Stocks Down About 80% from Peak

Chart obtained from Rolfe Winkler

Stocks are off about 80% from their peak, at least as measured in ounces of gold.

This chart shows the Dow priced in ounces of gold. Currently, it takes just under 10 ounces of gold to “buy” the Dow. Over time, this ratio has ranged from 1 to over 40. Some investors use this relationship to determine the relative attractiveness of stocks versus gold.

Others believe that measuring things in gold is a better reflection of inflation than deflating nominal prices by the CPI index. Unfortunately, both methods have deficiencies. Using gold as the deflator, investors who held stock since the 1920s would have lost money, at least in terms of gold. While this might seem unlikely, remember that the value of the dollar today is only worth about 4 cents when compared to its purchasing power when the Federal Reserve was formed in 1913.

The renowned octogenarian, stock market guru, Richard Russell, believes that this ratio is likely to go back to 1 again. That is, one ounce of gold would buy the Dow. Russell doesn’t pretend to know whether or not gold will go to $5,000 and the Dow fall to 5,000 or some other combination of numbers.