Gold vs. The Stock Market

I’ve never been able to figure out gold as an investment. It has a rich history as both a precious metal and means of monetary exchange, and more than forty years after the end of the gold standard, gold still gets an inordinate amount of attention.  I’ve read lots about gold, but even after countless pages written by very smart people, I am no closer to deciding if it’s worthwhile to own any. The main problem I have with it is that it is unproductive.  There are no earnings against which to measure gold’s price. But I thought in lieu of earnings it would be fun to compare the value of all the world’s gold to the value of stocks at various points in history. If you are interested in buying real gold, you may want to visit NBG for more information.

I remember reading an anecdote in one of Berkshire’s annual shareholder letters about how all the world’s gold could fit into a baseball infield, and that the value of all the world’s gold ($9.6 trillion at the time) could buy all the cropland in America plus sixteen Exxon Mobiles. I thought it would be fun to see how a similar comparison would look over the past 50 years.

This first chart shows, since 1963, how many times over all the world’s gold could buy the largest American company (whether it be Exxon, GE, AT&T, IBM, Microsoft, or Apple). So, for example, in February 1980—near a huge peak in the price of gold—the world’s supply of gold ($2.3T) was worth 56 times more than the value of IBM ($41B), the largest company in the U.S. stock market at that time.

So with a pile of metal—beloved for its beauty and mutually agreed upon value (but not so much for its utility)—you could buy IBM 56 times over.  Fast forward 20 years and the low point on the graph comes at two simultaneous market extremes: the tech bubble peak, and a multi-decade low for gold.  In March 2000, you could only have purchased 2 Microsofts ($535B) with all the gold in the world ($1.2T).  You get a much better deal today: the world’s gold ($7.1T) would net you about 14 Apples ($529B).

It’s more fun to calculate based on just one company, but the story is almost identical if you apply the same principle to the entire U.S. stock market (seen below).  Some of these numbers are amazing. In the early 1980’s—the major equity valuation low of our lifetimes and a peak in gold prices—the world’s gold could have bought you the U.S. stock market two times over, but in 2000, at a equity valuation peak, it could only have bought a 7% stake!         

Gold tends to do well when the stock market is skittish, so it is no surprise that many of the “peaks” in these charts come near major market bottoms in 1974, 1980, 1990, and 2009.  I think these charts are an interesting way to look at the market’s perception of the U.S. stock market. If they indicate anything today, its that we somewhat complacent and heading towards more overvalued territory, but we are not near the 1972 and 2000 lows of gold vs. the market. They also put in perspective how crazy the 1980 peak in gold was. Regardless of these fluctuations over the years, I am sticking with the productive asset (stocks) and only buying gold on my wife’s birthday.

 

NOTE ON CALCULATION. There were 165,000 metric tons of gold in the world in 2011.  I have assumed 2,500 more tons have been mined in each year since.  Prior to 2011, I adjusted the total world tonnage based on the data available here (http://www.numbersleuth.org/worlds-gold/), which reveals how many tons were mined each year since 1963 (and prior). The price of gold, in U.S. dollars, is from Global Financial Data, and I used 32,150.7466 as the number of troy ounces in a metric ton.  For U.S. total market cap, I simply summed the market cap of every publicly traded company domiciled here in the U.S that had a market cap>$200MM (a standard floor I use in most tests).  Here is the historical price and total value of gold in U.S. dollars: