The pendulum is always swinging. The Dow goes up the Dow goes down. And the same swings from overvalued to undervalued happens for all the other investment classes too. The other cycles that most investors watch are real estate and the gold and silver value. Now this is a tale of two brothers Dave and Gordon both born in the last half of the 1800’s and their families. At the turn of the century they both started their families and Dave and Gordon decided it would be a great idea to start an investment savings account for their first born children Joe and Bill. So they each invested one and a half ounces of gold in their accounts and bought a share in the Dow at that time worth $30.

By 1923 their investment had tripled, and then the markets really took off. In 1929 that share in the Dow was worth twelve times what their fathers had paid. In 1929 Joe’s daughter Sara was born and Bill had a son Daren. Both fathers in 1929 transferred the investment accounts in trust over to their newborn children. Bill had been taught and believed his bank’s investment advisor that you should have a diversified portfolio and hold on for the long term, so he kept the one share in the Dow, which was now worth $380, in the account. Joe on the other hand had recently learned a little bit about investment cycles and had a bad feeling about the stock market. With the Dow at 380 points he decided to sell and buy 18 one ounce gold bullion coins.

A couple of months later the Dow crashed and bottomed out at 40 points (2 ounces of gold) three years later. Joe now sold Sara’s 18 ounces of gold and bought 9 shares in the Dow. Sara held on to her investment for the next three decades and did very well. But in 1966 she remembered the story her father had retold many times about selling all stocks when the market is overvalued and buying gold. Sara looked at the P/E ratios in the market and found that stocks in general were extremely overvalued. And when the Dow was priced in ounces of gold it was one and a half time higher than the peak in 1929. So Sara sold her shares in the Dow and was delighted when she was able to make a gold purchase of 252 ounces at the current gold price per ounce.

In 1972 the US dollar was no longer tied to gold and the value of gold started to rise and in the late 70’s it took off up to $850 per ounce. At that point Sara decided it was time to sell her gold. The Dow also happened to be at 850 points at the time so she bought 252 shares in the Dow.

In 1999 Sara was getting renovations done to her house. One day she heard the workers talking about the dot com stocks they were buying and she immediately started to get an uneasy feeling about her stock investment. She found the P/E of the market was over 30 percent higher than the peak of the market of the 1929 crash. Then she divided the points of the Dow by the value of gold and found that in terms of gold, stocks were almost two and a half times more overvalued than before the crash. So Sara went to her computer and she put in an order to sell her shares in the Dow. She took the proceeds and bought 11,088 ounces of gold.

It had been years since Sara had talked to Daren and when they crossed paths again in 2008 Daren talked about the financial wisdom his father had passed along to him. “Live below your means, get out of debt, save your money and invest for the long term.” He was especially proud of how his first investment account that had remained invested in the Dow had grown over the years and today was worth $12,000. Sara didn’t have the heart to tell him about the eleven thousand ounces of gold in her account and what it is was worth with the current gold price per ounce.

Now let’s do a little math. That $30 share in the Dow Daren’s grandfather bought had gone up 40,000%. When you divide that $12,000 by the price of gold today you could buy 8 ounces. In 1929 it was worth 18 ounces, so in terms of gold that 1929 share in the Dow has lost 55% of its value.

Sara’s 18 ounces of gold in 1929 had grown to 11,088 ounces, a 61,600% gain since 1929 and from 1900 the original 1½ ounces gained 739,200%. That original $30 investment has had a gain of 55,440,000% with gold prices today at $1,500 per ounce.

Now the question is; - how many of you blindly accept the advice of you financial advisor at the bank and invest in mutual funds and bonds? Take a look at the history of gold, silver and the stock markets. You don’t have to wait a 100 years to get rich. We are in one of the biggest wealth transfers in history right now. If history repeats itself gold and silver still could have a long way to rise above todays gold rate and stocks are likely to fall in price.

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