Trader’s Narrative

Here’s an interesting chart from Chart of the Day: the historical ratio between gold prices and the Dow Jones Industrial index.

Or in other words, how much gold would you need to buy the Dow?

In the early 1980’s, just before the mega-bull market was about to awaken, you only needed 1.5 ounces of gold. But at the top, in 1999, you needed almost 49 ounces of gold to afford the Dow.

Over time, the two don’t always move opposite each other but during the past few years, not only has the stock market fallen, but gold has gone up. That has resulted in an unwinding of the ratio.

While the Dow Jones Industrial has only fallen 25% from its 1999 top, priced in gold, it has fallen almost 80%. We’re back to the levels that we saw in the early 1990’s

But of course, this ratio is ignoring dividends which gold doesn’t pay but the Dow does pay. I wonder what the chart would look like with that taken into account. Probably very similar.

Whether we’re seeing the birth of a new bull market or not, this ratio is not convinced that stocks, relative to gold are really cheap. Or at least, as cheap as we’ve seen them. Keep in mind that while the market may at times rhyme, it rarely repeats itself.