Inverted Dow:Gold ratio in the works?

derryb

As shown in the first chart, since 1913 (and the creation of a fiat money Federal Reserve system) the Dow to Gold ratio has historically been an indicator to reflect on a top or bottom in gold or equities. It has been an accurate portrait of when to get out of one and into the other:



The Dow:Gold ratio currently sits at 7.34:1 and continues it's trend towards the historical 1:1:



The question I would like to throw out for discussion is this: Will it be different this time; will the ratio eventually become inverted?

I propose that it could very easily become inverted and become replaced with a new Gold to Dow ratio. This will require a decline in faith in equities and a growing belief in the safety of gold - something not all that unrealistic. I base my premisis on the world's unchartered massive debt position that I believe has reached the point of no return and will result in unimaginable default and unrepairable damage to many fiat currencies. I also believe a move below 1:1 will mark two key events: an end to central bank control of money/debt and a parabolic rise in gold and other precious metal prices.

Before you say "impossible" consider this - We saw a major paridigm shift in conventional PM thinking when gold prices shot past platinum prices. At that point the PLT to GLD ratio did become inverted and has yet to "correct." What is to say that gold cannot shoot past the Dow, expecially in an economic environment full of debt and fully justifiable uncertainty and fear?

DoubleEagle59

Most everyone knows my position on the dow: gold ratio.

It will definitely go to 1:1 and that's when I'm selling.

I too however believe it will overshoot this 1:1 and go below this 'historical' barrier, because this present cycle we're in is much worse than the previous one.

Baley

If one draws a regression line though the righthand portion of the upper graph, one doesn't necessarily get the green line, one could just as easily get a relatively flat line equidistant from the red lines, and right at.. wait for it... 7.34!

I think the chart shows very well, the stock market booms of the late 1920's (public getting involved for the first time) the mid 60's (the birth of mutual funds and a new generation of stock investors) and the incredible bull of 1982-2000 (with the advent of computer and internet trading) It also shows the stock market crashes of 1929-33, the 1970's, and 2000, as well as the gold booms of the late 1970's and 2002 to present, and gold being dead 1982-2000

There's a phenomenon in wave physics called constructive and destructive interference that describes the interaction of additive and subtractive peaks in the waveform that at least partially explains the gyration of the Dow:Gold ratio.

the second chart of the ratio from 1980 to 2000 and 2000 to the present illustrates this very well, the first half shows a massive stock bubble and the gold bubble deflating, the second shows the gold bubble inflating and the stock bubble deflating.

my guess is it's more likely to go relatively sideways between 5 and 10, and IMO a drop below 5 or a rise above 10 would more likely signal a reversal than an accelleration of the prevailing trend.

jmski52

There are some variables that aren't being reflected in any of those charts. For that reason, all bets are off.

The Dow changes whenever some loser company is dropped from the Dow.

What 1980 to 2000 shows is some degree of normalization after the previous orgy of deficit spending to fund the Vietnam War and the Great Society.

The main differences now are things like having shipped production to China, peak oil, and the demise of the Euro.

I guess you could say that "it's different this time".











But I won't.

OperationButter

Everyone has their own opinions, thats why there are horse races (oh man I sound like my Dad!). I realize that there are people from both sides of this saying, these people are CRAZY to think that the Dow may get to 1:1 or even below! (we did see the Dow at 6k in 08) Then there are people that think exactly this, firm in their belief that the numbers are saying something, the government is printing $ it must create inflation etc etc. Its impossible to tell, with certainty, anything will or wont happen.

I know Im young, fairly educated but not seasoned/experienced, and my gut (and my $) are on the logic of thinking that at some point the party must stop. It makes me sad that this is the world that I am growing up in and makes me nervous for not only my future but my kids future.

Anyone else feel this way?

