Posts Tagged Dow-Gold Ratio
A Market in Search of a Bottom
Posted by Preston Poulter in Investing and Financial Doomsday on March 6th, 2009
The Dow Jones Industrial Average is at 6625 as of this writing. The last time the Dow was trading in this range was 1997. Back then it was on it’s way up. The lowest level it ever reached in 1997 was on April 10 when it closed at 6391. If the Dow falls lower than that, then we’re going back 1996.
Frequent readers of my blog know that I don’t follow the nominal value of the Dow Jones as much as it’s ratio compared to gold. The reason for this is that it the ratio of those two will automatically correct the Dow for inflation without referencing some wonky government statistic that has been worked over by “hedonistic price adjustments” until its lost its usefulness. In terms of the Dow-Gold ratio, the Dow looks far worse because $6625 would go a lot father in 1997 than it would today. The Comex Spot price of gold is in the neighborhood of $930; that would put the ratio of the DJIA to 7.1 ounces of gold. Last time we looked at the Dow-Gold ratio it was a 7.4. Last time it was that low it was the recession of 1991. The ratio is now trading belong its long term average, but it still has plenty of room to fall. People ask me when a good time to look at getting back in to the market is and I say when the Dow is trading at two to three ounces of gold. To paraphrase Dr. Seuss, “When we will get there, I can’t say, but I bet we’ll fall a long, long way.”
Deflation? Only for the Stock Market
Posted by Preston Poulter in Investing and Financial Doomsday on February 21st, 2009
I have to take a moment to pat myself on the back.
Around the start of the new year, I said that deflation was not going to be the main concern, and instead, it would be inflation that was going to be making a comeback. As it turns out, the January numbers are in and CPI inflation is up, not down . Gold closed at $993 an ounce today and is poised to soon break into new all-time highs. In this way, gold is serving its traditional purpose — as the canary in the coal mine warning all of us that things are not well and that danger, (in this case, inflation) is on the way.
Not everything is going up, however. Yesterday, the Dow Jones closed at a 6-year low. Today it went down even more — so now it’s flirting with its 10-year low. The Dow-Gold ratio, which I’ve talked about before, is rapidly reaching new lows. Dividing the Dow’s close of 7365 by gold’s close of $993 gives us a Dow-Gold ratio of 7.4, which is the lowest it’s been in roughly 20 years.
But it’s going to keep heading down even further than that. Soon, we should be seeing a Dow-Gold ratio of three or even two …
Imagine the Dow at 5000 and gold at $2500 an ounce and you get an idea of what the future holds. Read the rest of this entry »
The Dow-Gold Ratio Renders Its Verdict
Posted by Preston Poulter in Gold Standard on February 14th, 2009
As those of you who have read my book know, I’m a firm believer in the power of looking at the daily closes of the Dow Jones Industrial Average and comparing it to the price of an ounce of gold. For those of you who don’t know, the Dow Jones started as a simple average of the share price of all of the companies that comprise it; for example, if there were three companies on the comprised the Dow average that had share prices of $5, $10, and $15, then the average would simply be $10.
Over the years, the number of Dow companies that comprise the Dow has risen from the original twelve to now include thirty different industrial companies. Since it’s simply an average of the number of companies, expanding the number didn’t have much impact. it’d be similar to looking at the average test score for classes of different sizes: more or fewer students don’t matter as we’re looking at an average. The reason the Dow Jones Industrial Average (DJIA) is such a large number in comparison to the stocks that comprise it is that those stocks have had numerous splits throughout the years while the Dow has not. Rather the Dow simply corrects for splits so as to maintain a continuous average throughout time. Just as the price of a single share of Microsoft stock would be $8928 at the close of 2007 if it had never split, the DJIA is a average of companies with such share prices. Read the rest of this entry »