If the Dow Jones Index is expressed in the only currency that does not inflate over time, then the ongoing bear market is very clearly visible (with the rally of last year nothing more than that). How will this ratio proceed until it reverts to the bottom of one last seen in 1980?
Then the gold price was $850 an ounce and the Dow index highly depressed during the last big U.S. recession. Looking at this chart and extrapolating forward then gold prices look to be going much higher, while the Dow Jones is in for another downturn.
Simply stated it can be noted that over time gold, oil and other commodities have a reverse correlation to stock and real estate markets. One is rising while the other is falling, and vice versa.
So to revert to the long-term low point of one on this index almost certainly requires a combination of gold heading much higher in price and the Dow taking a tumble. And is that not what the bearish noises on Wall Street and the bullish babble from gold bugs is telling us?
Are we not heading into a couple of years of near depression like 1980–1982 with stock market prices too high right now? Is gold not increasingly attractive to investors with bond prices looking very vulnerable in particular, once stocks have corrected?
Turn it the other way, and stocks would have to fall by almost 90% just to get to the current gold price, or the gold price would have to surge by a factor of 10 to meet the current Dow.
Interestingly none of these scenarios is negative for the gold price. You would need to see the Dow:Gold trend broken entirely for that to happen. Long-term trends in major asset classes are among the most reliable of indicators.
Given that the trend is your friend until it is not, then the Dow:Gold chart is a guide to serious investors about where to put your money for the next few years. Of course, this is a long-term trend, so a short-term setback for the gold price can still happen as the Dow first sinks, and might be expected as the dollar would rally strongly.
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What Does the Dow:Gold Ratio Signal for Prices Ahead?
Source: GoldSeek, Peter Cooper (2/1/10)
". . .over time gold, oil and other commodities have a reverse correlation to stock and real estate markets."