By Sumit Roy
Could this be signaling an end to the gold bull market?
Both gold and stocks have been in the headlines in recent weeks for hitting various milestones, the latter for spiking to record highs and the former for plunging to the lowest levels in months. That makes now an especially interesting time to take a look at the Dow/gold ratio that many traders follow.
The ratio measures the relative value of the Dow Jones Industrial Average and the price of gold. A higher ratio indicates that stocks are relatively expensive compared to gold, while a lower ratio suggests that stocks are relatively cheap compared to gold.
From a quick glance at the chart above, we can see that despite the big moves in the Dow and gold in recent weeks, from a big-picture prespective, the Dow/gold ratio has barely budged. True, the ratio is up to 9 from as low as 5.7 in 2011, but it's hard to say that the move represents a change in the longer-term trend -- that is, the downtrend in the ratio where gold has been rallying, while stocks have underperformed.
Looking at tumultuous periods in the past, we've seen the ratio rise briefly before falling back down again. In two separate instances -- in 1933 during the depths of the Great Depression and in 1980 during the period of double-digit inflation -- the ratio fell below 2 before bottoming out.
Gold bulls suggest the same will happen again before the bull market in gold is over. Bears argue that a few data points from the distant past are hardly indicative of anything, and for all intents and purposes the ratio holds little use.