Dow Jones/Gold Relative Ratio, Annual Data from 1896

This chart from technician John Roque shows periods of Dow/Gold ratio. The first two bold blue lines highlight the 14-year periods when gold outperformed the DJIA (1928-1942 and 1965–1979). The current third bold line shows that gold has been outperforming the DJIA since 1999 – implying we are ½ way through this cycle.

DJIA / Gold Relative Ratio, Annual Data from 1896


Source: Natexis Bleichroeder

Roque notes that the long term average for this ratio is 9.5 and as of March 31, its 18.9. The current cycle could run to ~2013 or until this ratio gets down to the single digits like. Either way it looks like gold (and commodities) have further to go.

I should have more on this in a related research project in a few weeks . . .

I >

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Quote of the Day:

“English stocks are springing up like mushrooms this year, forced up to a quite unreasonable level, and then, for the most part, collapse. In this way, I have made over 400 pounds. [Speculating] makes small demands on one’s time, and it’s worthwhile running some risks in order to relive the enemy of his money.”

Karl Marx (from 1864 letter to his uncle)

Note: this info was emailed to clients on April 18, ~noon

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  1. vfoster commented on Apr 19

    it was 1 to 1 in 1980
    gold 5k/dow 5k?

    i think this is one of the best risk/reward trades available.

    Barry, you can chart this ratio v every US index and global index and it looks the same.. the Nikkei in gold is flat since 2003 with the nominal price up over 100%…

  2. John Navin commented on Apr 19

    I love the Karl Marx quote! My sentiments exactly.

    For an even more revealing look at stocks and the precious metals, take a look at the SPX/XAU ratio, especially the weekly chart.

  3. Alaskan_Pete commented on Apr 19

    You should add a companion chart with Oil:Gold

  4. royce commented on Apr 19


    So what’s the percentage allocation of gold in your portfolio now?

  5. B commented on Apr 19

    Good chart but I think the author fudged a little. It’s really 1968 where I would draw the line if you are really viewing it in the context of behavioral dynamics that drives the chart. That is when the bull market hit a massive PE similar to 1929 and 2000 and started it’s cycle of inflationary/deflationary teetering and hard asset boom. That’s also when Warren Buffett really made his riches by liquidating then buying relentlessly into the 1974 equity massacre led by commodities and gold. So much for Warren not being a market timer. I guess the dates are somewhat arbitrary plus or minus a few years. It’s the general thesis that counts. Averaging with a long term ratio of nine is sort of misleading. It doesn’t really take into account the statistical fat tails associated with the behavior similar to saying the long term S&P return is 7%. Well, that’s really comprised of some massive up and down moves and none too many at 7%.

    I guess one would look at that chart and say to buy gold for a period of ten or twenty years. That would have been one hellish ride that would have required more Pepto Bismol than I could digest.

    So, does technology and the rapid pace of chance to market dynamics shorten the cycle this time or do we repeat the same mess? If we do repeat the same mess, right now is the time to sell commodities. I’m sure those in 1929 could have argued the same point of shorter cycles with such an explosion of technology comparative to prior times.

  6. wcw commented on Apr 19

    I see this one come up from time to time, and even as a fellow who was buying junior golds during the ’99-’01 trough, I don’t like it.

    One, of course, the Dow is a terrible index. Yeah, it has a history and a recognizable name, and that is just about it. It’s price-weighted, fer cryin’ out loud.

    Two, the implication (equities measured in “hard” currency) is at its root kooky. Gold is hardly a stable metric. The 20th century encompassed the creation of the Fed, the end of the gold standard, the inception and eventual dissolution of Bretton-Woods, the attempted and failed silver corner, the forward and lending trades and central bank sales, to mention just a few perturbations.

    Three, if you want to benchmark equities to something other than fiat currency, what’s wrong with nominal GDP? Normalize for long rates if you like, but either way it’ll tell you a lot more than this chart.

  7. Mark commented on Apr 19


    If you were buying the junior golds then you are making an absolute KILLING right now so my hat is off to you my friend. I have been a buyer of the miners since last August. Tell me, does this action concern you? Basically we have the hedge funds/momentum players driving these metals straight up. When they run out of buyers (and they are running out right now on the HUI and XAU) it goes STRIGHT DOWN. Or am I wrong about this?

