Gold has a couple more years to outperform the stock market before the end of this leg, if history is any guide.
This week's chart looks at the Dow Jones Industrial Average expressed in terms of the number of ounces of gold it would take to "buy" the DJIA's index value. This is a popular comparison that a lot of chartists like to show, especially when it gets up to a really high level like it did back in 1999-2000, at the end of the tech bubble.
It has been falling since then, as gold prices have gone higher. Having an ounce of gold become more valuable means that it takes less of it to buy something else. And the (violently) sideways movement of the stock market over the past decade has allowed gold's price rise to pull this ratio back down toward "normal" levels seen over the past century.
Based on this way of looking at the DJIA, there have been 3 big bubble tops in the DJIA as expressed in ounces of gold. What I find interesting and relevant just now is that the declines out of those first two took 13 and 14 years respectively. So if the current decline follows the same course, then we can expect this ratio to bottom out about 13-14 years from the most recent top.
Doing the math on that is a little bit problematic, since the last top was actually 2 tops, in August 1999 and October 2000. So if we take 13 years from 1999, and 14 years from 2000, that gives us a date range of 2012-2014 for when to expect a bottom for this ratio.
That tells us about the "when", but it does not tell us about the "how far". The bottoms for this ratio in the 1930s and 1940s were down below 3.0, and it got all the way down to 1.3 at the low in January 1980 (based on monthly closes). If the DJIA were to stay around 12,000 for the next few years, then a ratio of 2-3 would mean gold at around $4000 to $6000 an ounce. Or the ratio could get down below 3 by having gold stay where it is, and the DJIA get cut in half, or some other combination of movements. That's how the math works.
It is risky to forecast both the timing and the price for the end of a trend, so I'll refrain from endorsing those numbers. I just offer them as food for thought. Nothing mandates that this ratio reach any particular level.
The more important conclusion to take from this is that the decline in this ratio does not seem to be done, and is not due to be done for a little while longer. But the end to this decline in the DJIA/gold ratio is going to come someday, probably when the Fed decides to wake up and start fighting inflation again via higher interest rates. That does not appear to be on their agenda any time soon.
Tom McClellan
Editor, The McClellan Market Report
Editor, The McClellan Market Report
