Interesting. Does this mean that stocks are cheap relative to gold right now? Or that gold is expensive relative to stocks right now? If 20oz of gold is the right value of the Dow, does that mean you should be buying or selling gold right now?
Also, how did you pick 1929, and are you accounting for dividend payments?
Answered my own question, you’re way way overstating the return to gold because you’re ignoring dividend payments. Hard to compare directly because of tax issues, but if two people bought, respectively, an ounce of gold or 1/20th of a share of the Dow in 1928, they’d have, respectively, $1,200 or $18,500 if they cashed in today. All numbers approximate.
Susanann – honestly, I can’t tell if you really believe the argument you’re making or whether you’re just trolling us to get a rise out of us. If it is the latter, then nice job, cause I’m about to fall for it 
But just in case you’re serious – as a thought experiment, try applying your argument to something other than gold. For instance, in 1929, Pablo Picasso was an unknown artist and you could have bought his paintings super cheap – only a couple bucks per canvas. So one share of the Dow was selling for, say, 50 Picasso paintings. But today, a Picasso painting may be 10-20 million dollars. So today a share of the Dow is selling for only .001 Picasso paintings. Therefore, by your logic, anyone who invested in the Dow has lost 99.998% of their investment.
Do you see the flaw in that logic?
Of course, this is not to say gold has appreciated as fast as a Picasso painting. Gold in 1929 was selling for a couple hundred bucks, and today it’s selling for 1200 bucks. Not a bad run. But on the other hand, the Dow in 1929 was selling for low triple digits (don’t have the figure off the top of my head) and today it’s selling for over 10,000. Definitely a much better return on the dow.
Well, if we’re talking about an economic loss, that’s actually true. An economic loss takes into account opportunity cost. I’m kind of doubtful if Susanann was going for that, though.
In America income taxes have to be reported on all nominal stock gains, and on dividends, all transactions are reported and the IRS makes sure. If you bought the Dow at 380, and sold at 10540, you would have a taxable gain that could not be avoided, so you would NOT “net” 10,160.
Most Gold purchases and sales are not recorded, and therefore are not taxed. If you bought an ounce of gold for $20 in 1929, you could sell it today (in any country of the world) for $1100 and nobody would know that you ever bought it or sold it. Of course, you never actually need to sell the gold since it is never going to go out of business and will never go bankrupt.
Gold in 1929 was $20.00
Today gold is $1100.
What do you mean by “nominal stock gains?” I get the impression that you think you need to report yearly if your stock has increased in value, and then pay taxes on the increase. That’s not true. You can hold stock indefinitely, and once you sell it, capital gains taxes are owed, if you sell at a higher price. And the long-term (over a year) capital gains tax rate is only 15%.
To get a long term perspective and a long term trend that 80 years would provide.
…cant go back much further than that because nobody ever heard of any of those companies, and nearly all those companies’ went bankrupt and their stock became worthless
Dont want to complicate it, but “most” public companies in the world that have issued common stock, do not pay any dividend, and secondly, if you want to be exact then you must reduce all dividends, if they exist, and all nominal stock trade gains, if they exist, by subtracting income taxes. Although we used the Dow JOnes to simplify the performance comparison with stocks and gold, the fact of the matter is that if you added up all the dividends of all the companies in the world who issue common stock and averaged their dividends, they would all average out to a small percentage less than 1%, and that is BEFORE it gets taxed by state, local, and federal income taxes.
To make an honest comparison with gold and stocks, you have to include ALL stock, not just the best and most successful companies that still are around. You can easily see that an ounce of gold bought in 1929 still exists and is still very highly valued any where in the world. EVERYONE who holds that ounce of gold, after 80 years, still has that ounce of gold. In contrast, there are thousands of companies who had issued stock from 1929 until the present, who went out of business and that stock is now worthless. A share of General Motors, or Kmart/Kresge, or Pan Am airlines bought in 1929 is now worth nothing and if you want to include all costs and gains then you should include all stocks that people buy,not just those companies currently in the Dow. The fact of the matter is, that most common stock becomes worthless in much less than 80 years - few companies survive that long and you lose all your money. That is why the list of companies in the Dow Jones average is so different from the list of company names in 1929.
Since most common stock companies in the world pay no dividend, or a very tiny dividend, and since all bankrupt companies like Kresge and General Motors pay absolutely no dividend, then the gross total dividends for all issued stocks since 1929 would be canceled out by subtracting the sales commissions on buying, subtracting the income taxes, and by factoring in bankrupt stock that pays nothing. It is a wash… at best.
