A Glimmer of Hope

This is the ninth post in a series entitled Currency, Money and the Economy.

The end of the last post was extremely depressing, so let’s change the focus and ask a simple question: If the sun does set on the American Empire, is there any hope for the individual investor? The answer is yes, if you quit blindly following the dogma of Wall Street and open up your eyes and mind to other possibilities.

Let’s take the “perfect” investing example provided to us by Michael Maloney.

In 1903, the Dow stood at 30 points and gold stood at $20 an ounce. Therefore you could buy the Dow for 1.5 ounces of gold. So let’s buy one share of the Dow for 1.5 ounces of gold. Now let’s move ahead to 1929 before the crash. The Dow now stands at 380 points, but since currency is still tied to gold, gold is still $20 an ounce. Therefore, it now takes 19 ounces of gold to buy the Dow. Let’s say we have a miracle vision and decide to sell our one share of the Dow and take the 19 ounces of gold.

The Great Depression takes hold and a deflationary period sets in. Three years later, the Dow bottoms out at 40 points. Gold is still $20 an ounce, so it only takes 2 ounces of gold to buy the Dow again. Let’s apply our 19 ounces of gold and buy 9.5 shares of the Dow. The United States production booms from the end of World War II until 1966, when the Dow hits 1000 for the first time. Gold is now selling for $35 an ounce. This means that you can buy the Dow for 29 ounces of gold. We decide to sell our shares in the Dow again and receive 276 ounces of gold.

Now, thanks to Presidents Johnson and Nixon, inflation rages throughout the 1970’s. In 1980, the Dow still sits at 1000, but gold sits at a whopping $850 an ounce. This means we purchase the Dow for just over 1 ounce of gold. President Reagan takes office and says that he will fundamentally restructure the economy. We believe him and we put our 276 ounces of gold back to work and buy 235 shares of the Dow. Fast forward to the year 2000 and we are nearing the end of the dot com boom. The Dow sits at 11,700 while gold has dropped to $279 an ounce. At this point, it takes 42 ounces of gold to buy the Dow.

Now, let’s say that we followed the “buy and hold” mantra all the way from 1903. The Dow started at 30 points and stands at 11,700 points. This equates to a total return of 39,000%, or an average yearly return of 6.3%. Not bad. This is the type of statistic that retirement plans love to quote to you.

However, had we managed our accounts like the example above, our original investment of 1.5 of ounces of gold has grown to 9870 ounces of gold for a total return of 658,000%, or an average yearly return of 9.5%. That extra 3.2% in average yearly return compounded over 97 years results in 17 times more return than the “buy and hold” method!

What does this example mean to the individual investor? We will find out in the next post.