The Dow Jones To Gold Ratio: Will 2015 Be The Turning Point?

This article is based on the charts from Goldchartsrus, courtesy of Nick Laird:

We have discussed the Dow Jones to Gold ratio many times before. The first chart below shows the history of the ratio until 2013 (courtesy of Incrementum Liechtenstein). As readers can easily observe, the historical moves have been quite similar and very cyclical in nature.

historical_dow_gold_ratio_1900_2013

 

 

Is the ratio ready to resume its downtrend? To answer that question, we should look at the charts on a smaller timeframe.

Interestingly, by zooming in on the charts, it appears that the comparison between the ongoing period and the 70ies is truly striking. The Dow Jones to Gold ratio experienced a countercyclical period between 1975 & 1976 where it went from a low of approximately 3:1 up to a high of approximately 10:1 before heading down to its final lows of almost 1:1.

dow_gold_ratio_2002_2014

 

 

Today, we see a similar situation, at least so far. The Dow Jones to Gold ratio had moved to a low of 6:1 in 2011. Since then, the stock market has been going north relentlessly while gold started a downtrend which is lasting 3 years meantime. The current Dow Jones to Gold ratio stands at 15:1, its highest level in since 2007.

As the Dow is now at all time highs and gold looks to be looking for a bottom, there is a real chance that the ratio is about to turn in the coming months. If history is about to repeat, the Dow to Gold ratio should continue its downward trend to its lows similar to the 1:1 ratio as in 1980.

dow_gold_ratio_1970_1980

 

Mind that this is not a timing indicator. Even if history will repeat itself, it could be that the turning point is still one year ahead of us. Do not make any timing decision for your investment(s) based on these ratios; they are outstanding in understanding relative value of assets but are no timing indicators.

 

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