The Dow To Gold Ratio: Still More to Move
The Dow to Gold ratio is often regarded as the most simple, yet surprisingly accurate and fundamental view of the economy and the stock market. The dow to gold ratio is following a very simple trend, but its not quite over yet.
Gold has inherent value because it has served as a medium of exchange for thousands of years and up until 1971 in the United States. Before 1971 the US dollar was as good as gold, meaning that the dollar could be redeemed at any time for specie. Today the US dollar instead relies on a fiat monetary system without any gold backing.
There is one interesting thing about this chart, we’re not even halfway done with the complete correction. If this recession and slowdown follows the trend that we’ve seen over history, the current drop should go as far that the dow to gold ratio is 1-3:1. At today’s gold prices that would make the Dow worth 831-2493. At today’s dow price that would make gold worth $2600-$8000.
There will have to be some middle ground when the figures finally align for the complete correction so its unlikely that Gold will hit $8000 or that the Dow will fall to 831 but could the market find middle ground at 2493 on the Dow and $2600 on Gold?
Unfortunately there is no true way to play the Dow to gold ratio or know which of the two is going to be moving the most. As of right now its anyone’s game, but what this can tell us is that the stock markets and commodities markets aren’t quite done moving yet. As of right now the Dow to Gold ratio is a little over 10:1. History suggests that the ratio should eventually rest anywhere from 1:1 to 5:1, but chances are that the market will bottom nearer to 1:1.
Some food for thought.
