Fred's Intelligent Bear Site



The Dow/Gold Ratio chart shows the ratio of the price of the Dow to the price of gold. Another way to look at it is the number of ounces of gold it takes to buy one share of the Dow. For example, with the Dow at 10,000 and gold at 500, it requires 20 ounces of gold to buy one share of the Dow, so the ratio is 20. The reason for using gold is that gold is the most unbiased form of money in existence. Fake government paper money comes and goes, but gold has been money for thousands of years. It is the ultimate store of wealth.

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.

The long term trend of the ratio is up at a rate of 1.25% per year. This should be expected as the process of mining gold becomes more efficient and cheaper due to advances in machinery, energy, exploration technology, chemicals, etc. In fact, the advances in mining probably match the efficiency gains seen in the economy in general.

The ratio has stayed within a defined channel except for an over shoot around 1980. An explanation for the over shoot could be that gold was pricing in the possibility of continued high inflation.

The Dow/Gold Ratio chart shows that we have witnessed the end of an era for equities. Stocks had an 18 year bull market where buy and hold was the guaranteed way to make money. Unfortunately for the stock market bulls, asset classes go in and out of favor, and gold has proven to be the next great asset class. The chart shows that it would be logical to expect the ratio to return to at least a value around 5. Perhaps a ratio of 5 would be gold 2000, Dow 10,000. How far down the ratio goes after that is completely dependent on government policy. Zero interest rates coupled with huge government deficits could send the Dow/Gold ratio far below 5.

The final bottom in the gold bear market was in April 2001. The raw gold chart came from the Kitco site: http://www.kitco.com



Gold had a nice decade long rally and has been in a bear market since September 2011.


10 Year Gold Chart


I want to thank Sharefin for the long term Dow/Gold Ratio data. His site is a wealth of information: http://www.sharelynx.com



Back to Fred's Intelligent Bear Site Home