How about Gold as a Call Option? Onward Sideways.

Former Wall Street analyst Ms. Schroeder on learning from Warren Buffet , “He thinks of cash differently than conventional investors,” Ms. Schroeder says. “This is one of the most important things I learned from him: the optionality of cash. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”


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To illustrate this point look what happens when you buy the day after a major crash. We recently had the 25 year anniversary of the 1987 stock market crash when the Dow plunged 22.6%. From Marketwatch:

“A $10,000 stake in the 30 Dow stocks on Oct. 20, 1987 would be worth more than $137,000 now, according to investment researcher Morningstar Inc. That’s an 11% annualized return, including dividends, and even factoring in shareholders’ “lost decade” between 2000 and 2010.”

Not too shabby. Since we don’t have a Paul Volcker like we did back then managing the Fed lets looks at gold.

Well, if cash can be a call option than over the last decade gold has been a call option on steroids.

The stock market has been going sideways for the last 12 years or so, also known as a secular bear market. Look at the Dow priced in gold.

More than likely you will be able to buy the Dow for an ounce of gold again, or at least two ounces.
Now lets look at the Dow valued is dollars over the same time frame.

Sideways! It doesn’t look it, but the stock market is getting cheaper in this sideways market. Right now we are in the high end of the channel, and it looks due for another drop or two (we might be getting one now as the Dow had dropped over 200 points today).

The Current Shiller PE Ratio (which is the PE ratio adjusted for inflation) is at 22.48, so according to that the stock market is expensive. But as you can see it’s down drastically from it’s 2000 highs.

This is why I think we will get another drop in the market. It is simply just not done correcting and getting rid of all the malinvestment. Typically if you have an extreme on one end, you will reach the other end and some point. When will this all goes down I don’t know, but I believe we will see the market continue on in it’s sideways channel for a while longer. Scoop up any large sustained drops.