Back in November I pointed out in a Seeking Alpha article that after a rally in the Dow, the Dow-Gold Ratio was back at a level of strong and plunging resistance that had held for over a decade as gold increased by over a factor of seven from $253.20 per ounce in 1999 to $1,923.70 in 2011.
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 had held for over 12 years.
At Friday's close of 7.42 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 29.9% from its 21-year 2011 low of 5.71 set on August 22, 2011.
Over the long-term, the Dow-Gold Ratio is 83.3% below its 1999 peak of 44.56.
Click to enlarge
The markets, measured by the S&P 500 (SPY) 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 (February 10, 2012) it only took 7.42 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
Many complain about that chart of the DJIA-to-Gold ratio back to the 1800s because they say the DOW didn't exist back then. What they miss is the DOW has changed often since Charles Dow created the index that bears his name back on May 26, 1896 with 12 stocks from "leading American Industries." Can you name any stocks that were in the index in 1896 that are in the index today?
Today there are 30 stocks in the Dow. Note that the DJIA-to-Gold ratio peaked shortly after Intel (INTC), Microsoft (MSFT) and AT&T (T) were added to the index on November 1, 1999.
With the Dow-gold ratio now at 7.42, it continues to trade 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.
Last year I added significantly to my Intel position in both my personal and newsletter "explore" portfolios at $20.01. I told my readers:
As I am working on my next newsletter, I found myself comparing other stocks on sale to Intel where Intel has about the best valuation on PE and PEG for any of my stocks that pay a dividend! It now pays 3.60% at $20!
I'll write a new article soon here about why I still like Intel. One of the reasons is they increase the dividend regularly so even at the current price of $26.69, Intel's 84¢ dividend gives it a 3.1% yield.
While Intel and Gold may go higher with inflation, Gold doesn't pay a dividend.
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 Feb 10, 2012 Close:
| GLD Price = | $167.14 |
| 52-week high = | $185.85 |
| 52-week low = | 127.8 |
| Below 52-week high by | 10.1% |
| Above 52-week low by | 30.8% |
My favorite GLD Charts and Intraday GLD Chart
ETF data for Dow (DIA) as of Feb 10,2012 Close:
| DIA price = | $127.85 |
| 52-week high = | $129.12 |
| 52-week low = | 103.84 |
| Below 52-week high by | 1.0% |
| Above 52-week low by | 23.1% |
I prefer SPY, the ETF for the S&P 500, over DIA because it is more diversified with 500 stocks compared to only 30 for the DOW.
Disclosures:
- 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 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 Intel, MSFT and SPY and and have recommended them in my newsletter "explore portfolio" with average prices per share well below the current prices. I also have "auto sell" price targets to take profits and "auto buy" price targets to buy more shares as I limit my exposure to these stocks while attempting to add to my long-term returns by trading their volatility.