AUandAG

Could this chart apply to any other metals? Like silver or platinum?

bob

calleocho

The rhodium chart must be wild!

roadrunner

The chart pattern over the last 100 years or so is a broadening top. 3 successive higher peaks with lower lows inbetween them. Even though Dow/Gold ratio is not a stock
per se I still think this TA pattern can be applied to it. The fact that dogs have been kicked out of the Dow is not a problem to me as that has been consistent over the past
100 yrs. The expanding wedge pattern are the FED induced boom and bust cycles. Each cycle getting more stretched than the last due to the underlying inflationary policies.
Such patterns often reach their projected target which is the lower wedge line. The fact that we're not doing anything different this time around with debt and monetary policy
means the fundamentals that drive this pattern are unchanged. My only concern is that typically there is a snap back to the mid channel line. We haven't seen that yet. And
maybe we won't if this is a final wave headed to 1-1. There hasn't even been decent rally back to 12-1 to test leaving the main channel. The short Dow, long gold trade is a good
bet until this broadening top pattern completes or fails. The overall chart is suggestive of a failed 100 yr monetary policy. The "solution" being applied is to key stroke more money
into existence and increase debt.

If the ratio does fall to <1 it becomes a fraction less than 1. When people are willing to give me gold to take their stock market shares, then the ratio would be negative.

derryb

<< <i>If the ratio does fall to <1 it becomes a fraction less than 1. When people are willing to give me gold to take their stock market shares, then the ratio would be negative. >>


And it could happen is my point. Happened recently with platinum after all of those years of platinum carrying a higher price than gold. All it takes is for the Dow to drop enough and Gold to rise enough to where one ounce of gold will buy more than one share of DJIA. Historically the ratio seeks an equillibrium greater than one before trends reverse. I'm saying that maybe, given economic conditions, the trend won't reverse before zero.

jmski52

I started wondering how P/E ratios were doing right now, and at 21.37 it looks like they really aren't very low, and need to go quite a bit lower before stocks should be considered as good investments, relative to gold.

What's even more interesting, is that the drop in interest rates doesn't correlate very well at all to the last time that (edited to) P/E ratios dropped. Something is OBVIOUSLY different this time, or perhaps we aren't "there" yet.

What is the same is that stock P/E ratios are going down while gold is going up, same as in the late 1960's to 1980. Is "there" the simultaneous peaks in both gold and interest rates - that corresponded to the bottom in Price/Earnings in stocks, all of which converged in 1980-1981? Kinda looks like it.

This is exactly why I put some credence into "Real Interest Rate" vs. gold prices.

One difference, is Bernanke vs. Volker. Major difference there.

And in retrospect:

P/Es dropped to around 5 after the 1929 crash, then it looks like they levelled out around 10. FDR officially devalued the dollar from $20/oz. of gold to $35/oz. of gold in 1933, and gold was being shipped to Europe at the time, so obviously gold was tracking upwards as stocks' P/E ratios were going down during the '30s.

cohodk

I propose that it could very easily become negative


Simply for that fact that this is impossible, I will disagree.

derryb

<< <i>I propose that it could very easily become negative


Simply for that fact that this is impossible, I will disagree. >>


A negative ratio is anything les than 1.00.

I would love to hear your explaination on how it is impossible for the price of one oz. of gold to be greater than the DJIA.

roadrunner

I feel like Bluto Bartowski from Animal house. I wasted 12 yrs of math in grade school followed by another 4 yrs getting a math degree....I may still not understand ratios.
But I think what Cohodk was saying that it is essentially impossible to achieve a Dow to Gold ratio <0 (ie in negative number territory). Short of my dumping ground analogy
below, I would tend to agree. I would also say that Dow and Gold prices are positively correlated over long periods of time. It's just a matter of which one is outpacing the other
at any pt in time.

When it comes to ratios they are either <1, 1, or >1. The gold to silver ratio is 53 to 1. It's been as low as 16. Probably won't ever get to 1 though.
The silver to gold ratio on the other hand is 0.19. Is that considered a negative ratio? Aren't negative numbers <0. Is the fact that SGR <1 of concern to us?
One could determine an inverse/negative correlation between the price of two items and conclude that they move in opposite directions (ie TBond rates vs. TBond prices).
In that case I would agree that a negative correlation could assign a number of up to -100% if a pair items were perfectly inversely correlated. The negative sign in this
case suggests direction. I know little about bonds but would think rates vs price are inversely correlated to 99 to 100%.

