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Stocks struggle against gold

The top chart shows over 80 years of the monthly stock/gold ratio, while the bottom chart shows daily values over the past three years. Over long periods, stock prices have edged out gold prices, but the ratio can be extraordinarily volatile at times. If stock prices are a proxy for productive assets, and gold prices a proxy for physical (hard) assets, then its reassuring to see that productive activities are more profitable over time than speculative activities. But it's a very rocky road.

Stocks need sound and stable monetary policy to flourish, as they did from the 1950s through the mid-1960s (when inflation was very low and stable), and from the early 1980s through the late 1990s (when inflation fell from double digits to a relatively stable 2%). The problem with stocks today is rooted not only in the potentially inflationary consequences of Bernanke's easy money, but also in the potentially crushing burden of excessive government spending.

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