Dow/Gold Ratio Falls to Post-87 Crash Low

By: Adrian Ash | Fri, Aug 19, 2011
Print Email

Today's gold buyers might still get to look early birds as this depression wears on...

GROWTH or defense... stocks or gold? Intra-day noise aside in summer 2011, Mr.Market's choice looks plain.

Dow/Gold Ratio

The Dow/Gold Ratio - a measure of the US stock market's valuation in ounces of gold - has sunk as equities have plunged but gold prices have jumped so far this summer.

Dropping through 6.0 ahead of Friday's New York opening, the Dow/Gold Ratio hasn't been this low since early 1989, back when world equity markets were recovering from the Great Crash of Black Monday 1987.

That slump itself had taken the Dow/Gold Ratio all the way down to 3.6, with gold prices rising to nearly $500 per ounce as the Wall Street index sank to 1776 points. Growth, of course, was only taking a pause in late 1987 - a quick breather before the real race to perfection of the late 1990s. Today, in contrast, the Dow/Gold Ratio could still go a lot further down. Or so says history.

Trading a little over its century-long average of 10.0 today, the ratio bottomed during the 1930s Great Depression at just below 2.0 ounces of gold for one Dow unit. At the nadir of the next global depression - the inflationary depression of the early 1980s - the Dow/Gold Ratio sank even lower, down to 1.0.

Whatever flavor of depression we've got at the start of this decade - and it is a depression, as Western jobs data continue to show and as the Dow/Gold yardstick will confirm if it goes much lower (keep an eye on the underperformance of gold mining equities, too) - a growing flow of private savings is choosing defense in gold bullion rather than choosing business-risk in listed stocks. That choice might sound self-fulfilling if you work in psychiatry or government, a kind of "clinical disorder" open to curing with medication, zero interest rates or perhaps a third round of quantitative easing - most likely aimed at risk assets, we guess, rather than the "risk free" Treasury bonds targeted by QE1 and QE2 - and which institutional investors are all-too keen to hold anyway.

So far, however, investors choosing to buy gold only account for a tiny portion of the money fleeing equities. From here to a true depression low in Dow/Gold (if such a level is reached), today's gold buyers will need to find many more friends. They'd also look early-birds compared with the rush out of stocks - and into gold - needed to reach that 2.0 or 1.0 mark.

 


 

Adrian Ash

Author: Adrian Ash

Adrian Ash
BullionVault.com

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the secure, low-cost gold and silver exchange for private investors. It enables you to buy and sell professional-grade bullion at live prices online, storing your physical property in market-accredited, non-bank vaults in London, New York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people from 97 countries used BullionVault, owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical silver (US$129m) as their outright property. There is no minimum investment and users can deal as little as one gram at a time. Each user's unique holding is proven, each day, by the public reconciliation of client property with formal bullion-market bar lists.

BullionVault is a full member of professional trade body the London Bullion Market Association (LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development body the World Gold Council (www.gold.org) joined with the internet and technology fund Augmentum Capital, which is backed by the London listed Rothschild Investment Trust (RIT Capital Partners), in making an $18.8 million (£12.5m) investment in the business.

For more information, visit http://www.bullionvault.com

© BullionVault 2006-2014

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

</body>
All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/