Tuesday, December 30, 2008

The Ratio

One of the most important ratios that I use to track real market values is the DOW/GOLD ratio. Markets throughout history have moved in long term secular cycles. (Usually about 20 years) From 1980 to 2000 we had a long term secular bull market in stocks, and from 2000 to the present we have been in a long term secular bull market for Gold.

The DOW/GOLD ratio shows how many ounces of Gold it takes to buy the DOW. For example, in the year 2000 the DOW started at 11,550 and Gold was priced at $288. The ratio was:

11,550 divided by $288 = 40 to 1 ratio

It took 40 ounces of Gold to buy the DOW. The following shows the ratio to start every year since 2000:

January 1, 2000: DOW: 11,550 GOLD: $288

DOW/GOLD Ratio:
40 to 1

January 1, 2001: DOW: 10,628 GOLD: $268

DOW/GOLD Ratio:
39 to 1

January 1, 2002: DOW: 10,282 GOLD: $278

DOW/GOLD Ratio:
39 to 1

January 1, 2003: DOW: 8,636 GOLD: $354

DOW/GOLD Ratio:
24 to 1

January 1, 2004: DOW: 10,469 GOLD: $415

DOW/GOLD Ratio:
25 to 1

January 1, 2005: DOW: 10,584 GOLD: $435

DOW/GOLD Ratio:
24 to 1

January 1, 2006: DOW: 10,952 GOLD: $514

DOW/GOLD Ratio:
21 to 1

January 1, 2007: DOW: 12,374 GOLD: $636

DOW/GOLD Ratio:
19 to 1

January 1, 2008: DOW: 12,817 GOLD: $835

DOW/GOLD Ratio:
15 to 1

Today: DOW: 8,513 GOLD: $868

DOW/GOLD Ratio:
9.7 to 1

I expect the DOW/GOLD ratio to cross 7 to 1 in 2009, and ultimately I expect it to become 1 to 1. That will market the end of the bull market for Gold and give a clear signal to buy stocks. The last time the markets received this signal was 1980 when the DOW was at 850 and Gold was at $850. A 1 to 1 ratio. This signaled the end of the previous bull market for Gold and the start of the new bull market for stocks.

The daily, monthly, or even yearly prices for the two asset classes do not matter if you are a long term investor. A stock market rise is a great selling opportunity, and a Gold pullback is a great buying opportunity. Here is the return for both markets since the year 2000:

DOW: January 1, 2000 through Today: -27%
GOLD: January 1, 2000 through Today: +301%

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