Friday, November 12, 2010

Dow Gold ratio: 2 charts show different perspectives on where we are today.

I get Chart of the Day every Friday and, once in a while, I post it. Today's posting by them was on the Dow/Gold ratio, which they show as far back as 1999. I then took my own chart which goes back to 1980 and updated it using a comparable Log scale. So here's what Chart of the Day says: Today's chart presents the Dow divided by the price of one ounce of gold. This results in what is referred to as the Dow / gold ratio or the cost of the Dow in ounces of gold. For example, it currently takes a mere eight ounces of gold to "buy the Dow." This is considerably less (82% less) than the 44.8 ounces it took to buy the Dow back in 1999. While the actual Dow continues to make new post-financial crisis rally highs, the most recent rally that occurred in the Dow priced in gold is fairly similar to several bear market rallies that have occurred since late 1999. It is also of interest that the Dow / gold has often tested (and is currently testing) resistance (red line) of its accelerated downtrend but has failed to break through on each occasion.

As you can see from this second chart below, which goes back to 1980, we may be in for a continued drop in this ratio, I don't believe the chart from the Chart of the day folks gives a true picture of where we are historically, as does this longer period chart below.

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Anonymous Anonymous said...

Charles, is this a subtle hint to keep a big chunk of a retirement fund in GLD or an equivalent ETF?
I would appreciate it if you could spell out action that can be taken here to not lose in this market.

9:07 AM  
Blogger Charles Amico said...

Sure Thor. What I meant to say is that the Dow/Gold ratio is going to stay down and go lower. That is implied in the shorter chart by Chart of the day but it doesn't have any reference point as to where it might go. Today at the very open I saw Gold was down and I calculated that in order for the Dow/Gold ratio to stay at about 8.1, the Dow would drop below 11200 for the day. I thought it might go as low as 11,160 and it closed at 11,167, which is pretty good guessing.

I said also last Friday/Saturday that the Put to Call ratio was at a 7 month low and it usually signals a reversal in trend, which occurred throughout the week.

Have a nice weekend Thor.

2:54 PM  

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