  8. vfoster commented on Apr 19

    to me its not about benchmarking the index its about pricing the index.. you get virtually the same result if you use Euros or Sterling.. it simply says the rise in stocks has been a reflection of the devalued currency. its simple economics. the rise in stocks and most other asset classes for that matter has not kept up with inflation.. at the end of the day you haven’t really made any money. yesterday’s rally was an illusion

  9. todd commented on Apr 19

    alright… gold jumps to $645?! Something is seriously wrong.

  10. Alaskan_Pete commented on Apr 19

    All good points. Which is why I suggest adding additional ratio charts to compare Gold to other metrics including commodities. Maybe it’s because I tend toward stat arb plays…short PEP, buy KO etc, but also because using the DOW alone for a metric is full of problems.

    Here’s a Gold chart I love (note, this is a link to a chart, but shortened through a site called tinyurl..very handy tool for long addresses BTW):

  11. todd commented on Apr 19

    good point in the article:

    “Will it reach $800? Yes, $1,000? yes, $2,000? yes. it has nowhere to go but up, but it depends on how far the dollar and other currencies will be devalued.”

  12. Barry Ritholtz commented on Apr 19

    As of yesterday, I have no position in Gold

  13. B commented on Apr 19

    Come on Todd. You didn’t listen to Janet Yellen? It simply is a strong global economy. Lots of people just want a bracelet or something. Isn’t that it?

    Wanna see some sadly hilarious quotes:

    -Jan. 1973. “It is very rare that you can be unqualifiedly bullish as you can be now,” Greenspan commented to the New York Times when he was president of Townsend Greenspan. That was two days after the 1973 stock market peak, when the market was on its way to declining 50 percent over two years, and we endured the worst recession since the Great Depression.

    -Dec. 2000. “I have gotten calls from a number of senior high-tech executives who are telling me that the market is dissolving rapidly before their eyes,” Greenspan said. “But I suspect that a not inconceivable possibility is that what is dissolving in front of their eyes is their own personal net worth!”

    -Jan. 2000. “The American economy is experiencing a once in a century acceleration of innovation, which propelled forward productivity, output, corporate profits, and stock prices at a pace not seen in generations, if ever. And I see nothing to suggest that these opportunities will peter out any time soon.”

    Now Janet Yellen April 19th, 2006 on CNBC Interview. Paraphrasing, “I see gold’s appreciation not as a sign of inflationary pressures but as a sign of a strong world economy.”

  14. B commented on Apr 19

    Ooops, all of those quotes are Greenspan

  15. royce commented on Apr 19

    “As of yesterday, I have no position in Gold”

    Barry, I’m curious on your reasoning here because the other bloggers I’ve seen who have talked about unacknowledged inflation seem pretty high on the merits of holding gold, and I remember you pointing out your positive call on it a couple of years back. So what’s on your mind right now about its prospects going forward?

  16. B commented on Apr 19

    I don’t like ragging on the Fed as much as others but I’m reading some of these 1999-2000 Fed minutes. How about this? I almost have to p*ss my pants from laughing. Here we are about to lose trillions in market value and rock the American economy so much that we are still dealing with it and Greenspan is pre-occupied with his coffee. It must be Starbucks.

    MR. PRELL. Just to grab onto one more string, though, it is possible that the buoyancy of the dollar has had something to do with what some might argue was a bubble situation in the equity market. So people may have exaggerated ideas of the prospective returns from these investments.


    MR. PRELL. Domestic and foreign investors. But foreigners are playing a role in this, investing in what they perceive to be very, very profitable U.S. ventures.

    CHAIRMAN GREENSPAN. Shall we break for coffee before it gets frozen?

  17. Mark commented on Apr 19


    I suspect that Barry likes to make money for his clients but he likes better to preserve it. He also follows technical indicators. He likely saw the absolute froth in this move and decided to take it off the table. What goes up (vertically)…. . I bought the dip to $534 in March and I am thinking the same thing. Barry can correct me if I am wrong.

  18. donv commented on Apr 19

    I assume you all saw the article in the WSJ in the last couple of weeks about gold, from mining all the way through to storing it in London.

    I thought that the interesting part of that article was the mention that typically 70% of gold production is used for jewelry, 15% for electronics, and 15% for reserves. Per the article, demand for jewelry is dropping significantly (no figures were given). That looks to me like an asset bubble– the end users of the asset are reducing their demand due to high prices as the speculators and momentum players pile in.

