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Nicholas Pardini
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Nicholas Pardini is the managing partner of the equity long/short hedge fund Nomadic Capital Partners. The fund specializes in commodities, emerging market consumer equities, and equities in the the global technology sector. He graduated from UC Santa Barbara with an economics degree in three... More
My company:
Nomadic Capital Partners
My blog:
Emerging Market Insider
My book:
The Definitive Guide to Emerging Market Currencies
  • How High will the Price of Gold Go? Look at the Dow to Gold Ratio 0 comments
    Oct 7, 2010 4:50 PM | about stocks: GLD, SLV, PLG, SPY, UDOW, UDN

     Gold and precious metals have been soaring in price recently due to uncertainty in the economony and the weakness of the US dollar. However, this recent move to nominal highs surpassing $1,350 per ounce is just the recent upswing of long term bull market in gold. Since the year 2000 gold has skyrocketed from its 2000 low of $252 to approximately $1340 today. That is over a 500% in the past ten years.

     Does that mean its time to sell out of your gold holdings? Not quite. Gold Markets price patterns tend to move historically against the Dow Jones index. When gold prices have reached their peak in a bull market cycle, the price of an ounce of gold has equalled the total value of the Dow Jones index. In both 1932 and 1980, the Dow to gold ratio reached one to one. Currently the Dow gold to ratio is trading at approximately 8.2. Based on past trends, that means there is plenty of upside left in buying gold. Also these current nominal highs are not adjusted to inflation compared gold's 1980 of $873 per ounce. In order for gold to reach its real high in terms of purchasing power, gold must reach $2243 an ounce.

     I believe that the best strategy with gold right now is to keep buying for a while. When the Dow/Gold ratio falls below 3, then it will be time to start selling off gold. If it falls below two, then gold will clearly be in a bubble and close enough to its historical highs to sell out of the position completely and possibly short it. Until then, just kick back and watch close the gap on the Dow and continue to outperform stocks and bonds. Whether the Dow and gold meet at 5,000, 10,000, or 15,000 the Fed's insistence on debasing the dollar through inflation and the economic uncertainty created by the recent struggles in Western economies will contiune to pull these asset classes towards convergence.


    Disclosure: No positions currently in Gold or the Dow Jones Index

    Disclosure: No positions
    Stocks: GLD, SLV, PLG, SPY, UDOW, UDN
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