The 200 yr Dow vs Gold chart provided doesn't have negative numbers on the right hand axis. There's no change in the numbering on either side of 1. The
axis ends at 0.1. What if the owners of the DOW decided to make it easier for all of us and decreed a new DOW numbering system were to be instituted immediately
by applying a 10/1 reverse split. The new DOW would read 1,258.8. This would make the Dow to Gold ratio 0.735. Should we be alarmed that it's now <1? But what
if the owners of the DOW were so concerned about future lawsuits and legal costs that they decided to pay people $1,258.8 for every "DOW share" you took off their hands.
(think of being paid to buy land on a former dump site). In that case I would concur we have a negative Dow to Gold ratio of -0.735. But I'm perfectly happy with 12,588 DOW
and $1713 gold. I'd even be ok with recalculating the gold price in terms of avoirdupois ounces instead of troy ounces, dropping Friday's closing price to $1561, knowing that we're
now further away from a 1-1 Dow to Gold ratio. The govt got tired of seeing CPI numbers reach into double digits in the 1979-1980 period. So later on they redefined the CPI
numerous times to help ensure we don't see double digits again. So far so good. They could just as easily redefine the terms in Dow/Gold ratio to ensure it doesn't reach 1-1.
Numbers can be twisted to give different perceptions. But what lies underneath doesn't change. The Bank For International Settlements didn't like world derivatives at $1.14 QUAD.
They fixed that by redefining the valuation process to mark them to their maturity value. Instantly the total left the Quad's and came down to a "manageable" $683 TRILL. In the
end, we're all talking about semantics here.

derryb

I agree, a dow:gold ratio number can never be below zero.

Never mentioned a negative dow to gold number, only a negative ratio. When a ratio inverts (goes negative) it is reflected by a number below 1.00 but always greater than zero. Or you could just invert the two things being compared to keep the ratio above 1.00 - start calling the dow to gold ratio the gold to dow ratio.

roadrunner

I just talked to an old college math professor. He told me that I am never allowed to use a negative Dow to Gold ratio until they start putting a negative sign on the Y axis.

A ratio is a number. Most everything in our physical world is a ratio. Man created a numbering sytem to help define and quantify all these ratios (Fibs, Pi, Phi, e, etc.) as well as
to count how many days it was until the next moon. But I'm open for change if there is some scientific body that defines a negative ratio as one where the number is <1.

Link to negative Price to Earnings ratio

derryb

<< <i>I just talked to an old college math professor. He told me that I am never allowed to use a negative Dow to Gold ratio until they start putting a negative sign on the Y axis.

A ratio is a number. Most everything in our physical world is a ratio. Man invented a numbering sytem to help define and quantify all these ratios (Fibs, Pi, Phi, e, etc.).
But I'm open for change if there is some scientific body that defines a negative ratio as one where the number is <1.

Link to negative Price to Earnings ratio >>


Never will be a negtive sign on the axis because as we all agree the ratio number can never be less than zero. What we don't agree on is my calling the point of gold exceeding dow (< 1.00 ratio number) an effective negative ratio. For those that don't see this just consider the title of the thread changed to "Higher gold price than Dow in the works?

roadrunner

I'm ok with that convention for the Dow to Gold ratio. Just puzzled as to why it doesn't apply to say Price to Earnings ratio where a value of .99 P/E not considered a negative ratio.
I can use any convention as long as it's consistent throughout the financial world. A negative P/E ratio is basically not applicable and not used for the same reason a negative
Dow to Gold ratio isn't (ie dumping ground scenario). A "P/E ratio" of >0 and <1 is not defined as negative per the link above. Just looking for consistency.
In the mathematics/accounting world they apparently consider negative ratios to be where only one of either the numerator or denominator is a negative number.

derryb

I miss-assumed that the non-mathematical experts would understand my point better with the use of "negative ratio" to identify a reversal in the ratio. I stand technically corrected. I maintain my position that although never seen with the dow and gold it is quite possible.