  19. zanzibar commented on Apr 19

    I believe there is a lot of value in comparing to gold price. Although gold has functional value in jewelry I think its price is mostly determined by investor sentiment. Gold prices may be reflecting underlying monetary and credit inflation.

    As the CW bakes in the Fed pause, the issue in my mind is less the cost of money -aka rates, but the quantity of money and credit.

    Are we now moving to the next rolling asset inflation with commodities on fire as housing cools ? Emerging market bond spreads, VIX and continued growth in CDSs, ABS reflect continued lack of risk perception.

    Like generals fighting the last war Bennie and other CBs keep focused on deflation while the opposite is happening. Sure the CPI and other “manipulated” data don’t show it but everyone living in the real world is experiencing cost inflation from health premiums to gas to tuitions.

  20. Alaskan_Pete commented on Apr 19

    donv, without timeframes around the “jewelry demand dropping rapidly” it’s meaningless. The Indian market in particular revolves around dowries in the form of gold jewelry/ornamentation during the wedding season…which starts about mid april and ends roughly late Sep/early Oct. So to see a “rapid decline” in the winter is the big “so what”.

    My point is, anecdotal claims like you cited are virtually meaningless without any backing longer term trend data.

  21. thecynic commented on Apr 19

    in regards to the Fed. i’d like to join the bashing..
    i personally think they are totally screwed. Greenspan has dumped a mess on their hands and Bernanke and his army of rookies have no idea what to do. forget the stock market. it’s irrelevant as the gold chart shows.
    what’s the worst thing that can happen to the Fed?
    a loss of credibility
    we obviously think they haven’t had any credibility in a while, but now there is more at stake because we have a new regime. no one really knows what Bernanke is thinking or what he’s looking at.. Yellen said they are looking at everything. maybe so, but i can’t believe they would even hint at a pause as long as there is so much speculation in the market.. any novice investor can look at the recent leaders and discern the inflationary themes.
    it could be that they are so worried about a housing collapse that they would rather err on the side of caution and chalk up the commodity rally as “demand driven” just like you pointed out.
    if this is their course of action the fx market will take over and crush the dollar. this recent rally in the dollar will be seen as a counter trend bounce and resume its bearish ways. a take out of the old low from last year could be disasterous as support (below 80 on DXY) is nowhere to be found going back about 30 years (we are 88 today only 9% above and we are 4% off the highs from last Nov)
    the market would be in uncharted territory leaving bond investors puking on themselves.. isn’t half our treasury debt outstanding at foreign central banks?
    what do you think that would do to the pension system?
    the alternative is to continue to raise rates to choke off the excess liquidity but where the hell is that level? 6%, 7%, 8%? i don’t anybody can say for sure with a straight face.
    i’d say they had it coming.. this is what you get when you operate with negative interest rates for 2 years..

  22. angryinch commented on Apr 19


    Here’s another few “best of all possible worlds” quotes for you of more recent vintage:

    “I have never witnessed or even read about an economy that comes close to the excellence of the current U.S. economy. It just doesn’t get any better.”—Arthur Laffer (Mr. Reaganomics), WSJ, Oct 28 2005.

    “After 9/11, Mr. Greenspan’s Fed did the best job I could ever imagine…As an encore, when the crisis was over, he mopped up all the excess liquidity immediately, allowing no opportunity for inflation to take root. This was absolutely brilliant. Ben Bernanke stands on the shoulders of giants. We need a Fed chairman who understands the importance of not rocking the boat, who is stable, solid and sticks to basics. Ben Bernanke is the right person at the right time.”—Arthur Laffer (Mr. Reaganomics), WSJ 10/28/05

  23. fred hooper commented on Apr 19

    I think I just heard Cramer say that gold was going to break $800.

  24. Mark commented on Apr 19

    Sure he said that. That’s because gold is being PROMOTED now so the traders can make money off it. It is no longer pariah to WSJ, Cramer or other touts. Cramer’s gotten the memo and now he’s being the good message carrier. Is is totally disconnected from fundamentals and is in the hands of the momentum traders.

  25. B commented on Apr 19

    You know the secret Polizei are going to come get us for bad mouthing our government. They are allowed to do that now under the Patriot Act. Spy, listen in to attorney-client conversations, arrest us without cause, hold us indefinitely, tap our phones, raid our houses…………

    All joking aside, I read Richard Russell’s commentary a month ro so ago and he thought the Fed would stop short of neutral to save the housing market. His argument was pretty much that everything depends on housing as it pertains to the American psyche.

