Whenever Pinocchio told a lie his nose would grow, and it would be very helpful to investors if we could easily see when someone was lying like Pinocchio. We are being told that the Nasdaq Composite Index hit a record high and rose above 7,800 for the first time in June. Many investors are celebrating, and the Nasdaq seems to have come a long way since it began at 100 in 1971. The truth is that most of those gains came from asset price inflation. America also left the Gold Standard in 1971, so looking at the Nasdaq on a gold basis provides fascinating insights into investing and an honest way to evaluate market performance.
The first thing you'll notice is that the price performance of the Nasdaq would have been terrible during the first few decades. If America had remained on the Gold Standard, the Nasdaq would have lost about 90% of its value during the 1970s. What is more, it would not have returned to the initial value of 100 until the Internet started taking off in 1995. Rather than the endless gains of the paper dollar era, the Nasdaq on a gold basis suffered through something like the Great Depression. The Dow Jones went about a quarter of a century without making a record high after 1929, and the period 1971-1995 would have been similar for the Nasdaq on the Gold Standard.
I can hear the objections about dividends already, and I'm glad to hear them. The price levels of the Nasdaq, the Dow Jones, and other stock indexes do not include the dividends that investors receive. On a gold basis, investors realize that corporate earnings paid out as dividends play an important role in the stock market. I must admit that gold pays no dividends, but there are also many Nasdaq stocks that don't pay dividends.
The Nasdaq really did repeatedly hit record highs during the late 1990s Dotcom Bubble, and that teaches us something else about record highs. Record highs on a gold basis are usually a warning that stocks are in a dangerous bubble rather than a reason to invest. On the Gold Standard, the Nasdaq would have fallen below its starting value of 100 again during the Crash of 2008 and only recovered to 100 in 2013. All of the long-term price gains of the Nasdaq against gold have taken place in the last six years, and no one knows if those gains will survive another bear market.
Nasdaq stocks have often been good investments, but you should never be afraid of missing out when you hear talk of record highs. All those paper highs are just big lies created by relentless central bank money printing. Gold does not lie, so the price of gold grows like Pinocchio's nose whenever they print money. When you start looking at stocks on a gold basis, you'll stop falling for all the Pinocchio lies about paper money record highs.