What could recent movement in the Dow/gold ratio suggest to investors??
*Dow Theory Letters, by Richard Russel, July 2, 2008
“In January of 1980 with the Dow at 887 one share of the Dow would buy only 1.04 ounces of gold. That was the least amount of gold one share of the Dow could buy. The ratio was heavily in favor of gold.
From 1980 the ratio shifted in favor of the Dow. By July 1999 one share of the Dow would buy 43.8 ounces of gold. At that time gold was dirt-cheap compared with the Dow — gold was selling around 265 an ounce while the Dow was selling around 11600.
Since mid-July the ratio has been declining in favor of gold. Yesterday, Dow/gold ratio dropped to a new low since 1999 of 12.05. The ratio had dropped roughly 72% since its 1999 high. In terms of gold, the Dow has lost almost three-quarters of its value over the last nine years.
How low will the ratio go? There’s no way of telling. I’m guessing that somewhere ahead the Dow/gold ratio is going to collapse, as gold goes parabolic on the upside and as the Dow finally sinks into its ultimate bear market low.”
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