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Thursday, November 11, 2010

DOW/gold ratio





The Dow/Gold Ratio

Shows us the ratio of the price of the Dow to the price of gold. It simple answers the question of how many ounces of gold does it take to purchase 1 unit of the DOW.

This is the struggle between paper assets and hard assets. Paper assets "win" when everyone is focused on growth. When the growth phase ends, the preservation of wealth becomes the goal and gold then "wins".

The Dow/Gold Ratio chart shows that we are witnessing 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 a value of at least 6  for the average case within the lower channel, but given the estimated magnitude of the current financial catastrophe, we are likely to dip below the channel like we did in 1987 (when there really wasn't a reason to do so!).
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