Baley

I think the words Inverse or Inverted convey the idea better than the word Negative. I also think the point is moot, because we will not live to see it happen.

For the same reasons that the gold price would inflate in dollar terms, the earnings of companies and the stock values would also inflate in dollar terms.

So would real estate values and salaries, and the prices of just about everything else.

VikingDude

Keep in mind that the DJIA is not a static measure. The companies that comprise it are constantly changing.

pursuitofliberty

I think the words Inverse or Inverted convey the idea better than the word Negative. I also think the point is moot, because we will not live to see it happen.

For the same reasons that the gold price would inflate in dollar terms, the earnings of companies and the stock values would also inflate in dollar terms.

So would real estate values and salaries, and the prices of just about everything else.

I'll not say never, but I'm with Baley on this one ^

derryb

<< <i>I think the words Inverse or Inverted convey the idea better than the word Negative. >>


Agree 100%, OP modified.



<< <i>I also think the point is moot, because we will not live to see it happen. For the same reasons that the gold price would inflate in dollar terms, the earnings of companies and the stock values would also inflate in dollar terms. So would real estate values and salaries, and the prices of just about everything else. >>


True, in a robust, growing economy, from which we (and the rest of the world) are moving in the opposite direction. Remember, the markets see "robust" only because of FED action. Have corporate earnings really improved to justify equity run-up over over the last few years, even with the added benefit of accounting rule changes to hide actual book losses? What happens when FED action no longer has the desired effect and there is still massive debt and rising unemployment? If QE were all it's cracked up to be how come we are on #3? If FED action were effective, why did we need #2 or #3? QE is for the benefit of the Wall St. banks and the equity markets (and they need it indefinitely), not the Main Street economy. If there were an equity crash largely due to a loss of faith in the dollar's future (good, likely cause), where would the money run to, the dollar? And I'm not even throwing in a rise in interest rates. The whole premisis of the OP is that it would run to gold and possibly push gold past a falling dow, resulting in a negative, I mean inverted, dow:gold ratio.

Can't happen? Time will tell. I think there is a good probability it will happen within the next three years. The FED has made it a whole new ball game. Anticipation of our economic future can no longer rely on the old rules.

Baley

<< <i>
Can't happen? Time will tell. I think there is a good probability it will happen within the next three years. The FED has made it a whole new ball game. Anticipation of our economic future can no longer rely on the old rules. >>



In other words, the United States economy survived the past 230+ years, through all the financial chaos of numerous booms and busts and near-death experiences that were far worse than the current time (and if you or anyone thinks the current crisis is the worst the country has ever faced, and it's people the worst off they've ever been in terms of quality of life by any measure, we can agree to disagree and end the discussion right here) anyway, we've boomed and busted through wars and depressions and natural disasters for all this time, but this time it's different?
I don't think anyone is saying it (Dow:Gold inversion) "can't" happen, just saying that it never has, and probably won't
PS: I'm not counting or crediting the left half of the chart, because "the Dow" did not exist then, and stocks were not even widely publicly traded until recently, and even if you do accept the "stock" values from the 19th century, look where it inverted: the panic of 1837 and the civil war. Both worse by far than now

edit: save this post for three years, and it will be evident that one of us prognosticated the outcome

derryb

Here's what's different this time, and it is a big one: The US no longer protects the value of it's currency during economic crisis. It actually now does just the opposite.

A strong currency is crisis insurance. We are becoming uninsured. Dollar only appears strong when compared to currencies in much worse shape.

If you kiss the prettiest girl at the ugly pagent, you still kissed ugly.

