Last Updated: 20 March 2023
The two charts below, taken from Fred’s intelligent bear site, show the long-term (hundred year) and medium term (thirteen year) trend in the Dow/gold ratio, the figure you get when you divide the Dow Jones Industrial Average index by the price of gold in US dollars. The ratio peaked in 1929, 1966 and most recently in 2000, signifying the top of equity bull markets. It hit lows in 1932 and 1980, which represent bottoms.
Since 2000, the ratio has fallen from its peak of 43.7 to a trough of around 7 in March 2009, from where it has recovered to the current level of just below 10.
It’s important not to get too religious about the charts and absolute levels of the ratio – the Dow, after all, has undergone many constituent changes over 100 years (even if the gold part of the ratio is hopefully unchanged). Also, the ratio doesn’t account for income received from equities, which is an important part of their long-term return.
But the plotting of share prices in gold (rather than cash) terms, plus the use of a logarithmic scale, help illustrate two things. First, the current equity bear market clearly started at the turn of the millenium, not in 2007 (when many share indices hit highs in nominal terms). In fact, the equity market rebound of 2002/07 doesn’t even register on the chart because the price of gold was rising at the same time.
Second, although the Dow/gold ratio has already come down from 44 to 10 or thereabouts, the log scale of the y-axis shows that, if we are heading for the same kind of low that we saw in 1980, we’re only about a third of the way through gold’s bull market (in equity terms). That’s worth thinking about when reading debates about whether gold can break through US$1000.
As Fred puts it on his site, “the chart shows the cyclical nature of the battle between paper assets and hard assets. Paper assets excel when everyone is fixated on growth. When the growth phase ends, and preservation of wealth becomes the paramount concern, gold tends to excel. When paper burns, gold shines.”
We’re talking very long-term cycles here. But those who have stuck with precious metals at the expense of equities since 2000 have been richly rewarded. And, with real economic activity everywhere under threat from government borrowing and possible debt deflation, who’d argue against gold embarking on another upleg in its bull market against shares?