risen 42 times against gold…they are considering buying—the Dow. The talk is not of buying gold while it is cheap…but buying the Dow while it is expensive.

The Dow has reached an extreme in dollar terms. In gold terms, it is as much as twice as extreme. At extremes…the markets are no longer random. They have a propensity to regress. It is impossible, of course, to say when the regression begins. Or what price levels will result. But, the smart money is probably betting that gold and the Dow will converge.

Bill Bonner
August 6, 1999