Let’s have a look today at a long-term indicator, the DOW/GOLD ratio. Typically its aim is to assess and forecast the bullion perspectives.
This indicator is built as the ratio between the Dow Jones Index and Gold prices. In other words, it tells you how many ounces of Gold you need to buy the most famous US equity benchmark.
Two scenarios can generate the ratio’s decline:
- The Dow Jones falls faster than gold prices
- Gold prices rise faster than the Index
This is of course the opposite way when the ratio jumps.
Despite that the Dow Jones is less representative than the S&P 500, it is more useful for the calculation of the ratio as it has a broad historical data base (since 1896 when the S&P 500 has been created in 1957).
If we look at the historical chart of the Dow/Gold ratio (on 100 years), it appears that a declining ratio basically always corresponds to bearish equity markets and to a rise of gold prices.
Symmetrically, a rising ratio always corresponds to bullish equity markets and falling gold prices.
Furthermore, bullish and bearish cycles of the ratio have an average duration of 15/20 years. The bearish cycles of the ratio usually end when the ratio is between 1 and 3.
The weekly chart shows that there is a current bearish cycle which has started at the beginning of the current century, which corresponds to the massive rise of gold prices on the commodities markets.
The daily chart shows that the ratio is currently moving around 11.5. Statistically, based on the observation that a cycle lasts between 15 and 20 years, there is a further 8 or 10 years of declining ratio ahead. Statistically, of course. Moreover, if we assume that the target of the bearish ratio is 3 as it has been observed statistically, it means that it is more than likely than gold prices should massively rise during the coming years.
For instance, a ratio of 3 means that for a Dow Jones at 9,000 points, it would imply an ounce at 3,000 dollars! Or for an ounce of Gold at 2,500 Dollars, it would mean a Dow Jones at 7,500 points. You can imagine so many other different combinations…
But globally speaking, what does this mean? Well, if you assume that historical data on 100 years are reliable, and if you think that statistics are an interesting decision-making tool, therefore you may conclude that the coming years are likely to be strongly bullish for gold prices.