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.

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.

Market comments for Aug. 4th

Lots of commentary this morning on CNBC by a guest economist, David Gerstenhager, President of Argonaut Capital Management, who says the real threat to the economy is deflation, not inflation and that it is already here in the Housing Sector and the Auto Sector. He was joined by another Chief Economist and former Consultant to the Treasury. They both said the best investment is 10 year Treasuries and that 30 year Treasuries are even better. He sees deflation affecting Corporate earnings negatively, as well. That was an interesting long term view and especially on the super positive cable channel, CNBC, which tends to hype up the market. I agree and have been saying that Deflation is the problem and has been for a while.

Today's chart is on the Dow Gold Ratio from Chart of the Day with my own modifications based upon Monday's close. As you can see the Dow/Gold ratio is 9.0 currently and it continues to go down as the trend shows.

Is the stock market trend up this week to be believed?

This week the markets have moved up steadily each day. The guests on CNBC and other networks are declaring once again things are getting better and while the jobs picture is still not recovered, we are doing better than we were a year ago. My goodness, with all this good news and the trend now going up in the markets, I should probably become a Bull and buy here, right? Wrong!

If you look at the chart above, the Volume is less than it has been when the market was going down just a month ago. This is not convincing to me. In fact it validates my conviction that it is an old con game designed to drive the market higher by enticing others to feel safe in the market only to have them get out at the top and the average person gets shafted again. Can the market go to 11,000? Yes it can. But is the enticement of a gain to the upside of the 500 points worth the risk of the market dropping 1000 -2000 points? I say it isn't, but heck, that's just me. You do what you want.

I am planning on doing a post soon with many charts you most likely haven't seen that hopefully will be illuminating. They will deal with historical data of the Dow, Gold, the US Dollar and the Core CPI among some of the correlations. Stay tuned!

Gold vs. Silver vs. U.S. Dollar: Where to invest?

All the talk about investing in Gold since November 30, 2008, I thought that I would show you that while it did move up significantly from the low at the end of November, Silver would have been a far better investment. Looking at the chart above, Gold’s advance ( the Red line) was about a 23% gain, but Silver (the Blue line) had a 62% gain! Now looking at the U.S. Dollar currency (the yellow line) during that same period, the dollar has dropped about 15%. The Dow has gained 10% in that same period, the Nasdaq gained 35% and the S&P 500 gained 17%. Clearly the best gain came from Silver. If inflation does start to creep into the equation (and I believe that is still a ways off), then Silver will yield a better hedge and return than Gold and may even be much better than owning stock securities as this period has shown us in the chart.

On any pullbacks, Silver will lose significantly more than Gold, so one strategy could be to sell Silver before a market correction, which I anticipate over the next 2 months and Buy Gold instead. When the correction appears to be abating and looks like we are in for a rally, Sell the Gold and Buy Silver. But whatever you do don’t keep cash, as it has lost already about 15% of its value.