Baley

but the supply and demand functions of human choice are not different. If gold were to skyrocket, some people with gold, in the aggregate, would choose to sell at least some of it and buy the means of production of goods and services, which are now comparatively cheaper vs. gold: farmland, factories, stores, homes, service businesses, and yes, stocks in those companies. This would put a lid on gold prices (as it has during this bull run, already. The average money manager diversifies)

If you're saying the whole system of American society and the entire economic system will crash, then gold will become less valuable than a can of soup, or a box of bullets

derryb

given current economic conditions, the stronger gold becomes the the stronger the hands that hold it.

roadrunner

Yeah, there is a difference this time vs. the last 230 yrs or even the last 2300 years. The difference is that the world's big banks have placed bets on 5X to 10X the size of the world's
financial system. That's like a bankrupt and unemployed home owner placing bets on 5X their highest ever net worth & that they will eventually fully recover. For now, all they have
to do is pay a few tenths of 1% on a note to give them that leverage....the financial system is happy to give it to them...because if they don't, it starts a daisy chain of failures that never
ends.

I don't recall any time in the past 230 yrs when the US financial system (never mind the entire world's financial system) took those kinds of risk. And ever since Lehman was flushed
away in 2008, there's no going back and netting all these contracts out. That opportunity is long gone. Wars, famine, disease, recessions, depressions, etc are all very difficult
circumstances. But people always find a way through. There's no precedence for the folly the current bankers have hoisted on the world with deadly 30-1 to 50-1 leverage. And if
tomorrow the president declares all otc derivatives null and void, then the system instantly implodes and the major banks are literally dead. 2/3 of our financial system just got flushed.
The other 1/3 would follow it shortly without the previous backing of the other 2/3. This would be Greece X 1,000 or maybe even 10,000.

jmski52

I remember watching Louis Rukeyser almost every Sunday for about 3 decades while I was learning about the markets, and one of the things that was burned into my consciousness was that P/E ratios mean something. Basically, any company's stock is subject to its own earnings history and expectations of future earnings as well.

Price over Earnings is a measure of a company's successes, the market's general trends, the market segment that the company resides in, and lastly what investors think the company is going to be doing in the future, based on the available information and whatever might be in the "pipeline" for company innovations, etc.

I enjoyed Louis making his funny and somewhat clever comments, so I became a fan. Stock Price, being the P/E numerator - is reflective of what the market thinks. Earnings, being the denominator - is the reality. The relationship can't get too far in either direction without correcting itself naturally. Case in Point - when I owned JDSU back in 1999, I remember that the P/E was something crazy like 200+ and even the whole industry segment was extremely high.

I remember a discussion in business school about IBM about 10 years prior, which had a large market capitalization and a hefty growth rate. The projection was that if IBM continued growing at the same rate for a decade or so, it would BE the entire stock market. Which can't happen. Similar comments have been made very recently about Apple. There are natural limits in stocks, and P/E ratios are one of them. Neither IBM, nor JDSU, nor Apple can levitate beyond what reality allows. Neither can the market as a whole.

A market P/E of 21.37 is still very high, historically.

I think that P/Es have to go below 10 for the market as a whole before any trend reverses itself. Earnings HAVE to be involved. Granted, in this government-picks-the-winners environment, there are lots of distortions. I mean lots of them. In a normal market correction, everything adjusts to the business conditions - interest rates, wages, company profits, prices - the whole shootin' match. We've got virtually none of that now. It hasn't been this screwed up since Nixon.

What I can say, is that stocks (yeah, Baley - there are always exceptions) are still too high, because P/Es are still too high, even though they ARE trending down. The companies still represent real assets, even tho they are under earnings pressure, so it's not totally irrational to buy a stock - it's just not a very good time to be doing that. Truth be told - stock prices are high, but earnings haven't been much to write home about. Stock prices are mainly reacting to money creation by the Fed, which doesn't really make a good case for owning stocks at the moment, either.

With bond yields at record lows, fund managers are forced to look for something that **might** have a positive return in order to keep their jobs, and so they buy stocks with crappy earnings. I'm sure that this is the main goal of our dear central planners. Goodbye retirement guarantees.

