Dow/Gold Ratio Remains Low On Historical Basis

Dec. 3.12 | About: SPDR Gold (GLD)

As of the November 30, 2012 close of 7.59, the Dow-Gold Ratio is up 32.9% from its 21-year low of 5.71 set last year on August 22, 2011. The Dow-Gold Ratio is a measure of inflation and stock market sentiment. It shows how many ounces of gold it takes to buy the 30-stock Dow Jones Industrial Average.

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This next chart shows the DOW:GLD ratio.

GLD is the exchange traded fund for Gold which is much easier for individual investors to own than physical gold, especially in IRA accounts.

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My favorite GLD Charts and Intraday GLD Chart

Is GLD a Buy Today?

This chart shows the price of gold is much closer to all-time highs than its 30 year low of $253.20. With central banks around the world have printing presses running at full speed, the value of all currencies is falling thus putting upward pressure on commodities such as gold. (click to enlarge) Click to enlarge

The markets, measured by the S&P 500 and DIJA, may have recovered to new highs in 2007, but the Dow-Gold Ratio told a different, truer story of just how unhealthy the U.S. economy was.

  1. Back in 1999, it took nearly 45 ounces of gold to buy the DJIA.
  2. On Monday August 22, 2011 the Dow-Gold Ratio hit a 21-year low of 5.71.
  3. August Gold/GLD Resistance and support levels for the price of gold.
  4. As of November 30, 2012 it now takes 7.81 ounces of gold to buy the Dow.
  5. Gold quote and charts.

All Time Lows: The DJIA-to-Gold ratio got down near 1 in the early 1980s and was just under 0.2 in the early 1800s. This 200-year Dow-Gold chart (courtesy of shows the Dow-Gold ratio from 1800 through August 2008:

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With the Dow-Gold ratio now at 7.81, it is still trading below the green zone in this chart.

Historically, buying stocks when the ratio is below the green band was rewarding if you had patience.

My key comments to critics of these chart from my article "Dow-Gold Ratio Rallies To Downtrending Resistance Line"

  1. Obviously, this chart from Sharelynx is making estimates to show TRENDS. To me that is useful hence I'll continue to show the chart until I find something better.
  2. The DOW changes often... there was no Microsoft or Cisco back in 1896 or even 1956 yet they are in the DOW today. I show the chart knowing it has imperfections so some people don't jump to conclusions saying the ratio is near a historical bottom which some might have using my 30-year chart.

During a May 4, 2012 CNBC interview Charles Munger, vice chairman of Berkshire Hathaway (NYSE:BRK.A), said,

"I think gold is a great thing to sew into your garments if you are a Jewish family in Vienna in 1939. But, civilized people don't buy gold. They invest in productive businesses... I love the portfolio we've gradually developed in Berkshire... By and large they are doing productive, useful work, it's not outsmarting the computer systems in the trading markets."

On May 7, 2012 Bill Gates, Microsoft (NASDAQ:MSFT) founder and former CEO, said,

"Certainly equities are, their attractiveness relative to bonds is higher today than any time in my lifetime.... so we have more... we've always had a very high equity percentage but its... ah... virtually EVERYTHING is equity oriented at this point."

It is interesting to me that two of the more successful capitalists in my lifetime don't own any gold as an investment and they were on TV about the same time talking up equities. I can't ever recall Bill Gates talking about stocks as offering good value before then.

How to trade

Unless you worry about an Armageddon where you could lose access to your investment, one of the safest and easiest ways to trade gold is through an ETF. The fund managers buy and store the metal for you so you don't have to worry about storage costs or security. The major disadvantage is that if the whole financial system melts down, you may lose access to your investment. For that reason, many who want to hedge against inflation and an Armageddon-type event will buy gold bars and coins.

I prefer SPY for the S&P 500, over DIA because it is more diversified. I agree with Bill Gates that stocks offer tremendous value now. It doesn't mean they won't go lower and give even better value in the short term, but long term I expect they will outperform gold and bonds.

Disclosure: I own some gold jewelry and gold coins mostly for pleasure and for an Armageddon event. For inflation protection, I own individual TIPS and Series-I Bonds which are boring compared to the volatility of gold or silver (NYSEARCA:SLV) but pay inflation adjusted dividends which add stability to my investment portfolio which aids in getting a good night's sleep no matter what the market does. I also own SPY and recommend it in my newsletter "explore portfolio."

Disclosure: I am long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.