Vector Money Management

March 26, 2012

Stable Money Makes a Difference

Filed under: Uncategorized — vector @ 4:04 pm

The chart below is offered as an example of top down insight on monetary policy and its effect on the S&P 500 benchmark.  Even though the U.S. has operated with a fiat currency since President Nixon closed the gold window on August 15, 1971, gold is still a useful metric in assessing the job the Federal Reserve is doing in providing a stable dollar.  Gold is, after all, history’s oldest form of money and still recognized around the world as money.  The graph below charts the S&P 500 versus the value of the dollar in fractions of a gold ounce from August 15, 1971 through January 31, 2012.  The chart is divided into a 10 year period of a falling dollar, a 20 year period of a relatively stable dollar and a 10.5 year period of a falling dollar: The gains shown for the S&P 500 for these three periods do not include dividends.  The out-performance by the S&P 500 during the stable dollar period is dramatic.  The data strongly supports the notion that the broad economy and the broad market (where the benchmarks focus) perform better with a stable dollar as measured against gold.  Common sense also supports that notion.  Tens of thousands of contracts, almost all denominated in dollars are signed every day between businesses for delivery or receipt of goods and services.  Those contracts are much more likely to be profitable for all parties when the dollar is stable for the life of the contract.  Change the value of the dollar and it will be a boon for one party and a bust for the other.  Boom and bust is an apt description of the economies and financial markets in period 1 and 3.