Saturday, August 14, 2010

The Dow-Gold ratio and what it suggests about the future of the stock market.

Today I have a surprise for my readers. I have put together a chart, as you can see above, of the Dow/Gold ratio going back to 1980 to the close of Friday's market. Each point plotted represents an entire year, except the last point, which was Friday's close. I have the data on a monthly basis on an Excel spreadsheet as well. Here's why this chart is important and what it could portend for the future of the stock market. When I did my earlier stock chart analysis going back 30 years on the Dow and also 30 years on the S&P 500, I predicted we were in a cycle never seen in our generation and that we were headed down on the Dow much more significantly than we could ever imagine. I suggested a Dow of 2,500 as a low. The Dow closed Friday at 10,303, so it's a long way to go down from where we are now and we have never dropped anything like this amount in our lifetime.

Looking closely at the chart above, you will notice that the Dow was at 876 back on Jan. 31, 1980 and Gold was at $653/ounce at that time. With the Dow currently at 10,303 and Gold closing Friday at $1216/ounce, you can also see that if you doubled the 1980 Gold Price you get $1306, which is only off about $80/ounce from Friday's close. If you double the Dow of $876, we should be at $1752. That's not that far off from Dow 2.500, is it? Notice that the slope of the line in the chart from 1980 to about 1995 was gradual but in 1996, it started to ramp up and ultimately reached its peak around Jan. 2001. This was the Bubble that burst first with the Dot.Com business, and then the Sept. 11, 2001 Terrorist attacks in New York. Since then we have steadily declined. The Housing bubble peaked in 2005 and 2006 and the Sub-Prime defaults started in 2007 and accelerated in 2008 and the rise of unemployment started to rise from 5% in April 2008 to a peak so far of 10.1% in Oct. 2009.

The third from the last point is where President Obama began his term as President and the Unemployment rate at his inauguration was 8.7%. While this Dow/Gold ratio chart looks like it has leveled off, I am pretty confident it hasn't. I believe we are in for a shorter tail down to a ratio of about 4.0. This means both the Dow will drop as will Gold prices, but the Dow drop will be greater than the Gold. When I looked at the charts of the price of Gold, I saw Gold dropping down to about $600-$700/ounce. That too is a long way from $1216/ounce. Many believe Gold will go way up and the Dow will stay close to where it is now and have predicted Gold at $3000-$5000/ounce. I get their promotional emails to Buy Gold too. I just don't see that happening. It seems much more realistic that the Dow will be the major drop, hence the bearish outlook I have had now for a year.

Now lets look at the Dow chart above, from the same time period. You can see that while the Dow Gold ratio has dropped significantly since 2007, the Dow remains up since 2008 lows because, in my view, the market has been manipulated by the Fed through there Quantitative Easing policy and printing money out of thin air. Then they give it to Goldman Sachs and say buy stock for us. It would make sense if the Dow were at 8,000 now, not 10,300.

I would love to hear some comments from you and which you see moving, the Dow, Gold or both and in what direction. Take a risk, leave a message and let's start a dialogue. Click just under this post on the word Comments and follow the instructions. Don't be alarmed if your comment doesn't appear when you are done, as I do read them before posting them to the site and ensure there is not foul language. Other than that, I publish everything.

Thanks for coming by.

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Blogger Vic Cebollero said...

Bottom line is we don't know what the scoundrels are up to. Gerald Celente is claiming 2010 will be the crash, so far it's 50/50 probability. Sooner or later the unemployment situation will tip us over. Till then we can only relax and be prepared by hedging. I like your thinking on the gold side but we simply are guessing as to how much is real money. Thank you.

6:23 PM  
Blogger Charles Amico said...

I agree I am guessing. However if things go as bad as I predict, I just don't see people able to buy Gold at $3000-$5,000 and using it to buy food. Can you imagine someone with a 1 ounce gold coin trying to get the change in dollars for the coin after buying groceries. Paper money will still be in use and it will be scarce, just like it is starting to do now. More and more businesses are trying to get you to part with your fewer and fewer dollars. I don't see them as successful as witnessed by Q2 earnings reports. Top line Revenue has disappointed many companies and their shareholders.

7:07 AM  
Blogger Charles Amico said...

Tom S. writes me this:

"IMO - it's GREED vs FEAR. Greed is equivalent to the Dow while Gold is the equivalent of Fear. This is reflected in the Fear that exists in the economy while the Dow will turn to recover as the attitude becomes more positive in making money."

1:13 PM  

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