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While the DOW flirts with 14,000, now just 1.2% below its all-time closing high of 14,164.53, the DOW:Gold ratio remains near 20-year lows.

DOW Statistics: (click to enlarge)

As of the February 6, 2013 close of 8.33, the Dow-Gold Ratio is up 45.9% from its 21-year low of 5.71 set 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 DIA:GLD ratio. DIA is the exchange traded fund for the Dow Jones Industrial Average, an easy way to invest in all thirty Dow stocks with a single investment. Likewise, GLD is the exchange traded fund for Gold which is much easier for individual investors to own than physical gold, especially in IRA accounts.

(click to enlarge)

Note that this chart shows DIA with dividends reinvested is at an all-time high. I prefer to own SPY, the exchange traded fund for the much broader S&P500 index but the idea is the same. Dividends matter and they are often overlooked with discussing the relative merits of stocks compared to gold.

While Gold is up in the last two years, so are stocks. In my February 2011 article "How to Play Expected Inflation from the TIPS Spread," I wrote I was long SPY, as one way to benefit from expected inflation. "I also believe it is a good time to own equities including SPY, the exchange traded fund for the S&P 500, for both inflation protection and income."

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)

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 February 6, 2013 it now takes 8.33 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 sharelynx.com) shows the Dow-Gold ratio from 1800 through November 2012. I added some trend lines. I think it is not a coincidence that the wild swings in the Dow/Gold ratio began after the formation of the Federal Reserve in 1913.

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With the Dow-Gold ratio now at 8.83, 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. Those of us who bought or added to our equity positions in the past four years have clearly been well rewarded.

My key comments to critics of this 200+ year chart from my November 2011 Seeking Alpha article "Dow-Gold Ratio Rallies To Downtrending Resistance Line" are:

  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.

My Recommendation: I own some gold jewelry and gold coins mostly for pleasure and for an Armageddon event. For inflation protection, I own stocks that pay dividends and have recommended SPY here for years in my Seeking Alpha articles and in my newsletter portfolios. I also 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.

Source: DOW / Gold Ratio Still Low On Historical Basis