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What does the Dow:Gold Ratio signal for prices ahead?

with one comment

If the Dow Jones Index is expressed in the only currency that does not inflate over time then the ongoing bear market is very clearly visible, with the rally of last year nothing more than that, and we have to ask how will this ratio proceed until it reverts to the bottom of one last seen in 1980.

Then the gold price was $850 an ounce and the Dow index highly depressed during the last big US recession. Looking at this chart and extrapolating forward then gold prices look to be going much higher, while the Dow Jones is in for another downturn.

Commodity boom

Simply stated it can be noted that over time gold, oil and other commodities have a reverse correlation to stock and real estate markets. One is rising while the other is falling, and vice-versa. The Dow:Gold chart shows this inter-relation very neatly.

So to revert to the long-term low point of one on this index almost certainly requires a combination of gold heading much higher in price and the Dow taking a tumble. And is that not what the bearish noises on Wall Street and the bullish babble from gold bugs is telling us?

Are we not heading into a couple of years of near depression like 1980-2 with stock market prices too high right now? Is gold not increasingly attractive to investors with bond prices looking very vulnerable in particular, once stocks have corrected?

Other scenarios

Try to turn it the other way round – which is also a way to the index point of one. Then stocks would have to fall by almost 90 per cent just to get to the current gold price, or the gold price would have to surge by a factor of ten to meet the current Dow.

Interestingly none of these scenarios is negative for the gold price. You would need to see the Dow:Gold trend broken entirely for that to happen, and what on earth could do that? Long-term trends in major asset classes are among the most reliable of indicators.

Given that the trend is your friend until it is not, then the Dow:Gold chart is a guide to serious investors about where to put your money for the next few years. Of course, this is a long-term trend, so a short-term setback for the gold price can still happen as the Dow first sinks, and might be expected as the dollar would rally strongly.

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Written by Peter Cooper

January 31, 2010 at 8:46 am

One Response

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  1. A whole lot of folks are saying that, because of Greece and other Southern European countries’ debt, the euro is going down, and the US dollar will continue to go up. You can read a very good (and long) article on the Bloomberg site. Will gold slide some as a result of a stronger dollar?
    And wouldn’t you know it, just as I was ready to make a killing on oil, some big Iraqi official says Iraq will be the largest exporter in 6 years. That, and a stronger dollar, might even push the oil price down a bit for a while. If it actually happens, it will certainly push back peak oil a few years. There went my dream jet. I get air sick on the little ones anyway.

    Bill Simpson in Slidell

    February 1, 2010 at 2:52 pm


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