Back to Gold?

By Paul Amery

Is gold about to embark on another upleg when measured in terms of the Dow Jones Industrial Average index?

The two charts below, taken from Fred’s intelligent bear site, show the long-term (hundred year) and medium term (thirteen year) trend in the Dow/gold ratio, the figure you get when you divide the Dow Jones Industrial Average index by the price of gold in US dollars. The ratio peaked in 1929, 1966 and most recently in 2000, signifying the top of equity bull markets. It hit lows in 1932 and 1980, which represent bottoms.

Since 2000, the ratio has fallen from its peak of 43.7 to a trough of around 7 in March 2009, from where it has recovered to the current level of just below 10.

click to enlarge

It’s important not to get too religious about the charts and absolute levels of the ratio – the Dow, after all, has undergone many constituent changes over 100 years (even if the gold part of the ratio is hopefully unchanged). Also, the ratio doesn’t account for income received from equities, which is an important part of their long-term return.

But the plotting of share prices in gold (rather than cash) terms, plus the use of a logarithmic scale, help illustrate two things. First, the current equity bear market clearly started at the turn of the millennium, not in 2007 (when many share indices hit highs in nominal terms). In fact, the equity market rebound of 2002/07 doesn’t even register on the chart because the price of gold was rising at the same time.

Second, although the Dow/gold ratio has already come down from 44 to 10 or thereabouts, the log scale of the y-axis shows that, if we are heading for the same kind of low that we saw in 1980, we’re only about a third of the way through gold’s bull market (in equity terms). That’s worth thinking about when reading debates about whether gold can break through US$1000.

As Fred puts it on his site, “the chart shows the cyclical nature of the battle between paper assets and hard assets. Paper assets excel when everyone is fixated on growth. When the growth phase ends, and preservation of wealth becomes the paramount concern, gold tends to excel. When paper burns, gold shines.”

We’re talking very long-term cycles here. But those who have stuck with precious metals at the expense of equities since 2000 have been richly rewarded. And, with real economic activity everywhere under threat from government borrowing and possible debt deflation, who’d argue against gold embarking on another upleg in its bull market against shares?

Original post

Comments

[yellowhoard:]

Good article.

Dow gold equivalence is my sell trigger for long term gold.

Question is, depending on QE, this could be either 2000 or 30,000.

Sep 04 06:33 PM

[Gold Barron:]

I believe the answer to the recent increase in the price of silver and gold can be attributed to what is written in the following article by Ted Butler. Any serious gold or silver trader should read the following article. Amazing article!

news.silverseek.com/Te...

Sep 05 12:02 AM

[surgcare:]

Fox reported that the chinese were encouraging their citizens to buy gold and silver . How does that square with the chinese defaulting on shorting silver?

Sep 05 09:25 AM

[Vuke:]

QE is now in place everywhere. The crowds have lined up for their passport access to it except the bureaucratic administators don't know the back end of a horse from its front.

Naturally, they'll opt to reward the smooth talking crowd first. We'll see the market (and gold) go much higher before we see equivalence. With the money changers in charge that will take some time during which gold will continue its measured pace up.


On Sep 04 06:33 PM yellowhoard wrote:

> Question is, depending on QE, this could be either 2000 or 30,000.

Sep 05 09:35 AM

[The Recusant:]

Question: are the banks attempting to short PMs to keep them below $1000 (gold) and $20 (silver)? If so, can they keep them below those resistance levels when robust sales are pushing them up? Your thoughts are requested.

Sep 05 12:05 PM

[Keer-eh Khar:]

Indeed: At Dow 3000; Gold price will be 3000 -- for a Ratio of 1.

This within 5-8 years.

Sep 05 09:45 PM

[5142152-337:]

The Recusant:

IMHO, sir, the JPMorgans who have dominated the shorting of silver are being squeezed by the ENLIGHTENED who have started to demand their PHYSICAL silver instead of sitting on a bundle of WORTHLESS paper. Now that that is happening, its only a matter of time (verrrrry sooon) that these EGBs (elitist greedy bastards) will end up on the SHORT end of the stick, and the true price of silver (and gold) will be evident. So, YOUR role here is to get some silver and gold and hold on, its gonna be a whirlwind run up on their prices.

A significant event within the past week which will indeed impact PMs is that China has SUCCESSFULLY engaged a number of nations to utilize their currency (yuan/renmendi) side stepping the almighty US dollar. That will have an enormous negative for the Fed who will be buying bonds (some 54 billion) next week to keep the USD from taking a dive (which is inevitable, unfortunately). That is another reason to get into PMs--physical--.

Sep 05 10:56 PM

[YaHozna:]

It seems gold and silver will be the star performers in 2009/2010.

Since their prices are orchestrated by the US/GB politburo's already for many, many years, it is no surprise that nature will finally overrule these manipulations and with that, the criminal plans of the members of these politiburo's.

Sep 06 02:16 AM

[harammph:]

Gold Barron: What is your problem, this is the 2nd time you have posted your link and it has No Relevance to Gold's Appreciation unless you wish to consider "Rumor Mongering" as a reason for Gold to Move Up.

Ted Butler has made an Inference from An Article he used to support his Claims.

The Following are the last few paragraphs from that Article:

"While the existence of the letters is in doubt, the debate over what to do about losses at Chinese state-owned enterprises, and the search for a political solution, is real.

The state-run Shanghai Securities News said at the beginning of this month that Beijing planned to tighten the rules on trading in over-the-counter derivatives.

The same week, China Business News cited an unidentified source as saying banks and business trading in financial derivatives would be more heavily regulated, speculation discouraged, and derivatives trade between foreign institutions and domestic companies banned.

–Chris V. Nicholson"


"While the existence of the letters is in doubt, the debate over what to do about losses at Chinese state-owned enterprises, and the search for a political solution, is real."

The Author of the Article that Butler used for his premise, doesn't believe the Rumors. He does believe China is acting to address the situation.

"The same week, China Business News cited an unidentified source as saying banks and business trading in financial derivatives would be more heavily regulated, speculation discouraged, and derivatives trade between foreign institutions and domestic companies banned."

Why the hell would Gold Move up based on this Statement?

Sep 06 07:53 AM

[Keer-eh Khar:]

Indeed: At Dow 3000; Gold price will be 3000 -- for a Ratio of 1.

This within 5-8 years.

Sep 06 10:20 AM

[one eye:]

I'm in the less than 2,000 Dow Camp, more than $2,000 Gold camp in 3-5 years.

Sep 06 02:35 PM

[Keer-eh Khar:]

one eye --
I like 3000 better!!
How about 5000 at 5000?
Anyone?




On Sep 06 02:35 PM one eye wrote:

> I'm in the less than 2,000 Dow Camp, more than $2,000 Gold camp in
> 3-5 years.

Sep 06 05:30 PM

[Gold Barron:]

The spot prices of gold and silver are going to soar eventually. Be sure to hold the physical metals because the paper contracts are worthless.

Do you believe what the US government is telling us? I don't.

Sep 06 09:09 PM