Saturday, June 18, 2016

In 1980 the gold price equaled the Dow, if this happened today the metal would be worth $17675 per ounce

There is an interesting comparison between two value indicators that have the potential to occur again in the markets.  Back in 1980 when the gold price reached an all-time high of $850 per ounce, this value was exactly the same as the Dow Jones stock indicator for the NYSE.  And while the ratio of 1:1 would quickly diverge over the next 36 years, the fact that they were once on equal par means there is potential for it to occur again.

On Friday the Dow Jones closed at $17675, with gold closing at $1298.10 per ounce.  This means that the current gold to Dow ratio is at 13.617:1, and is skewed that badly thanks to manipulated bubble speculation that has driven equities far above the own fundamental values.

Interestingly, there are many analysts who are forecasting a future divergence from today which will inevitably bring the gold to Dow ratio back to levels at or near 1:1.
For the past couple of years, Wall Street’s perma-bulls have had it their way. They’ve been gloating openly as stocks went up and up and up, seemingly without pause.
It got to the point that those warning about valuations and danger signs had been mocked into silence — or were simply ignored. 
Not now. 
I don’t mean to be alarmist or to induce panic, but someone needs to tell the public that there is a plausible scenario in which the U.S. stock market now collapses by another 70% until the Dow Jones Industrial Average falls to about 5,000. The index tumbled more than 3% to 16,460 on Friday and over 1,000 points in early trading Monday. 
Dow 5,000? Really? - Marketwatch
The thing to remember is that following the 2008 stock market crash, the Dow fell from its then all-time high of 14100 to a bottom of 6600 in 2010.  And at that time the price of gold soared to its newest all-time high of $1940, which made the gold to Dow ratio 3.4:1.

When the central banks are forced to end their zero interest rate policies and tens of trillions from quantitative easing, all the money and debt that has propped up stocks will rush to the door and desperately look for a safe haven that preserves their wealth, even if it means they get no yield from it.  And as the chart above shows over the past 50 years, the natural equilibrium is always wanting to go towards a ratio of 1:1, and of the two, the asset that will rise will always be gold.


Post a Comment