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Gold is Always Gold, but Stock Indexes Frequently Change Names

At times like this, beware of articles that say gold has not done very well, using 1980 as a starting point. As soon as gold retreats below its new high, you will see articles in many major publications saying that gold has not even reached a new “real” after-inflation high. They will say the $850 peak in 1980 is really around $2,500 to $3,000 in today’s dollars but taking any investment’s peak as a starting point is unfair.

 

There are three problems in comparing gold to stocks. #1: The first is that gold competes more fairly with cash and bonds than stocks. Most investors should own some stocks, but gold has clearly beaten all forms of cash and bonds over time.  Most currencies in history have been inflated out of existence, but those that survive have been badly beaten by gold. The U.S. dollar has only retained about 1.5% of its value to gold since the Federal Reserve was launched in 1913. But even comparing gold to stocks, consider these flaws:

#2: The stocks within the stock indexes keep changing. The Dow Jones Industrial Index began with only 12 stocks in 1896. After the index reached 30 stocks in 1928, nearly half (14) of them were replaced during The Great Depression years from 1934. Not one lasted the next 90 years. Most died a natural death as their products went out of style or their businesses failed. The stock that lasted the longest was General Electric, but it was taken out of the Dow index in 2018 when its fortunes started to fail.  Recent replacements were rising powerhouses which replaced the old-line industrials, like Apple replacing AT&T, Cisco Systems replacing General Motors, Intel replacing Goodyear, Microsoft replacing Union Carbide and Nike replacing Alcoa. By that token, it looks like the real “industrials” were cast aside in favor of the glamour stocks, so why don’t we change the name to the Dow Jones Darlings

#3: Most major stock indexes are dominated by a very few mega-stocks, which bloat their returns. Bespoke Investment Group published a study which showed that through Monday July 13th, the seven largest companies in the S&P 500 – namely, Alphabet (Google), Apple, Amazon.com, Facebook, Microsoft, Netflix and NVIDIA – as a group were up 45% year-to-date, while the rest of the S&P 500 had declined 11%. The major indexes are warped because the biggest stocks weigh them down by their size (“capitalization,” which is price times number of shares).

Gold is always gold. Silver is always silver. But the contents of stock indexes are often warped and ever-changing.

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