Saturday, September 18, 2010

It's time for a reality check. Are you holding your own or going backwards? Surprising data

So you think you have made money in the market from July 6th when the Dow was only 9,743 points to now? Think again! Here's why you haven't made what you think you have. Oh, sure the Dow closed Friday at 10,607 and shares you owned have similarly gone up the 864 points or +8.88%, but have your asset really gained this amount when you consider the following. If you used the same amount of real money to buy Gold instead, Gold was $1195/ounce on July 6th and yesterday it closed at $1274/ounce for a net gain of 6.61%.

The first chart below shows the Dow from July 6th to yesterday's close.

I have labeled this the Illusion Factor because it is all an illusion.

Now the chart below shows the variation of the Dow/Gold ratio from July 6th to the close of the market yesterday. Notice that the ratio on July 6th was 8.2 and the ratio at the close of business yesterday was 8.3, so the real gain did not happen. It is an illusion aimed at having investors believe their net worth rose almost 9% over the period when their actual purchasing power remained the same, but you feel better now, don't you?

You see the reason one can make this comparison is that both stock and Gold values are in U.S. Dollar Currency. So the fact is, the currency devalued assuming Gold is the defacto World standard. In order for the Dow/Gold ratio to impact the psychology of the American people to wake up, the Dow should have dropped or stayed exactly where it was back on July 6th, at 9743 give or take a few points. So if the market drops and Gold stays about where it is, you will get a better sense of really where we are, not in a good place.

By the way, Oil was selling for $71/barrel back on July 6th and yesterday it closed at $74.70/barrel, for a gain of 5.2%. Still think you made 8.9% gain? And think about this, on Jan. 4th, the Dow closed at 10,583 and Gold was at $1121.50/ounce. The Dow Gold ratio then was 9.4, so we have been dropping consistently in net asset value for the whole year.

Now comes the real eye opener. Below is a chart I have put together of the Dow/Gold ratio from 1980 to now. You will notice that we have been in a steady decline of that ratio since the Dot.Com bubble burst. If you have been feeling poorer, you are, and so am I. Today's Dow to Gold ratio is equivalent to the 1991 to 1992 time period. If you live in a home that you owned back then ask yourself the question, how much did you pay for your house then and what do you think it is worth now? The difference is an illusion. In real value it is worth the same purchasing power. Scary isn't it to feel like you are going backwards. Now you know why I am writing this. We have been going backwards since about 2000 to 2001. That's all of President Bush's years as President and one and a half year of President Obama's. The only good thing I can get from this chart is that it looks like we are flattening out on the curve. But it still may drop down from here. One other possibility is that the Dow could have the major correction many of us have expected and get Gold to track and come down as well.

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