    Well, gold might simply be telling us the obvious. I read some place that global growth could be well over 4% this year if they stop now. Can you imagine? That includes a world of Africa, the Middle East, Japan, Europe and South America that are typically bankrupt, corrupt, stagnant or some other serious -ism. Superspike in commodities beyond the recent spike?

    I guess we have to wait and see. He also wasn’t really bearish on the dollar either. But, I’m sort of in the camp that the dollar could head to unchartered territory and cause a crisis of sorts for the world’s reserve currency.

    I’ll keep those quotes from Laffer. Especially the post 9/11………..You know, after reading some of the 1999 Fed minutes, I wonder if they were just totally lost. Not the researchers who pointed to an equity mess but the noble appointed ones. Do the Fed researchers laugh at them like we do our management?


  26. ballyache commented on Apr 19

    Okay, all of you folks are more knowledgable than I but, if I’m not mistaken, in 1980 (or so) when gold was around 800 wasn’t the DJIA in the exact same neighborhood?

    Or, take that 800 from 1980 and factor for inflation.

    Or, run the gold price against the price of oil.

    Don’t all of these things say that gold has a good long way to run?

  27. X commented on Apr 19

    Some words of wisdom from one of the “gray-haired” on Wall Street.
    Sooner or later, record high commodity prices have to start pulling inflation higher. Companies will have to start passing along their raw material costs or suffer accordingly. Most Fed members believe that inflation is well contained and is likely to stay that way. It’s hard to understand how they can hold that view in the face of a falling dollar and soaring commodity prices. The recent jump in bond yields to four-year highs suggests that the bond market is concerned about inflation even if the Fed isn’t. The Fed might do well to pay more attention to market action in the bond, commodity, and currency markets before declaring a victory over inflation. If anything, any halt in the Fed’s rate hikes will only serve to weaken the dollar even further which would only add to inflation pressures and higher bond yields.

  28. KirkH commented on Apr 19

    “As of yesterday, I have no position in Gold”

    But you’re conviced the CPI is a joke… so we’re about to see deflation ala Japan? Possibly followed by hyperinflation?


  29. zack commented on Apr 19

    History doesn’t repeat, but it rhymes.

    Now, this doesn’t show you the trip from 35 to 200 that occurred before this. But pretty good correlation here:

    630s were the intermediate target after the latest breakout. Discipline demands that some money be taken off the table here. Looking at the silver chart, I think you’d be nuts NOT to sell something on the first high-volume reversal we get.

    I got interested in the golds last summer, spent some time thinking about it and still picked the wrong horse. I put on a big position in NEM right around the time of Katrina, thinking that this sector was very small-cap and NEM would be the one fund managers would need to reach for. They have pooched earnings a couple of times now, so I have to sell calls against it.

    I wish now I had picked GG. I missed it at that perfect 16 entry point and had to settle for 20.

    If there is a next leg, you have to figure it is supply-driven. South America and Africa are not no-brainer safe havens anymore. It is cheaper now to buy rather than develop.

    Also, in reading the history of the late 70s, early 80s, after gold peaked in January, 1980, the *average* junior gold on the Toronto Venture exchange gained 1350% in the next 8 months. I can’t recall the ticker, but the best one went from 0.70 to $70 in that time period. As a cautionary tale, not one of those tickers now exists.

    So what I have been doing with speculative money is building a full-sized position out of a basket of microcaps with resources in the US and Canada, then trading around a core position. One after another, they breakout then do a bull wedge or pennant and you can buy by the oscillators.

    When you do the research, every single one of these has problems. They are not pretty situations sometimes.

  30. KirkH commented on Apr 19

    That’s tough zack but it’s worse having a portfolio that’s short homebuilders and long gold and RHAT since last August… except it’s a fake yahoo portfolio because I’m paying off my Finance Degree/ Student Loan. And furthermore I learn more about finance reading blogs than I did in school. Aaaarrrgh.

  31. donv commented on Apr 20

    Pete, you are absolutely correct.

    However, googling “gold jewelry demand” quickly yielded some figures, including a demand drop of 21%, or 600 metric tonnes, in 2006 (for combined investment jewelry and adornment jewelry).