Gold is reacting in the opposite direction of the P/E ratio trend in stocks. This appears to be the same type of movement that gold has had in the past, see the charts I posted above. My biggest concern isn't whether or not gold & silver will go up, it's whether or not they catch the eye of enough jerks in government to warrant punitive action towards anyone who takes action to save his or her own money from the destroyers by simply buying something besides government regulated paper crap.

roadrunner

My biggest concern isn't whether or not gold & silver will go up, it's whether or not they catch the eye of enough jerks in government to warrant punitive action towards anyone who takes action to save his or her own money from the destroyers by simply buying something besides government regulated paper crap.

And that's why select rare coins and other choice collectibles still get a lot of attention from the hard asset crowd. It's not as likely that rare coin, rare art, and rare antiques
will be hit with windfall profit taxes....though I don't rule out the possibility. Investing in "golden" twinkies might accomplish both goals for you.

cohodk

<< <i>I miss-assumed that the non-mathematical experts would understand my point better with the use of "negative ratio" to identify a reversal in the ratio. I stand technically corrected. I maintain my position that although never seen with the dow and gold it is quite possible. >>



Okay I'll change my response from impossible to improbable.

roadrunner

Dow / Gold ratio < 1? I'd put the odds at 15-30%...or somewhat probable. After all, the projection of that lower wedge line does intersect at <1.

Prior to the 1870's it was the norm for this ratio to be <1. Washing out a 240 yr trend will be bring some unexpected results.

derryb

"improbable" makes it possible.

Baley

Here's a much better Dow:Gold chart

Looks like it's right at a historically "average" value (if you were to draw a regression line, it would be relatively flat at about 8 or 9, wouldn't it?)

what do you think will happen next? (hint, it's not 1:1 )

nibanny

<< <i>Here's a much better Dow:Gold chart

Looks like it's right at a historically "average" value (if you were to draw a regression line, it would be relatively flat at about 8 or 9, wouldn't it?)

what do you think will happen next? (hint, it's not 1:1 ) >>



It could happen what happened in August 1976...from 8.87 to 1.3!
I was 2 back them, what was going on?!

Baley

<< <i>

<< <i>Here's a much better Dow:Gold chart

Looks like it's right at a historically "average" value (if you were to draw a regression line, it would be relatively flat at about 8 or 9, wouldn't it?)

what do you think will happen next? (hint, it's not 1:1 ) >>



It could happen what happened in August 1976...from 8.87 to 1.3!
I was 2 back them, what was going on?! >>



What happened in the late 1970's? The biggest bubble ever in gold and silver prices formed, and then popped, and stayed popped for 25 years.

derryb

nibanny

<< <i>

<< <i>

<< <i>Here's a much better Dow:Gold chart

Looks like it's right at a historically "average" value (if you were to draw a regression line, it would be relatively flat at about 8 or 9, wouldn't it?)

what do you think will happen next? (hint, it's not 1:1 ) >>



It could happen what happened in August 1976...from 8.87 to 1.3!
I was 2 back them, what was going on?! >>



What happened in the late 1970's? The biggest bubble ever in gold and silver prices formed, and then popped, and stayed popped for 25 years. >>



Right, I didn't realize...so I have 4 years to sell all of my PMs!
Keep on stacking now...

cohodk

<< <i> >>




Are you saying deflation, ie bubble popping, is the biggest concern?

Baley

is it?

Baley

trend reversal?

Baley

comparison to previous dow/gold fluctuations

Ratio back above 10

Baley

above 12, flirting with 13?

edit: it's too bad you guys delete your links.

jmski52

Is there any doubt what QE is doing? Should we assume that the Ratio ever has to go back down to 1.0?

Baley

2014 is half over for the pessimists, while the optimists consider that half of the year remains

cheers

MGLICKER

<< <i>2014 is half over for the pessimists, while the optimists consider that half of the year remains

cheers >>



Well said, Baley!

derryb

<< <i>above 12, flirting with 13?

edit: it's too bad you guys delete your links. >>


I for one clean out my photobucket account with items over a year old. But, feel free to saving any images I post so that you can comment on them after the year is up.