Everyone Should Be Thrilled By The Collapse Of Gold

On Friday, when the price of gold plunged we said it was “great news.”

The idea is basically this:

The last few years have seen a major ideological battle take place.

On one hand you have established economists, who believe the government has tools at its disposal to address a crisis. These tools include deficit spending and a violent expansion of the Fed’s balance sheet.

Conversely you have critics who slam the arrogance of economists and central planners, and who have predicted that all of this economic acrobatics would result in an economic collapse, hyperinflation, and an explosion in the price of gold. Gold is important to their worldview, because it represents a quasi-money that’s not tied to any government or central bank.

Investing in gold is a rejection of government money and finance. Money flowing into gold-related assets represents a belief that rocks (however shiny they are) are a better place to invest than human endeavours (like stocks).

Here’s a chart of the S&P vs. gold going back a few decades.

FREDYou can see that even with the recent upturn in stocks, relative to gold, gold has crushed stocks since 2000.

Arguably, 2000 represented a peak in belief in the capabilities of humans. The internet inspired all kinds of crazy optimism about how humans would re-shape the world for the better. The ebullience spread beyond the net. There was, for example, optimism about new ways of transporting humans.

Of course, the bubble crashed. Then we had 9/11. Then we had two wars. Then we had the housing implosion. Then we had the financial crisis. Then the horrible recession. Then the European crisis and the debt ceiling and everything else.

In other words, we had a series of a events that, for good reason, shook our faith in humanity. During this time, people thought about history on a large scale. And gold, having been used as a money for thousands of years, did pretty well, especially relative to stocks, which represent companies made up of humans.

If we zoom in on the above chart, we see that stocks vs. gold (red line) actually bottomed in Summer 2011. Stocks themselves bottomed in early 2009 (blue line).

FREDThe nadir of the red line came immediately after the US debt ceiling struggle, which is when it looked like the U.S. — weary of crisis and angry about everything — might do the unthinkable and blow itself up by not paying its debt.

That didn’t happen (fortunately) but if you want to pinpoint a time when it made the most sense to believe in rocks over humans, that was probably the moment.

Since then, the fever has begun to break.

Washington is fractious, but not like it was in 2011.

Housing, which was central to America’s national malaise, has begun to turn around for real.

Note that the XHB (homebuilder ETF) made its bottom right around then, and then began to turn around for real (via Stockcharts.com).

homebuilders index

So ultimately, the decline of gold and the rise of stocks is a big trend that everyone should cheer.

The huge corpus of economic research, which has informed the U.S.’s efforts to stimulate the economy, is not a pile of garbage. You can do a lot without blowing things up, as the goldbugs claimed would happen. And more broadly, this represents a breaking of the fever, and perhaps a return to thinking that humans aren’t such a horrible disappointment.

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