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« Agnico-Eagle Mines Ltd | Main | Silverado Gold Mines Ltd »
Wednesday
Jun212006

Dow Jones Gold Ratio

DOW JONES / GOLD RATIO

The driving force behind a gold bull is of course the key fundamentals backing it. However a key metric in determining relative future gold prices is the ratio between the gold price and the Dow Jones Industrial Average. How many ounces of gold does it take to buy the Dow Jones?

Over the last century or so, there have been three periods where 1 ounce or 2 ounces of gold could buy the Dow Jones Index.
It began in 1897, when the ratio was 1:1.
Then in 1929, just before the Wall Street Crash, it took 18 ounces of gold to by the Dow.
Three years later it took two ounces of gold to buy the Dow Jones.
In 1966, it surged to 28 ounces and by 1980, one ounce of gold bought the DJIA.
However in July of 1999, it took 44 ounces to buy the DJIA. This was at the height of the dotcom explosion.
It now takes 19 ounces to buy the Dow Jones, with the index trading around 11,000.

There are many ways that you can interpret this ratio, to predict the height of the gold prices in this bull market.

· The DJIA/Gold ratio pattern is 1:1, 1:2, 1:1 and so the next ratio could be 1:2. Two ounces to buy the Dow Jones
· If you ignore the 1897 data, the DJIA/Gold ratio pattern is 1:2, 1:1 and so the next ratio will be 1:0.5, it will take half an ounce of gold to buy the Dow Jones
· The average of all the ratios is 1:1.333. So in future one and a third ounces of gold will by the Dow Jones

Of course this is only half of the equation. To make it complete you need the value of the DJIA. In previous situations, such as 1929, the Dow has fallen to meet the gold price. However in the recession during the 1960’s and 1970’s, the DJIA did not fall dramatically to meet gold, but gold prices rose to meet it.
So what could happen?

· The DJIA crashes and loses 90% of its value (as it did in 1929) leaving it at around 1100 and it falls to a ratio with gold of: 1:2=$550 1:1=$1100, 1:0.5=$2200
· The DJIA halves to 5500 and gold rises to meet it at a ratio of: 1:2=$2250, 1:1=$5500, 1:0.5=$11000
· The DJIA stays around its current value (at it did during the 60’s and 70’s) and gold rises to equal the Dow at a ratio of: 1:2=$5500, 1:1=$11000, 1:0.5=$22000

The Dow Jones is unlikely to lose 90% of its value and replicate the 1929 crash, as this was largely affected by WW1 debt.
Therefore, whatever ratio or Dow value you choose, gold prices should be significantly higher over the coming years.

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Reader Comments (3)

I have a question (my last question below) about the second to last sentence of your article..."The Dow Jones is unlikely to lose 90% of its value and replicate the 1929 crash, as this was largely affected by WW1 debt."

The debt is higher than it has ever been and it's growing at an alarming rate. Because of this, isn't it now likely that the Dow will lose 90% of its value?

Also, now that the price of gold is over $1,000 and the remedy for stabilization is nowhere to be seen, do you now think that gold will rise to about $5,000 and the Dow will come down to meet it, creating a 1:1 ratio?

But my real question is this: What is the significance of a 1:1 ratio? What does that mean in the real world? - Dusty

October 11, 2009 | Unregistered CommenterDusty

Dusty,

We wrote this article back in 2006 when it was inconceivable that gold would ever get back to a 1:1 ratio with gold, however, historically gold has been there at the 1:1 ratio three times as we have pointed out. We believe that there is a strong possibility that we could see it again in the not too distant future.

October 11, 2009 | Unregistered CommenterGold Prices

"The Dow Jones is unlikely to lose 90% of its value and replicate the 1929 crash, as this was largely affected by WW1 debt."

BUT from my point of view Dow Jones will lose some values because of BAILOUT Money (Another form of Debt). Because if you ask who got the money, you would say you dont know and the money is not in the market, it was paid for the top executives as bonus money to chill and save their job and donate it back later on as some other form of favour to certain people!!!

November 5, 2009 | Unregistered Commentersum1

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