I think it would be instructive to take a look at a wide view of the S&P 500 Index, both in nominal and in real terms to gain some perspective. First lets look at the nominal value chart. It has been quite a thrill ride over the last 12 years and the index is climbing for its third test of 1550. Essentially this index has gone nowhere in nominal terms and is a little over 100 points lower than it started back in 2000. First thing to notice is the trend in RSI, a measure of peak strength, is declining with each subsequent peak in price. This suggests that strength is waning over time when comparing similar price levels. This of course is a bad omen that suggests a odds are greater that the re-test of 1550 fails. Another bad sign is the trough made in RSI is getting deeper with each new crash indicating weakness is increasing during the down swings. Finally, momentum in the market is waning and is illustrated by the down sloping MACD trend line and declining volume. This is what a technician would characterize as a weak chart.
Most people buy on exuberance and sell in despair. Clearly this mentality has separated these people from their wealth. A small minority have possibly kept their noses to the grind stone and were able to ignore the carnage of the markets that occurred twice in the last decade. They likely dollar cost averaged their positions and did quite a bit better. Lets look at a rosy scenario: lets assume that 100% of someone’s S&P position was acquired at or near the what has been support around 750. Lets also assume that they did this back in 1997 when the index was at that level. This assumes the most favorable purchase cost basis possible over the ensuing 15 years. The assumed annual rate of return, using the Rule of 72, is 4.8% and assumes all dollars that were invested during those 15 years were invested up front at the most favorable time. In other words, the real nominal performance of the portfolio is something far less than 4.8%.
Now, lets look at real performance when you take into account the loss of purchasing power of the dollar relative to a currency of fixed supply. Oops, there aren’t any. But, there is a monetary asset that will serve this purpose quite well as it has for thousands of years, gold. Here’s the same chart of the S&P index, only this time in terms of gold rather than the dollar. It will give us an idea of the effect inflation has had on nominal performance:
First let see what happened to people who were buying at the top in 2000. They have lost 85 cents of every dollar they tossed into this index in that year. How about later, perhaps 2004? They only lost 72% or 75 cents on those dollars. How about our very friendly assumption that all money invested somehow went back into time and was invested fully in 1997? Now we are getting somewhere, the investor only lost 41% or 41 cents of their dollar. So our example of an ideal and most favorable 4.8% nominal rate of return was actually a 41% loss. Wow! Do you feel whole yet now that the S&P is flirting with all time highs? Now lets see what happened to someone who says gold is for saving and investing in dollar derivatives like stocks and bonds is for speculating. This person wants return of his capital, not necessarily return on his capital. Or in this case negative return on capital.
Looks like the saver has been rewarded handsomely and then some. Now remember our example of being fully invested at the most opportune time in the S&P. Our gold bug using the same scenario bagged a 364% rate of return on invested money since 1997. How about since 2004? Well, this time only a 269% return. For fun, lets say that all of the money was somehow invested at the peak in late 2009. Damn, the saver is only up 35%! So lets roll with that scenario and say that the saver did not participate in the rise in gold price from 1997 to 2010 by dollar cost averaging, and instead dropped at the very peak in 2009 thinking it was going to the moon. His effective annual compounded growth going back to 1997 is 2%. Now I know this is ridiculous, the gold bug was buying gold all along because he is a saver and not a speculator, so his compounded rate of return is far higher just like the real life investor in the S&P received less than 4.8% nominal rate of return.
I hope this little example has shown the carnage in the stock market over the last 15 years and the folly of “investing”. Conversely, I hope it has shown you the wisdom in saving in gold. Gold is for saving, and fiat dollars is for spending, borrowing, and speculating. In the case of the last 15 years I should add “losing wealth” to the list of uses for dollars.
Gold, how long can you afford to not have any?