Right, and based on those trends, DJIA:Gold ratio of <1 makes sense. As you pointed out, though, everything changes if hyperinflation occurs. That chart doesn't include any periods of hyperinflation (though it does include partial defaults).
If it's a run-of-the-mill cycle like the 30s and 70s in which people think the world's been changed forever for the worse, but hasn't really, then historical ratios will work. That means the system will survive. Specifically, the currency will survive. Political reforms will have to be made, which means, in the US, massively reforming Social Security, Medicare, and Medicaid. If that happens and stocks are cheap on a trailing PE basis, a DJIA:Gold ratio <1 would be a nice entry point for the start of the next stock bull.
But...this time around, there may no political will to reform SS, Medicare, and Medicaid, in which case the only way for the obligations to be paid will be in worthless dollars. With a Fed chairman who believes the problem with the Great Depression was lack of newly printed money, and with a President who thinks central planning is the answer to everything, the hyperinflation scenario is not to be discounted.
In that scenario, all bets are off. Everything becomes more difficult to evaluate. If that seems like it's going to happen, I'll probably merely diversify my gold holdings into foreign stocks and real estate in more stable countries with less irrational governments, while always keeping a stash of gold handy. |
