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It is very understandable why investors believe America’s engines are ready to roar
again because economic indicators in America are turning up even though bad news barrages us from all sides… [That being said,] I believe the Dow Jones Index has not bottomed when viewed from an historical perspective with gold. We have further to go down in the Dow/gold ratio before the next big bull market begins. [Let me explain.] Words: 1250
So says Asa Harrington (www.tryfreedom.us) in edited excerpts from an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited below for length and clarity – see Editor’s Note at the bottom of the page. (This paragraph must be included in any article re-posting to avoid copyright infringement.)
Harrington goes on to say, in part:
The Dow/gold ratio measures the number of gold ounces it would take to buy a share of the Dow Jones Index. The graphical representation of the Dow Jones Index below is log scale so it is easier to identify percentage increases and decreases. (All graphs are my own, unless otherwise attributed, and monthly data was compiled from FRED St. Louis Reserve, Wren Investment Advisors, and KITCO.)
90+ year DJIA – Log Scale
As one can see from the [above] two graphs, the DJIA peaks and bottoms correlate highly with the Dow/gold ratio peaks and bottoms respectively.When first glancing at the Dow/gold ratio graph above, it would appear the “real” value of the Dow Jones Index has gotten hammered in the last decade and that this might easily be signaling a bottom and that, [as such,] stock market woes are a thing of the past if the past trend is indicative. However I encourage all bulls to look at the log scale Dow/gold ratio graph below because I believe it tells a more complete story.
90+ Year Dow/Gold Ratio (Log Scale)
The [above] log scale graph tells a similar story, but it also shows that the ratio might indeed have further to fall before a bottom is realized. The January Dow/gold ratio currently stands at 7.2, a far cry from the other major bottoms of 2.22 and 1.32. If history has anything to say, the Dow/gold ratio has not fully bottomed out but could be tracing a wave pattern similar to the false bottom before the Jan 1980 bottom.
Some scenarios that are possible in order for the Dow/gold ratio to fall another 60% and be under 2.5 could be:
- the Dow collapses by 60% to end up around 4200 while the price of gold remains around $1750/ounce [Charles Nenner’s Cycle Analysis Predicts Dow to Peak in 2012 and Then Decline to 5,000 – and Much More!],
- a surge in gold’s price by 290% to around $5000/ounce while the Dow stays in its current trading range [More than 100 gold analysts believe gold will peak at $5,000+], or
- a combination of the two.
Given the [above] scenarios I believe it is more likely that either gold’s price will surge or a mixture of the two will occur.
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Why is gold still under-priced?
While the DJIA has stayed relatively high, gold has soared during the last decade, which has contributed majorly to the Dow/gold ratio down trend since the peak in 1999. This characteristic is very similar to the decade leading up to the 1980 bottom when the price of gold then too soared relatively. Again the graph below is log scale to accentuate percentage changes in gold’s price for the periods mentioned.
40+ Year Gold Price (Log Scale)
From the [above] graph, we can verify that if that the Dow/gold ratio does indeed have further to fall maybe one cause will be gold continuing to rise because it has not traced out a similar boom to that of the decade leading up to Jan 1980.
Gold as a % of Global Financial Assets
To add on to the argument that gold may not have topped a comparison of gold as a percentage of world assets in the bubble of 1980 and now [as seen in the table below clearly shows that] gold has not reached 1980 levels of valuation.
(Chart courtesy of U.S. Global Investors)
Comparatived to the peak of the 1980 bubble, in 2010 gold only represented a third as much of Global Financial Assets. While the price of gold has increased 70% since 2010, the price has further to go to reach 1980 levels of valuation. This suggests to me, this time around the gold bubble has more growth ahead before a top in gold and a bottom in the Dow/gold Ratio and major bottom in the DJIA.
Monetary Base United States (M0 or highly liquid base money)
On a longer time scale, increases in the monetary base seem to indicate that gold is still underpriced.
(Chart courtesy of Shadowstats.com)
The monetary base has increased 38,600% since 1918 while the price of gold, in dollars, has only increased 8,440%. If gold is indeed a fair retainer of “real” value then it would appear gold may be underpriced.
Conclusion
Regardless of whether a continued surge in the price of gold is coming, I believe the Dow Jones Index has not bottomed. When viewed from a historical perspective we have further to go down in the Dow/gold ratio before the next big bull market begins. I am looking forward to this turning point, as it will likely be the best buying opportunity for another 20-40 years for equities.
*http://www.tryfreedom.us/2012/02/27/midnight-in-america-and-too-early-for-the-dow/
Editor’s Note: The above article has been has edited ([ ]), abridged, and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
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