Will Gold Outperform Stocks?

Let me share a little story, that I think will help illustrate a point. Before Copernicus, people believed that the other planets orbited the Earth. They looked up at the night sky and saw that the outer planets like Jupiter normally moved slowly eastwards in the night sky. But sometimes, they seemed to stop moving and then moved west for a while.

With their assumption of the Earth being at the center, this funny path was hard to describe and impossible to explain. What could possibly cause planets to stop and even reverse?

As it turned out, retrograde motion is just an artifact of viewing other planets from Earth. Earth is moving faster in a smaller orbit. The outer planets are not reversing, it’s the Earth sometimes passing them. This was impossible to understand until they rejected the geocentric view and adopted the heliocentric theory.

Today, we see how naïve they were back before the 16th century. We don’t believe in anything so silly as Jupiter orbiting Earth. For one thing, Jupiter has far more mass. If the two were alone in space, it would be Earth going around Jupiter!

No, we have a more nuanced view. At least when it comes to astronomy. However, in finance we’re still stuck in the medieval period. Nearly everyone believes that all assets revolve around the dollar. To know if an asset is going up or down, they believe, one just has to observe its price in dollars.

It is in this light that we consider a question that the gold community is now asking: will stocks go up more, or will gold outperform?

gold outperformance

With the paperocentric theory, this is hard to answer. We have to estimate rates of inflation (meaning increases in the quantity of dollars) and calculate how much inflation (meaning rising prices of all things, consumer and asset) that will cause. Then we have to somehow put a value on gold, though it earns no yield. It boils down to a guess: will inflation (meaning rising quantity of dollars) cause a bigger reaction in gold than in stocks? Perhaps armed with the knowledge that over the past several years, it has worked much more magic on stocks, we conclude (or want to conclude, which isn’t the same thing) that it will push gold more, over the next few years. $3,000 here we come.

Not so fast.

The Sun and the planets do not orbit the Earth. Earth and the planets orbit the Sun. Gold and other assets do not orbit the dollar. The dollar and other assets orbit gold. This turns everything upside down (or, I should say, turns things right side up!)

For instance, we know that the dollar has fallen far, since the government began divorcing it from gold. In 1913, the dollar was over 1,500 milligrams of gold. Today, it is about 28mg, or down more than 98 percent. The site Priced In Gold lets you look at charts of every kind of asset.

The aurocentric view also makes the question a lot simpler. It reduces to: will stocks go down? That’s what we’re really asking. We want to know if stocks be worth less, when measured in terms of money (gold).

In one sense, as I wrote last week, I hope so. The seemingly endless bull market has caused consumption of capital on a staggering scale. The sooner the destruction ends, the better.

However, falling stock prices is also a problem. It means that businesses are chronically becoming less and less valuable. What could cause that? It means they are consuming or otherwise destroying capital. Any company doing that is surely headed towards bankruptcy. If it is occurring to all firms, then the economy is in liquidation mode.

If gold outperforms stocks, then that means stocks are going down in terms of money. No one gets wealthy in a world where businesses are eating themselves alive.

Keith Weiner is president of the Gold Standard Institute USA in Phoenix, Arizona, and CEO of the precious metals fund manager Monetary Metals. He created DiamondWare, a technology company that he sold to Nortel Networks in 2008. He has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona. In March 2015 he moved his Gold Standard column from Forbes to SNBCHF.com.
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