Here’s the definitive reason why gold wins. Anybody who has an interest in either gold or the stock market needs to understand this fact…
So it’s been a very frustrating few months ever since gold topped most recently on September 8th.
Here’s a Sunday pick-me-up to anybody who is frustrated, and some old school stock market butt kicking for anybody who is curious.
Gold is absolutely crushing the stock market this year.
The answer is simple: One troy ounce of fine gold.
You see, one ounce of gold is one ounce of fine gold.
According to the LBMA, Sir Isaac Newton, Master of the Mint, set the gold price in the year 1717 at £4.75, and that price lasted for 200 years.
The point is to show that one ounce of fine gold is one ounce of fine gold.
In other words, gold has what we call “weights and measures”. That is to say, one ounce of fine gold is an exact definition that always only means exactly one thing.
If someone wants to argue semantics, it is possible to say “one troy ounce of .999 fine gold”, and that would suffice to give an exact weight and purity. For simplicity, however, we’ll just say one ounce of fine gold.
It bears repeating: One troy ounce of .999 fine gold is the same weight and purity throughout all of history, all the world over. It’s the same whether we are talking about one ounce hidden in the Great Wall of China, or whether it is part of a shipwreck off the coast of Florida.
And that’s the point, and here’s why it beats the stock market hands down, even this year as you will see.
Today we talk about the price of gold just the same as has been done for hundreds of years. Moving on to the stock market, however, and the scam is easily seen.
Let’s look at the Dow. Specifically we’ll look at the Dow 30.
The Dow consists of 30 companies, but it originally consisted of just 12 when it was created in 1896.
Today, we are getting reports that GE’s membership in the Dow 30 is now in question. In other words, GE might get kicked out of the “prestigious” Dow Jones Industrial Average.
That’s not the problem, however. This is, and I’ll highlight it in red and put it in italics for emphasis:
NEW YORK (Reuters) – It is hard to imagine the Dow Jones Industrial Average without General Electric Co. The U.S. industrial conglomerate’s stock is the lone original component of the venerable blue-chip index that debuted in 1896.
Let that sink in for a moment. In London, in 1717, the price for the yellow metal was based on one ounce of fine gold.
Pricing gold in “one ounce of fine gold” terms has not changed in 300 years.
The Dow, on the other hand, has only been around since 1896, and of the original companies, there is only one left: General Electric.
In other words, while gold has remained the same one troy ounce for 300 years, the companies that make up the Dow have come and gone and changed many times over the 121 years of the Dow’s existence. Here’s more from Reuters:
Changes to the Dow are made on an as-needed basis and selection is not governed by quantitative rules, according to published methodology for the index.
On the other hand, one ounce of fine gold never changes.
And that is why gold wins hand down. Gold is a constant, throughout all of history, but Dow goes through companies on the regular.
If one were to make a fair “gold vs stock market” comparison, well, one would have to compare gold to the constants of the original 12 companies. The problem is, they either do not exist any more, they have merged with other companies, or in the single case of GE, that company is still around, but on the verge of getting kicked out.
As for the original 12 companies? and what happened to them. Here’s a cheat sheetl:
Here are the original dirty dozen of 1896 and where they are today:
- American Cotton Oil – Ancestor of Best Foods, now part of Unilever.
- American Sugar – Became Amstar in 1970 and subsequently Domino Foods.
- American Tobacco – Broke up into separate businesses in 1911, expanded beyond tobacco and renamed itself American Brands; now Fortune Brands.
- Chicago Gas – Absorbed by Peoples Gas, which replaced it in the Dow in 1898. Now part of Integrys Energy.
- Distilling & Cattle Feeding – After a series of deals became National Distillers, then sold liquor assets to Diageo and fellow Dow component progeny American Brands. Rest of business now part of Millennium Chemicals.
- General Electric –Still an independent company with diversified assets around the world. Was removed from the Dow twice around the turn of the 20th century, but was reinstated both times.
- Laclede Gas – Still around, as the primary subsidiary of the Laclede Group.
- National Lead – Changed its name to NL Industries in 1971, 83% owned by conglomerate Valhi. Once known for mining, moved into paints (Dutch Boy brand), pigments and coatings. Sold paint business in 1970s.
- North American – Dissolved by a federal court in 1938, surviving successor became Wisconsin Electric, part of Wisconsin Energy.
- Tennessee Coal Iron and RR – During the panic of 1907, TC&I was acquired by U.S. steel, with banker J.P. Morgan playing a key role in arranging the merger.
- U.S. Leather – The only preferred stock in the original Dow, U.S. Leather is also the only company to have vanished with nary a trace since the trust was dissolved in 1911.
- United States Rubber – Merged first into Uniroyal in 1950s then with B.F. Goodrich in 1986. Resulting company was bought by France’s Michelin in 1990.
All that red shows just how inconsistent measuring “one ounce of fine gold” against the stock market is. And it’s not like these companies are outmoded or out dated. To the contrary. Those companies represent:
- Coal, railroads and steel
Those items that made up the original Dow 12 are items that billions of people still use in their daily lives, with the exception of the vices. So it’s not like they were all buggy-whip or typewriter companies.
And just for fun, to show the real winner this year:
And going back to 1985:
It’s obvious who the real winner is.
Before anybody is quick to say “Bitcoin rules”. Well, gold beats bitcoin too because simply put, Bitcoin is “undefined”.
To prove this, take the current Bitcoin price and divide by zero.
– Half Dollar