Tuesday, June 07, 2011

Dow Gold ratio hits a new 1 1/2 year low

As an added feature today, I have noted that the Dow/Gold ratio hit a new low yesterday of 7.8 and it looks like it is not yet as low as it is going. First an explanation of the Dow/Gold ratio for those unfamiliar with it.

In very simple words, the Dow-Gold ratio tell investors how many ounces of gold is needed to buy one Dow Jones Industrial Index.

If we consider today's index value and gold prices then:

Dow-Gold Ratio = Value of Dow Jones / Value of Gold in Ounce = 12,089 / 1549 = 7.8

So, if the Dow-Gold ratio were to touch one, either gold will go ballistic in the long term or the Dow Jones Index will crash very significantly.

The first chart below is of the Dow/Gold ratio for all of 2010 and 2011 as of the close of the market yesterday.

The second chart shows the Dow/Gold ratio every year since 1980 taken on Jan. 31st. The last data point on the chart is for yesterday's close of a 7.8 reading.

This 3rd chart below is and commentary is from an article written by Faisal Humayun and Seeking Alpha on June 7th 2009:

This from Seeking Alpha:

"Below is my opinion (Faisal Humayun) on why I feel that Dow-Gold ratio will touch one and why I also feel that it will be gold that will go ballistic in the long term leading to this ratio touching one.

Before I proceed, I would like to present a 200 year Dow-Gold chart for readers. This will give a clear idea as to how this ratio has moved historically.

What is interesting is that the stock markets have gone up post 2003 till late 2007. But during this period, the Dow-Gold ratio has gone down. This means that the stock markets have gone up only in nominal terms. In terms of real money or other hard assets the US stock market has been on a decline since 2000 as indicated by the Dow/Gold ratio."

To read the entire article on Seeking Alpha, click here, it's worth the read.

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