The DOW/Gold Ratio has been talked to death (or life possibly in this case) for decades. All foolish speculation aside, watching ratio’s instead of prices give a much more relative and ultimately realistic view of how different markets react to each other. People have talked ratio’s for millennia, dating back in all cultures to the barter days before kings and kingdoms placing their faces and claiming authority through seigniorage. Those same kingdoms have always tried to fool the public by shaving value from those mandatory coins either literally, or by devaluing them by using other less appealing products like copper, tin or paper, and most popular today, the 1’s and 0’s of binary in today’s digital money. But ratio’s have held true, and those who ignore them are doomed to repeat the fools errands of those past.
When Charles Dow created his averages of the markets, they were based on a simple principle, the cumulative value of the average equals an ounce of gold… This ratio has stood the test of time as an indicator (at the very least) of over or undervaluation of the famed Dow Jones Industrial Average. As rampant speculation through cheap leverage comes to a grinding halt, the averages have begun to realign themselves. Although the grand US Dollar itself, incumbent placeholder as the true international reserve currency may be the cause for the diminishing role in industrial production and demand and a global cooling of speculation, as money exits investments and turns towards safety, the dollar, being the cause, is no longer the only place large scale investors are turning to. Likely, as prices shift, one can assume the general investor will be soon to follow, although as usual, a day late and a very literal dollar short.
With a very legitimate, but elementary understanding of the DOW to Gold Ratio, one assumes that the most common way to track if the DOW to Gold Ratio is accurate is that when the DOW goes up, Gold goes down, and vice versa. However, there are more scenario’s the investor should be aware of, and although not perfectly cyclical, here is a look at how those could unfold.