On the other hand, Gold is quite easy to compare, it never goes bankrupt, and virtually nobody pays income taxes on it …an ounce of gold is an ounce of gold, It is the same ounce it was in 1929 or 1809, and an ounce of gold is worth just as much today in Denver as it is in Geneva or Hong Kong.
I would “guess”, that 99% of all common stock issued in the past 200 years is totally worthless, but that is just a guess. Most people who bought stock since 1929, in all common stock ever issued since then , saw “most” of their investments go to zero. Maybe 1 out of a 100 companies still exist? Maybe?
Nominal gains do not take inflation into consideration.
If you bought a stock at $100, and then sold it at $200, and if inflation doubled the prices of everything in that time frame, you have a “nominal” gain, but in fact, you have no gain since $200 now only buys what $100 used to buy. $200 today = $100 yesterday.
However, with stocks, you dont get to keep that $200.
YOu have to pay income tax on it to the feds, and to your state. Lets say you have a marginal tax rate of 25%. Therefore, after taxes, you only end up with $175, which, in real terms, is less than your original $100. In fact, you have lost wealth.
Of course, you still dont get the $175, because you owe sales commission on the trades to buy and sell, so you end up with less than 175. Buy and sell 2, 5, 20, or 100 times, and sales commissions really start to add up.
(It is true that if you dont sell a stock you dont have to pay income taxes, but if you dont sell a stock, sooner or later, it probably becomes worthless since most stock companies end up going bankrupt. Most of the stocks traded in 1929, if you “bought and held” to avoid paying income taxes, are now totally worthless)
WHAT?
Dividends seem to have fallen out of favour in the US, but the US is not the world.
Cite to this fabulising assertion.
Again an extraordinary assertion (yes there is an issue of survivorship bias in analysis of stock returns, but you’ve taken a real issue and … exaggerated it beyond recognition.
One bloody well does pay taxes on it if you sell it. Unless you’re talking the black market, but then …
I would guess that your guess is utterly worthless.
If you want to play nominal versus real gains, the proper price comparision for gold c. 1929 is rebased to account for inflation. US$20 in 1929 wasn’t US$20 2009 value.
Until you come with some actual data for your fantastic assertion of massive bankruptcies in listed companies, well… this is pretty much a worthless argument.
See, your mistake is thinking that the only value you get from holding stock is the value at which you sell it. In fact, companies pay dividends, which, over the period 1929-2008, add up to a substantial amount of money. The $18,500 takes dividends into account (it assumes that you reinvest the dividends into the stock market).
For example:
So from 1929-2008, you earned cash payments averaging approximately 6% of your stock value each year that you held a share of the Dow Jones. That’s on top of the price appreciation built into the stock market, and why stocks were such a better investment than gold (at least over the time period you’re looking at; maybe less so if you bought gold in 2001 and sold in 2009).
So stocks outperformed gold by maybe a factor of 11 over that time period if you take dividends into account. Also, you picked a time period that seems basically designed to make gold look good; 1929 was a stock high point and a gold low point; if you picked almost any other time period, stocks would have out-performed gold by a much higher margin.
In this case one would *owe *the tax, you are just suggesting that one would not *pay *the tax. While this is easy enough to do with $1200 in cash, it becomes increasingly difficult to do with larger amounts of cash.
So, why 80 years? Why not 100 years, or 50 years?
We have Dow Jones averages going back to 1896. Why not pick 1896 as your starting date? Why 1929? Why is 80 such a magic number?
Also, of the initial 12 companies that formed the Dow, all but one are still in business* (although only GE is still in the index, and by “still in business” I mean they were bought out by larger companies that are still in business).
*Footnote: American Tobacco Company was broken up in antitrust action, but its stock value didn’t go to zero, and its components are still in business e.g., RJ Reynolds. One company in in Chapter 11, but still operating. One company was dissolved; not sure how much of a payout its stockholders received.
Cite please.
Maybe. Dividends can be received tax-free under certain circumstances. Taxes would reduce the performance of the dividend-adjusted stock market, but stocks would still out-perform gold over the 1929-2008 time period by a factor of 6 or so, if dividends are accounted for.
It was 1.25% in 2008 for all U.S. companies, and that was a historic low. Maybe 1% after taxes. And that’s 1% more than gold paid out.
I addressed this above. Go look at the Dow in 1929; a surprising number of those companies are still in business.
Prove this, please
You have to pay taxes on capital gains, whether from stock or gold appreciation.
A share of IBM is worth just as much today in Denver as it is in Geneva or Hong Kong; in fact, I think you’ll find that stock is a much more liquid investment than gold. And from what I’ve seen the transaction costs on gold purchases/sales are maybe 6% of value, which is huge.
