Today’s previous article we just posted looked at loss of purchasing power by adjusting the US and Canadian dollars for inflation compared to gold adjusted for inflation. Well this article shows a different way of looking at share market returns. Rather than just adjusting share market returns for inflation – how about pricing them in gold? (In the past we’ve also priced NZ housing in gold and NZ housing in silver to look at returns against real money there too. )
For the investor that invests in gold, silver and PM (precious metal) stocks, one must look at the performance of the global benchmark US S&P 500 chart for the past three years when it is priced in gold. Often when people have “gains” in nominal dollars, Euros, pounds or other fiat currencies, they have no clue that they actually lose money in terms of purchasing power! Why would I say that? Keep reading this article and you will find the answer.
Because the US Federal Reserve keeps printing money and devaluing its own currency (as does the ECB with the euro), one must take the time to understand what is a “real” gain. If we only see the history of stock prices in dollar or Euros, gains appear positive. However, if we look at the S&P 500 in term of other currencies, REAL currencies like gold and silver that have been viewed as a form of money and a store of value for thousands of years, only then will one see the truth of stock market performances today. These following simple charts reveal how poorly the S&P 500 has performed when priced in real money, gold and silver.
From the chart above, the price of S&P 500 in term of gold has declined from the very first day of January 2009 to March 6, 2012. The price index of the $SPX was at 931.83 back and the ratio of the $SPX:$Gold was 1.07. The price index of the $SPX today is at 1343.36, and just looking at the nominal gains, it appears that the $SPX has risen a cumulative 44.13% in terms of US dollars. However, in terms of gold, the $SPX:$GOLD ratio has plummeted from 1.07 to 0.8 during this same investment period, a very significant drop of -24.46% during the last three years.
As well, the S&P 500 priced in silver illustrates even worse performance than when priced in gold. From the same time period the S&P 500 price in terms of silver has declined badly -51.57% from 84.10 to 40.73. Look at the S&P500 priced in gold for the past 10 years and the picture becomes even clearer.
Priced in the real money of gold, the S&P 500 has lost more than 85% in the past decade. Talk about buy and hold, if you’ve been holding on to investments in broad stock market indexes for a decade now, you have nothing to show but a 85% LOSS in terms of real purchasing power, and this is BEFORE even factoring in capital gains taxes or the cost of inflation.
Even though it should be crystal clear from these charts that gold and silver are real money and have been hands down among the best investments in the world for 10 years running now, we incredibly still receive worried emails asking for our opinion about recent comments that Warren Buffett, chairman and CEO of Berkshire Hathaway, made about gold being a bubble ready to pop. One always must take into account the context in which Buffet makes these comments. Buffet recently made more than $1.4 million a day from his investment in a very special dividend paying preferred class of Goldman Sachs shares and he recently just invested $5 billion in Bank of America. Rising gold prices are kryptonite for banks and Buffett invests in banks.
Furthermore, in the same time period we spoke of above, from January 2009 to March 2012, price BRK.A gains in terms of gold and these gains quickly become losses. If we price Berkshire Hathaway in gold, Berkshire Hathaway has lost -34.24 % in just the past three years. No wonder Buffet hates gold! Gold’s returns have been slaughtering the returns of his company’s stock not only for the past three years but also for over a decade now.
Just look at the chart of gold and silver performance for the past 3 years below.
In conclusion, if one observes global inflation tracking higher every year, this is the reason one needs to prepare themselves by holding real money that can’t be devalued by governments or banks if they don’t want to end up living in poverty. Frankly, all talk about gold and silver being in a bubble is plain silly and one should prepare for another strong upleg in gold and silver very soon.
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