Back in February I pointed out in a Seeking Alpha article that after a rally in the Dow, the Dow-Gold Ratio had reached a level of strong resistance. The Dow-Gold Ratio is defined as the ratio of the price of the Dow Jones Industrial Average divided by the price of gold. This plunging resistance line has held as gold, then only $1,349 per ounce, has moved significantly higher while the Dow is virtually unchanged.
At Friday's close of 6.79 for the Dow-Gold Ratio, the Dow Jones Industrial Average, measured in how many ounces of gold it takes to buy the 30-stock Dow, is up 18.9% from its 21-year 2011 low of 5.71 set on August 22 of this year.
Over the long-term, the Dow-Gold Ratio is 84.8% below its 1999 peak of 44.56.
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.
- 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.
- August Gold/GLD Resistance and support levels for the price of gold.
- As of Friday (November 11, 2011) it only takes 6.79 ounces of gold to buy the Dow.
- 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 August 2008:
Click to enlarge
With the Dow-gold ratio now at 6.79, it is trading below the green zone in the second chart.
Historically, buying stocks when the ratio is below the green band was rewarding if you had patience.
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.
ETF data for Gold (GLD) as of Nov 11:
|GLD Price =||$173.96|
|52-week high =||$185.85|
|52-week low =||127.8|
|Below 52-week high by||6.4%|
|Above 52-week low by||36.1%|
ETF data for Dow (DIA) as of Nov 11:
|DIA price =||$121.53|
|52-week high =||$128.63|
|52-week low =||103.84|
|Below 52-week high by||5.5%|
|Above 52-week low by||17.0%|
I prefer SPY for the S&P 500, over DIA because it is more diversified.
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 (GLD) or silver (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 own SPY and recommend it in my newsletter “explore portfolio.”