Archive for the ‘Dow Gold Ratio’ Category

h1

Dow Gold Ratio 1896 – 2006 showing secular trends in US equities and commodities

March 2, 2007

Historical Dow Gold Ratio

Dow Gold Ratio 1896 – 2006 showing secular trends in US equities and commodities

>>The Dow Gold ratio is a unique way of illustrating the fact that Western Equities have historically tended to trend over durations lasting generations.

>> It measures the number of ounces of gold it takes to purchase a unit of ‘the Dow,’ in essence replacing fiat currency(the dollar) with specie currency(gold).

>> A rising Dow/Gold ratio (1920-1928,1940-1965 and 1980-1999) has marked periods of secular uptrend in the Dow Jones Industrial Index i.e. periods in which US Equities have significantly outperformed physical commodities (gold, etc). A buy and hold strategy applied to US equities over this period has proven very successful.

>> A falling Dow/Gold ratio (1928-1934,1965-1980 and 1999-ongoing) has marked periods of secular downtrend in the Dow Jones Industrial Index i.e. periods in which US Equities have significantly underperformed physical commodities (gold, etc) and a buy and hold strategy applied to US Equities for secular periods has proven generally unsuccessful. Over these periods, active management and specific stock selection has been the way to add value.

>>Interestingly enough, despite the Dow Industrials making new all time highs in 2007, the long term trend of the Dow/Gold ratio remains unfaltered and gold continues to outperform the Dow(US Equities).

>>A simple extrapolation of the Dow/Gold ratio reveals that the secular downtrend in US Equities will end somewhere between 2015 and 2020.