Currencies Are a Poor Measuring Stick

People often think that when they see their bank account go up in value due to the investments that they’ve made that they are getting richer. What they fail to take into account is inflation. If their investments only make 5% return and inflation is 10% then that means they actually lost 5% over the period. Just to break even they would need to make a 10% return, which historically, the stocks market barely does. Funny enough, when people see their holdings in gold/silver go up they also think they’re getting richer because they argue that those things are holding their purchasing power intact and now they can buy more things with it. Truth is that it is just maintaining their wealth and not increasing it.


A better way to measure your wealth is by measuring with other stores of value. For example, measure things like gold and silver with oil, real estate, and the DOW. The gold/DOW is often used as a measure of value for the dollar and whether or not gold/DOW is under or overvalued. The mean DOW to gold ratio has been about 4. That means it takes 4 ounces of gold to buy one share of the DOW.

Interestingly enough in 1929 it took 18 ounces of gold to buy one share of the DOW. Because the DOW was overvalued and it had to revert to the mean, in 1932 the DOW/gold ratio reverted to 2 ounces of gold to buy one share of the DOW. In 1966 the ratio was 28:1. In 1980 the ratio was 1:1. In 2000, the ratio was 45:1. Currently we’re hovering around 6-7:1. We’ve got a ways to go before we see things return to normal. Some people even believe, which is not entirely impossible, that we’re heading towards hyperinflation as a country, which means that the ratio could be 1/10th:1.

What is funny is both gold and silver are undervalued, but the silver ratio is even more volatile.

Peter Schiff says that the proper ratio of oil to gold should be 10:1. Right now it is about 18-20:1. With the 7 billionth baby being born we see the demand for oil only getting greater. Another way I’m learning more about is to measure value with the mortgage to rent ratio, more on this later.

Basically if you can use proper measuring sticks and those help you to get out of a certain investment at the right time you and you can buy into the undervalued asset you can make a killing.