Stocks vs. Gold
Source: Jason Hommel, Silver Stock Report††(5/26/10)
"The NYSE is currently valued at $28 trillion, and should be worth no more than $0.28 trillion. . ."
May I explain for a moment why American stocks are so overvalued compared to gold?
Ok, let's start with the basic premise of stocks.
A stock is a fractional ownership of a business, the goal of which is to make money. If the business can make money, then the stock might be worth something, in theory, if everything goes right.
If money is defined by gold, then all the businesses in the world can never be worth more than all the gold that exists, because all the businesses in the world can never earn more than that which exists.
All the gold that has ever been mined in all of human history is estimated at about 155,000 tons, or about 5 billion ounces of gold, which is less than 1 oz. of gold per person on the planet, as there is an estimated 6.8 billion people (as of May, 2010).
With gold valued at about $1,200/oz. x 5 billion oz., then all the gold in the world is worth about $6 trillion.
The total value of all the businesses in the world should never be worth more than that. Period. Because they cannot all earn more than exists, and that's what exists.
The U.S. is only one nation on earth. U.S. GDP is $14 trillion out of a world GDP of about $60 trillion.
The NYSE is only one stock exchange in the U.S. It does not include stocks listed on the NASDAQ, Amex, Pink Sheets or the OTC markets.
The NYSE is the world's largest stock exchange by market capitalization of its listed companies at US$28.5 trillion (as of May 2008).
Let's assume that the NYSE is a proxy for the American economy. Clearly, it is not, as there are many American companies that are not listed on the NYSE; but many companies make money overseas, so let's assume those balance out.
World gold, again, is worth only a paltry $6 trillion, at $1,200/oz. The American economy (with the NYSE as a proxy for that) is 14/60th part of the world economy. Thus, the American economy (NYSE) should be worth no more than 14/60th parts of world gold valued at $6 trillion, which is only $1.4 trillion.
But companies have costs, so not all of what they earn can flow as profit. Let's assume the average business has 80% costs and earns 20% of net revenues, and assume net revenues can actually be as high as "all the gold in the world" that they could earn, which is grossly over optimistic.
Then the American economy, (NYSE) can only keep, or earn, 20% of the $1.4 trillion, which is $0.28 trillion.
It is said that companies can be worth a multiple of earnings. Yes, but people also spend only a tiny fraction of savings each year; so that balances out. So if people only spend 1/10th of world gold each year, and if companies are worth 10 times annual earnings, then it balances out, and no math is needed to adjust.
The point is that the NYSE is currently valued at $28 trillion, and should be worth no more than $0.28 trillion. The point is that American stocks are currently 100 times overvalued compared to gold. Or, conversely, gold is 100 times undervalued compared to American stocks.
How did this happen?
Stocks and paper money became an irrational mania, one fed off the other. These manias can last a long time, in this case, well over a generation, as gold has not been common money anywhere in the world for multiple generations now. Manias, like frauds, can end very swiftly, literally overnight.
This overvalued stock mania is close to ending, merely for the fact that the baby boomers, who bought into it, are holding stocks that they plan to sell off as they begin to try to live off the proceeds for retirement. When that entire generation stops earning and begins selling, who will be buying?
Stock values must collapse; there is no way that any force anywhere is big enough to keep them propped up. Gold will go up, as more and more people realize the value of scarce gold. And silver, even more so.
All the world's silver mined is only worth $10 billion, most consumed by industry, leaving a scant $2 billion for investment per year. That's $0.002 Trillion.
The only way that a $28 trillion market, can flow into a $0.002 trillion market, is when the $28 trillion market collapses in value, and the tiny $0.002 trillion market explodes in value.
Get silver. It's a race against time. It's a race against all the other baby boomers who bought into a stock mania that is destined to collapse against the harsh reality of historic and trusted values.
While we are considering historic values, consider what life was like over 105 years ago, on Market Street in San Francisco in 1905ówell before the Federal Reserve was founded in 1913. Check out this movie on YouTube. The freedom on the streets is amazing; no rules of the road, nobody is hurt, people are dodging cars, driving the wrong way. . .it's just amazing.
Life will go on, whether you make the right investment decisions or not. Ownership will just accrue to those who take wise actions.