The Most Important Chart in the World
for Long-term Stock Investors

 
Jay: Please study the following chart. It is one of the most incredible charts illustrating the secular stock cycles from 1800 through today.

This chart is provided courtesy of www.sharelynx.com  

This is the most powerful evidence supporting the "stocks always go up" thesis. This chart clearly shows the Dow in a 208 year up trend against gold. Stocks have indeed always gone up. The problem is, the up trend is interrupted by the secular bear markets lasting 10 to 20 years. This is a remarkable chart.

Ted: Thank you. It's interesting how the drops got worse after the creation of the Fed - the old saw-tooth effect for robbing the masses (in addition to fake money, thanks to the removal of the gold standard, and interest on nothing, thanks to the fractional reserve policy).

Jay: True. And this chart shows it better than any I've ever seen.

Ted: What would you say were the factors causing the massive drops?

Jay: I won't pose as much of an expert on this, but fiat money combined with human fear-greed to make the cycles more violent. One of the most accurate ways of depicting them is (if not the most accurate) is the stock index (representing the economics of the nation) against gold, the only true currency in the world. The abandonment of the gold standard accentuated the cycles, but didn't change gold as the world's best currency. That role has never changed. Gold is intrinsic wealth, the only currency that isn't someone else's liability (promise). 

Ted: What would you say have been the factors causing the steady rise in the Dow?

Jay: Ah, this vindicates the American free enterprise system as the best for creating wealth and prosperity...I would say a vindication of Austrian economics, and the genius of our founding fathers. (And of course Scriptural truth). Are we about to lose it? I don't know the answer, but it appears in grave danger.

Ted: Thank you for your comments and the chart. It does look like we are not yet half way through a bear market.

Jay: Yes, but Steve Seville pointed out that theoretically it could be over yesterday. That's unknown until after the fact.

Ted: Is this what you and Rogers have had in mind all along?

Jay: Yes, I would guess I have said or quoted Rogers as saying at least ten times our working hypothesis is a 17-20 year secular bear market in stocks beginning in 1999, concurrently with a 17-20 year secular bull market in commodities (maybe twenty times).

Ted: Saville says some people called 2003-2007 a stock market rally, but if you look at it compared to gold, it was not even a rally, right?

Jay: Exactly right. That's the problem with fiat currencies. They're confusing.

Ted: Does this mean that even if the current stock market capitulates in 2009 or 2010 and then goes up some, it is still on a downward trend for many years and conversely, gold is on an upward trend?

Jay: Yes, that's my assumption, but we can't have 100% certainty, obviously. Major unexpected events could change it. But it's a great working assumption.

Ted: I'm getting the feeling that gold is a better basis for valuation than the dollar.

Jay: Beyond any question. It is the best and most reliable standard for measuring wealth.

Ted: Today, the Dow/gold ratio is around 8:1. Does this chart seem to say that we might see the Dow/gold ratio approach 2:1 or 1:1 in the next 5 or 10 years?

Jay: Very possible. It has before.

Ted: So do you think the greater move will be in gold?

Jay: No idea. It's the ratio you're interested in. Let's hypothesize. I can easily imagine, say, the Dow at 3,800. Can I easily hypothesize gold at 3,800? Absolutely, or even higher. Of course I can visualize an even lower Dow. Timing is involved, i.e. how soon the ratio reaches 1. Almost anything could happen, a much lower Dow; much higher gold, or both.

Ted: How about silver? I heard that historically, the gold/silver ratio has been somewhere between 30:1 and 15:1, and now it's around 70:1.

Jay: That's a different kind of ratio. For centuries it was around 15:1, the assumed initial ratio in the earth's crust before any gold or silver was mined. Add to that the fact that most of the silver mined has been consumed while most of the gold mined is still above ground, and you have an interesting prospect for a dramatic reversion of the ratio back toward the historic 15:1. There have been many good articles written on this. Here is a recent one: Silver/Gold Ratio Reversion.

Jay O'Keefe is a retired investment consultant.  Ted Spaeth does editing work in the information technology field.