IN an interesting article Paul Amery looks at the Dow/Gold Ratio.
He presents a long term and medium term view that suggests that the recovery in the Gold price has just started.

He asks:” Is gold about to embark on another upleg when measured in terms of the Dow Jones Industrial Average index?”
The chart seems to be compelling

Whilst I totally agree with his sentiment that we shouldn’t get too religious about charts (I’m often amazed how Technical Analysts advise people on the strength of a chart to buy or sell shares while knowing nothing at at all about the fundamentals of the sector or the individual company in question and repulse criticism with “it is all in the chart”) I think that it is worthwhile to understand what Amery is saying…..
“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 millennium, 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?”
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