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Summary

  • Thursday the Dow set a record intraday high of 17,161.55 before closing at 17,069.58.
  • Gold closed at $1,261.70, well off its all-time high of $1,923.70.
  • The Dow/Gold ratio is 13.53, 70% off its record high of 44.56.

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.

  • Back in 1999, it took nearly 45 ounces of gold to buy the DJIA.
  • On Monday August 22, 2011 the Dow/Gold ratio hit a 21-year low of 5.71.
  • As of today September 24, 2014 it now takes 13.53 ounces of gold to buy the Dow.

With the markets just off record all-time highs and the price of gold well below its 2011 record high, the Dow/Gold ratio has soared.

Despite recent gains for the market, the Dow/Gold ratio remains 69.6% below its all-time high.

As of the September 24, 2014 close of 13.53, the Dow/Gold ratio is up 136.9% from its 21-year low of 5.71 set on August 22, 2011.

Since my last Dow/Gold article on April 13, 2013, "With Market At Record Highs, The Dow/Gold Ratio Is Still Low On An Historical Basis":

  • the Dow has gained 15.2% and
  • Gold has declined 14.5%

At the time of the last article, I said I did not own gold but said I was long SPY, a better proxy for the market than DIA, the exchange traded fund for the Dow.

"Dividends Matter:
One of the reasons for owning stocks rather than gold I've listed over the years of writing these Dow:Gold articles for Seeking Alpha is dividends. Note that the chart above 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."

Going Forward:

Will this trend of the stock market going higher while gold goes lower continue or is it a short-term opportunity for gold investors?

I still like stocks for the long run, as recommended in my numerous Seeking Alpha articles recommending SPY, but I recently took a small trading position in GLD, the exchange traded fund for gold, because:

  1. We are starting to see 2.0% inflation in the US
  2. Last month ECRI's US-FIG reached a 71-month high. In "U.S. Debt At 102% Of GDP Hits Another Record... Is It Time To Buy Gold?") ECRI Chief Operations Officer Lakshman Achuthan said "With the USFIG rising further to a 71-month high, underlying inflation pressures are clearly ratcheting up."
  3. Today (9/4/13) the ECB (European Central Bank):

    • cut its main refinancing rate to 0.05% from 0.15%,

    • lowered the rate on overnight deposits to -0.20%, which means banks pay to park funds at the central bank, and

    • cut its marginal lending facility - or emergency borrowing rate - to 0.30%.

    • and starting next month the ECB will begin buying asset-backed securities, another form of "money printing" similar to the US Federal Reserve's QE.

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)

200 Year Chart:

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.

(click to enlarge)

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 five years have clearly been well rewarded. With the Dow/Gold ratio now at 13.53, it is trading back in the green zone in this chart. Obviously, we already made the "easy money" from buying equities when the ratio was below the green band, but there is plenty of room to the upside, even if gold moves higher.

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.

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: Besides the trading position in GLD, that I may sell if it hits my personal "stop loss criteria," I own some gold jewelry and gold coins mostly for pleasure and for an Armageddon event. For inflation protection, I own real estate, REITs and stocks that pay dividends. I 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 but pay inflation adjusted dividends that adds stability to my investment portfolio which aids in getting a good night's sleep no matter what the market does.

What do you think? I like both. I've taken significant profits in stocks so I have cash if we see a major correction and I have a position in GLD.

Source: Despite The Dow Soaring To A Record High, The Dow/Gold Ratio Is Still Low On An Historical Basis