The Dow is trading above its historical average when priced in gold
Here’s a blast from the past. Remember when gold went 12 straight years of positive returns from 2001 through 2012? Not only that, it outperformed the Dow Jones Industrial Index (DJI) in 10 of those years. When the Dow began making new highs in 2013, it was still down 75% when priced in ounces of gold. Some people made the case that heavy money printing inflated the index's price, masking the fact that the economy wasn’t really in great shape. Looking back, bulls should have made the case that it signaled stocks were still cheap. Either way, I thought it would be interesting to see where the stock market stands now, in terms of gold and a few other commodities.
Stocks Priced in Precious Metals
Below is a chart of the Dow along with gold since 1975. Gold lost about half its value from 1980 through 2000, but it then surged higher over the next decade. Gold continued higher as stocks crashed during the financial crisis in 2008-2009. The metal finally topped out in 2011, but fell nearly 30% in 2013. Currently, gold is trading around $1,300 per ounce, while the Dow seems to just go higher -- especially over the past couple of years.
Next is the chart of the Dow priced in ounces of gold. In 2013, as the Dow was making new highs (in terms of dollars), the index was trading around its long-term average of about ten ounces. The past two years have been decent for gold, gaining more than 8% in 2016 and 13% in 2017. It’s not match though for stocks. The Dow was up 13% and 25% in those years, respectively. The index is approaching 20 ounces of gold, which is about double the all-time average and a level that has only been reached on two other occasions -- and neither of those times did a pullback happen immediately.
If you price the Dow in ounces of silver, then it looks even more expensive. It’s about three times the all-time average. If silver remained flat, the Dow would need to gain about 60% to match its all-time high from the tech-bubble years.
Stocks Priced in Other Commodities
If you’re not valuing the Dow in dollars, then it seems most natural to value it in precious metals like we did above. Gold and silver have been used as currencies in the past. You can, however, value the Dow in anything. The chart below shows the number of barrels of oil it would take to buy the Dow. Interestingly, the current level is like gold in that it’s about double the all-time average and half the all-time high.
Copper is often referred to as "Dr. Copper" because, according to Investopedia, it is said to have a Ph.D. in economics and can predict turning points in the global economy. The chart below prices Dow in pounds of copper. Copper gained 17.5% in 2016 and 30% in 2017, which actually beat stocks. In pounds of copper, the Dow is a bit more than double the all-time average. If copper remained stable, the Dow would need to gain 150% to reach its all-time high when priced in the metal.
In conclusion, stock indexes are reaching extremely high levels. The Dow is less than 10% away from being twice its 2007 high. On the other hand, maybe it’s not as expensive as we think. When priced in some other commodities, the Dow needs to significantly increase (by 60% in terms of gold or 150% in terms of copper) to reach its high from nearly 20 years ago.