Chart of the week: Gold vs. DJIA

May 21, 2008 - Courtesy: Nick Barisheff, Bullion Management Group -  Bullion Management Group manage the Bullion Fund, a Canadian mutual fund that invests in Gold, Silver and Platinum bullion directly. The Bullion Fund trades at net asset value, and in the case of the precious metals themselves, at spot price. The following chart tells an important story about the value of diversification in changing markets.

Many investors believe the myth that gold is a risky investment, while blue chip US stocks are safe investments. The table above, which shows the performance from January 2000 to March 2008 of the individual stocks that made up the Dow Jones Industrial Average in January 2000,clearly refutes this myth. The table shows that many of the blue chip giants, such as GE and Microsoft, have lost over 70% of their value in US dollars. On the entire portfolio of Dow stocks, the equity loss has averaged 24.5%. For Canadian or European investors, additional currency exchange losses of 45% and 35% would have to be added to the equity losses. These losses are higher than the Index itself, which showed a slight increase of 6.7%, as eight of the original stocks have been replaced and the Index is weighted according to market capitalization. Unlike the Index, many investors with a buy-and-hold strategy would not have been in a position to simply replace the stocks. The picture for the NASDAQ Composite Index is even worse. While the Index itself is down by over 50% from its March 2000 high, the average performance of the actual stocks that made up the NASDAQ is even more dismal. Many of the 3,032 NASDAQ stocks that made up the Index in 2000 have lost all of their value, and have been replaced. Those who lost all of their investments with these stocks cannot simply replace them as the Index does. An allocation to "risky" gold, which can never decline to zero, would have at least mitigated these losses through the positive returns of over 224% that it generated over the same period.

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