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In the last century major economic crises (such as the Great Depression, World War II, the first and second oil crisis) lowered the Dow/gold ratio, an indicator of how bad a recession is and whether the outlook is deteriorating or improving, to a value well below 4. The ratio fell on February 18, 2009 to below 8. During these difficult times, many investors tried to preserve their assets by investing in precious metals, most notably gold and silver.
The performance of gold bullion is often compared to stocks due to their fundamental differences. Gold is regarded by some as a store of value (without growth) whereas stocks are regarded as a return on value (i.e., growth from anticipated real price increase plus dividends). Stocks and bonds perform best in a stable political climate with strong property rights and little turmoil. The attached graph shows the value of Dow Jones Industrial Average divided by the price of an ounce of gold. Since 1800, stocks have consistently gained value in comparison to gold in part because of the stability of the American political system. This appreciation has been cyclical with long periods of stock outperformance followed by long periods of gold outperformance. The Dow Industrials bottomed out a ratio of 1:1 with gold during 1980 (the end of the 1970s bear market) and proceeded to post gains throughout the 1980s and 1990s. The gold price peak of 1980 also coincided with the Soviet Union’s invasion of Afghanistan and the threat of the global expansion of communism. The ratio peaked on January 14, 2000 a value of 41.3 and has fallen sharply since.
On November 30, 2005 Rick Munarriz of The Motley Fool posed the question of which represented a better investment: a share of Google or an ounce of gold. The specific comparison between these two very different investments seems to have captured the imagination of many in the investment community and is serving to crystallize the broader debate. At the time of writing, a share of Google’s stock was $405 and an ounce of gold was one day from breaking the $500 barrier, which it did December 1. On January 4, 2008 23:58 New York time, it was reported that an ounce of gold outpaced the share price of Google by 30.77%, with gold closing at $859.19 per ounce and a share of Google closing at $657 on U.S. market exchanges. On January 24, 2008, the gold price broke the $900 mark per ounce for the first time. The price of gold topped $1,000 an ounce for the first time ever on March 13, 2008 amid recession fears in the United States. Google closed 2008 at $307.65 while gold closed the year at $866. Leading into 2010, Google had doubled off that (100%), whereas gold had risen 40%.
The analysis of log-linear oscillations in the gold price dynamics for 2003–2010 conducted recently by Askar Akayev’s research group has allowed them to forecast a collapse in gold prices in May – July 2011. As of 18 July 2011, this collapse had not yet occurred, with gold at record prices of over $1600 per ounce.
In his book Basic Economics, Thomas Sowell argued that, in the long-term, gold’s high volatility when compared to stocks and bonds, means that gold does not hold its value compared to stocks and bonds:
To take an extreme example [of price volatility], while dollar invested in bonds in 1801 would be worth nearly a thousand dollars by 1998, a dollar invested in stocks that same year would be worth more than half a million dollars. All this is in real terms, taking inflation into account. Meanwhile, a dollar invested in gold in 1801 would by 1998 be worth just 78 cents.
Article Source: en.wikipedia.org
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