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Tuesday, May 11, 2010

DOW Gold Ratio with Gold at All Time High

Despite gold at an all time high over $1,230 per ounce, the current Dow to Gold Ratio is closer to its resistance level than its support level shown on my graph below.
At 8.72, the Dow Jones Industrial Average measured in how many ounces of gold it takes to buy the 30 stock DOW is up 24% from its  March 6th low of 7.03. Despite that impressive gain, the DOW-Gold ratio is currently 80.5% below its 1999 peak of 44.77.
Here is a chart showing the current Dow to Gold Ratio, the ratio of the price of the Dow Jones Industrial Average to the price of gold. When measured in ounces of Gold, the DOW has been in a secular bear market since peaking in late 1999 at nearly 45.

chart courtesy of (Click for full size image)

The markets, measured by the S&P500 (S&P500 Charts) and DIJA, may have recovered to new highs in 2007, but the DOW:Gold ratio told a different, truer story of just how unhealthy the US economy was.
  • Back in 1999, it took nearly 45 ounces of gold to buy the DJIA.
  • On Friday March 6 of 2009 the DOW-Gold ratio hit a low of 7.03
  • As of today (May 11, 2010) it only takes 8.72 ounces of gold to buy the DOW
  • Gold quote and charts
The scary part is the DJIA-to-Gold ratio got down near 1 in the early 1980s and was just under 0.2 in the early 1800s.

This 200 Year Dow/Gold Chart shows the DOW/Gold ratio from 1800 through August 2008.
chart courtesy of (Click for full size image)
One way to get inflation protection without buying gold is with Series I-Bonds.   Currently new iBonds pay 1.74% which combines their 0.2% base rate plus 1.54% for annualized inflation.   For details, see:

CDs have been a "safe haven" for those wishing to preserve assets and get a small inflation adjusted return. See "Very Best CD Rates with FDIC" for a list of the best rates and terms.
    Disclosure: I own a very small amount of gold hidden in the house for bribes if we see Armageddon. For income plus inflation protection, I own and recommend in my newsletters TIPS, TIPS mutual funds and Series iBonds.

    For more information, see:
    Question: Which way do you think the DOW-Gold ratio is headed?

    Please post your answer here

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