Precious metals, commodities and equities slipped again yesterday on news that France and Germany continue to disagree on the best way to expand the European Financial Stability Facility (EFSF). All eyes will be on this Sunday’s European Council gathering, with the markets hoping for signs that Europe’s leaders have at last cobbled together some sort of plan to address the debt crisis. This weekend will mark the second anniversary of the escalation of the Greek debt crisis (when bond yields on the country’s debt first started surging). More than 100,000 Greek demonstrators marched through the streets of Athens yesterday in protest against the Greek government’s austerity measures. The Greek parliament is due to vote on further austerity measures today.
Gold and silver prices continue to fluctuate. Other commentators have rightly pointed out the “Groundhog Day” nature of the markets at the moment – with trades following a fairly predictable two-day course: “risk off” when uncertainty grows about Europe, sending the euro lower, and the dollar up, and equities and commodities down – followed by a “risk on” day, where increasing optimism sees the euro rise, the dollar fall and equities, commodities rise. Until there is more political certainty about some kind of solution to Europe’s debt crisis, the markets will continue to tread water.
This kind of side-ways action that has defined many stocks markets over the last decade masks the real losses that those holding developed world equities have endured in recent years. The chart below showing the history of the Dow/Gold ratio over the years illustrates this point well:
Dow/Gold ratio 1860-2011
Over the decades, stocks have gradually become more expensive in terms of gold. This reflects the fact that over time, as capital is accumulated and productivity increases, business generally become more profitable in real terms – and thus their stock becomes more valuable. This highlights the point James Turk is fond off: that gold is not an investment, as it generates no cash return.
But gold certainly is a very useful tool, in contrast to constantly depreciating fiat currency, for measuring true value. And on this point, it’s abundantly clear that over the last decade stocks have lost real value – reflecting deteriorating economic circumstances in America and elsewhere around the world. In January 1980, when the gold price peaked at around $850 per ounce (around $2,400 in today’s dollars), the Dow/Gold ratio got as low as 1.3. Given that the debt and banking problems facing many economies today are that much worse than they were 31 years ago, it seems realistic to expect a similar ratio – if not lower, perhaps below 1 – to be achieved in the next few years.