Gold has been a very bad investment over very long periods of time. Comparing inflation adjusted dollars, you would still be in losses on all gold you bought from 1978 to 1989. Look at this chart.
While you’re looking at that chart, notice that 1929 was a historic low for gold. By coincidence 1929 was also a historic high for stocks. Remind me again why you picked 1929 as you measurement date?
Well, OK, if you’re willing to cheat on your taxes, then I admit that does give you an advantage over investing in the stock market. But that will work for a small amount of gold. It won’t work for a sizable investment porfolio of $100,000 or so. First of all, no gold dealer will do off-the-books, all-cash transactions for those amounts (or if he does, then he’ll charge extremely high transaction costs). For large amounts, the risk of your tax evasion being discovered is very high.
But even ignoring that, now you’re talking about storing the gold yourself. You can’t exactly hide $100,000 of gold in your sock drawer, so now you’re talking about paying storage costs of a vault and/or insurance costs. If you try to just hide the gold in a box under your bed, you’re running a risk that it might be stolen by any crook who breaks into your house, etc. Owning that gold will cost you a certain amount of money each year for storage/insurance, and you need to factor that into your calculation.
And finally – gold is not liquid. When you’re ready to secretly sell the gold you’ve been secretly hording, where do you go? As a private individual, you can’t get the “official” price, certainly not if you want to hide it from the government. You can sell it at a pawn shop or trade show, but those people charge 10-30% commissions.
This is true, and also applies to gold. In 2009 dollars, gold cost probably $350/oz in 1929, approx $400/oz in 2001, and now sells for probably $1,200/oz. That’s (back of envelope calculation) approximately 1.5% appreciation per year, almost all of which happened since 2001. In fact, that’s approximately 0.1% appreciation from 1929 to 2001, and approximately 15% appreciation from 2001 to 2009. Does that seem odd to you? Like a bubble?
Bingo!
To be fair to Susanann, the price of gold was fixed during much of the twentieth century. But I still don’t agree with her assertions about the performance of investments in gold vs the stock market. (But what do I know? I’m a bleeding-heart liberal capitalist.)
The Dow Jones Index is a fascinating and arcane thing, so it’s been studied extensively. Going back to 1928, the Dow Jones Index adjusted for splits and dividends is at:
Go here.
You have to either download the data (button at bottom of page) or just look at the First and Last pages (also at the bottom). The Index on 12/2/29 is (last column) $248.48. The Index on 12/1/09 is $10548.51.
For gold, go here and check the “1833-1999 yearly” box in “Yearly Gold Charts,” then hit the “View Data” button just below that table. (It’s a picture).
Assuming they’re showing prices at the end of each year, gold at the end of 1929 was $20.63. This chart only goes up to 9/1/09, but elsewhere on the kitco site, on 12/1/09, gold was at $1196.00.
In both cases, these are prices disregarding any taxes. So, gold went up by a factor of 57.97 in the same time the Dow (including splits and dividends) went up by a factor of 42.5. So gold looks better.
The way taxes work, you pay taxes whenever you realize a gain. For gold, you only have a taxable event when you sell the gold, so that would be once, on 12/1/09. I insist that we pay taxes on this sale, because it’s illegal not to (in the US).
For the Dow, you’d get taxes whenever you received a dividend (and the Yahoo numbers assume you DRIPped the dividend back into more Dow). So, throughout the years, you’d have been paying taxes on these incremental amounts, and if you sold it all on 12/1/09, you have a big taxable event with rather complex components. You’d have to determine the cost bases for every chunk of your holdings (the chunks being the amount of “shares” you purchased with each dividend each year stretching back to 1930), made worse by having to account for the splits. This is where inflation really hurts, but I’m going to be bold and wave my hands and say that the tax on this sale would be roughly the same as your sale of the gold. However, you’d also have to account for the money you spent over the years “servicing your holdings” – i.e., when you paid taxes on the dividends. What I’d do would be to look at the amount of $US that was taxable for each year and translate that to 2009 dollars, and subtract all of these from your gross proceeds, just to make the overall comparison with gold “fair.”
Ultimately, these negatives look like they’d be larger than the taxes on the one sale of your gold, and gold outperformed the Dow on a pre-tax basis already, so I believe gold looks like the better buy.
However, IANA financial analyst, though “bleeding-heart liberal capitalist” sounds like it would describe me.
Your numbers for the Dow don’t include dividend reinvestments, so you’re off by a factor of about 30.