What are Wealth Cycles, and do they help predict future asset class values?
Understanding the right time to make your next money move is the key to building true generational wealth. While it is next to impossible to perfectly time the highest or lowest value of an asset or the direction of the marketplace, it is possible to plan a shift of your wealth into the most valuable asset class of that time based on a specific methodology.
Mike Maloney explained a methodology based on the belief that long-term cycles might be the key to unlocking exponential growth, also known as ‘’Wealth Cycles’’. It’s worth noting that Wealth Cycles aren’t a new tool, it has already been around since ancient Rome and Greece. However, it may let people recognize certain upcoming wealth cycles that might change their investment idea’s.
The easiest way to grasp the Wealth Cycle concept and accurately measure an asset’s value is to use gold as a counter valuation metric to establish a baseline. Gold has historically been used as a form of currency and most importantly, its supply is not counterfeited by banks. Unlike fiat money, which is constantly changing. This is one of the reasons why Hatchworks used gold as a valuation metric in this report.
Below is a summary table that shows gold’s current ratio and where gold was overvalued and undervalued compared to other asset classes.
An important component of the Wealth Cycle refers to the infamous “bubble” we have all heard of. This occurs when investors from one asset class rush into another asset class until it becomes overbought and overvalued to the point where it collapses or bursts.
However, in a world driven by central banks who are constantly printing fiat currency, asset classes that should be undervalued tend to go sideways or just slightly increase in value. The ever-expanding monetary system then creates an environment where it becomes difficult to determine the true valuation of an asset at any given time.
In a more specific example, during the 1970s, gold was rising much faster than the value of stocks. If one had invested in gold and attempted to sell it 10 years later, one would be able to buy a greater number of stocks in comparison due to the high valuation of gold. If one wanted to flip the scenario, and wanted to sell stocks in order to buy gold, one would end up with a much smaller amount of gold due to the lower valuation of stocks.
Once the decade was over in 1980, gold had peaked around $686 per ounce causing an overvaluation of this asset class while stocks were very undervalued. This caused the Wealth Cycle to reverse and form the 20-year bull market, which saw the value of gold decrease and the value of stocks increase until it reached the legendary “tech bubble” in early 2000.
As mentioned earlier, timing the future value of an asset is not an exact science. However, with the Wealth Cycle methodology, it becomes simpler to identify opportunities to buy and sell in an ever-changing marketplace by dividing an asset class such as real estate or stock with the price of gold.
In another example, we can look at the price of gold in comparison to the Dow Jones Industrial Average (DJIA).
Around 1971 we would have needed 22.94 ounces to buy just one share of the DJIA. In 1980, about 9 years after President Richard Nixon halted the convertibility of gold, the DJIA/gold ratio reached a low point. For 1.41 ounces of gold, investors could buy 1 share of the DJIA leaving this an optimal time to sell positions in gold and buy DJIA shares according to the Wealth Cycle. Currently the DJIA/gold ratio is at around 16.36.
Shortly after, the biggest bull market in history drove the DJIA/gold ratio to a new high of 40.22 leaving yet another opportunity for investors to shift their wealth out of the DJIA and into gold. This sent gold on the rise to reach an unprecedented amount of $1,821 per ounce before the bear market took hold.
When Bitcoin entered the arena, an interesting dynamic unfolded. Like gold, Bitcoin has a limited supply. This is in comparison to fiat currencies that are more prone to inflation. If you purchased Bitcoin in early 2013 for 0.056 ounces of gold, you would have been able to sell it in 2017 for 14.019 ounces of gold. After this peak, Bitcoin became bearish and the Bitcoin/gold ratio dropped to a low of 2.119.
This would prompt a scenario where one could potentially buy 1 Bitcoin back for 2.119 ounces of gold and hold on to the other 11.9 ounces of gold to diversify its portfolio. It should also be noted that the Bitcoin/gold ratio bounced back a few times to 5 before going back up again even further. To give you a real-time example, at the time of this writing, the Bitcoin/gold ratio is at 19.378.
Learning to ride the waves of the marketplace by using the Wealth Cycle methodology, alongside a range of other tools, to measure asset classes against the price of gold, can be an insightful exercise. Understanding that making progress and not worrying about perfection will help you stay grounded in an unpredictable marketplace. Please note, however, this is not investment advice to buy or sell bitcoin or gold in any way and should not be taken as such.
Disclosure: Hatchworks is an investor in a range of equities, gold, bonds, bitcoin and other assets on a proprietary basis. The information provided in this document is not investment advice nor is it a solicitation to invest in any asset. For webinar, social media appearances, you may send an email to info@hatchworksvc.com.
