Thursday, March 24, 2011

Has the stock market really gone up? A look at the Dow Gold ratio

I have updated my recent charts on the price of Gold and also the Dow/Gold ratio and I find it quite revealing in light of the bullishness of those in the stock market and investor sentiment numbers being at near record highs. As you can see from the chart of the price of Gold, we have set a new record high this week. Of course that is the price of Gold in US dollar currency. The Dow/Gold ratio from the other chart shows that the trend continues to go down. Many investors in the stock market have felt very good at the gains they have made in the past year or so. You see since January 1st, 2010 to March 23, 2011 the Dow has gained about 13.9%. On the surface, that would appear to be a fabulous year, wouldn't it, that is unless you compare it to the price of Gold. Gold has risen in the same period over 33%. Now that is a big gain. So if you consider Gold a standard to measure your progress financially in real assets, you have lost significant ground based upon this data. Still feel good?

This all happening with the help of a Fed whose job has been to try and help the recovery using another round of Quantitative Easing (QE2), or as many like to call it, printing money out of thin air. The consequence of this is that in order to purchase a 1 ounce gold bar a year ago you would have needed 39% less dollars than today. Taking the same analogy consider for a moment the real value of Real Estate on a Gold basis if you really want to be depressed. We all know housing prices have dropped significantly around the country and many consider the absolute value in dollars as their yardstick. But it you consider that while housing prices have dropped about 10% over the past year in dollar terms, the value of properties, as measured in ounces of Gold, those houses have really dropped in value and the numbers are staggering. That's what's happening to our Country. You can buy US assets in Gold or Oil today at far cheaper prices than what we mentally think is their true worth. Depressing, to say the least. Of course if you have a lot of Gold, or Oil, you can buy much of America today for a bargain. But who would want it? Below is a chart of Housing Prices in terms of ounces of Gold to purchase a home.

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