  32. Mark commented on Apr 20


    “Discipline demands that some money be taken off the table here. Looking at the silver chart, I think you’d be nuts NOT to sell something on the first high-volume reversal we get. ”

    Silver, gold, copper the charts all look the same. A reversal could come any day. These charts are all divorced from reality now that the funds have piled in and its a momentum play. Sure wish I had a larger position on but it is what it is. I see that Barry took his off yesterday. Since he went short and took it off just a tad from the bottom I’m betting his instincts are just as good here. Gold gets to maybe 650 before the plug is pulled. Or will it be copper that collapses first?

    Yep, NEM wasn’t the winning horse. GLG, AEM, LIHRY– all better results. But they are a solid non-hedger so it made a lot of sense at the time.

    Someone mentioned to me that the PMs are becoming like tech in 1999. I wouldn’t doubt it. Let’s be idiots and run them to the stratosphere in the Big Party then watch the commodity complex take the markets down with them when they finally collapse. What’s a three year slide among friends anyway?

  33. RW commented on Apr 20

    It appears the gold majors are catching up to the juniors as the price of gold powers higher. Now that they are worked into the wall street sell-side models they will probably go higher yet but it seems clear we’re broadly overbought here (and not just gold stocks either) and at the end of a cyclical bull so a correction must happen and I’m selling into this current strength now.

    It is what comes after that has me baffled but personally I believe we have actually been in a stagflationary environment for some years and the stability of the long end of the yield curve was trying to tell us that – e.g., Greenspan’s ‘conundrum’ frustrated the bond bears and made for a nice trading range for some time – but now it’s given up and the rest must inevitably follow IMHO.

    But this incredible tide of liquidity must go somewhere and right now I can’t see anything other than commodities and equities as the natural place to go longer term (although believe me I’ve been searching). I’ve made good money in this run up and will leave some on the table. Having some extra cash won’t upset either but it bothers the h*ll out of me that I may have to buy back in to what increasingly looks like a house of cards even if I hope buying back in may come at a lower price.

  34. D. commented on Apr 20

    What is gold worth?

    Let’s look at the worst case scenario: run on the US dollar… the standard that replaced the gold standard.

    If this ever happened, what would we use to back up the currency in order to stabilize it? Water? Oil? Gold?

    If gold was to be used, just divide the number of issued US dollars by the number of ounces. I’m sure it’s more than 800$!

  35. D. commented on Apr 20

    What makes me somewhat nervous is that there seems to be a monetary crisis, where the standard is questioned, every 30 years (generation?) or so.

    It’s only been since the 1970s, that we have had no physical assets backing our currencies. Our entire system is based on faith.

    If the US dollar slumps, will it mean the beginning of the end of this 30 year system? If so, what next?

  36. B commented on Apr 20

    What would we use to back our currency in a crisis? The same thing all other currencies use. The same thing all currencies that have had crisis use. The same thing we’ve used since going off of the gold standard. The free markets or brute force. We aren’t going back to the gold standard and neither is anyone else. You have $15 trillion you want us to plunk down for that endeavor?

    Therefore, what is gold worth instrinsically? What the market will absorb. Today that is $600. Tomorrow it might be $5,000. The next month it might be $200.

    We’ve already had a dollar crisis since going off of the gold standard. We’ll have another some day. Russia’s had them, Japan has had them, Mexico, Italy on and on. It is a scary unknown if it happens more as to how the financial community will react but it won’t be the end of the world.

  37. RW commented on Apr 20

    Aye, therein lays the rub D. A devaluation of the $USD certainly seems a real possibility but will it be replaced as the default world currency? If so I find it difficult to believe that any commodity is going to be the longer term answer although that might be part of a transition to something else and perhaps it is doubt concerning the nature of that something else that is, at least in part, a commodity driver now. If we are indeed in transition then I would guess a basket composed of the strongest currencies would be the end game – possibly an extension of the Yen/Yuan agreement to a USD/Yen/Euro/Yuan?

    But assuming something like that is happening, figuring it out is well beyond my expertise, so I guess I’ll just sell a bit, hedge a bit, leave a bit on the table and contemplate my general lack of good investment ideas for now (and perhaps a semi-tall glass of scotch later).

  38. B commented on Apr 20

    So, what would replace it? The Ruble? The Yuan? The Euro? A third of the world’s wealth and one fourth of it’s consumption & GDP are American. Come on. Be serious.

    The impractical ramifications of a basket of currencies would never be adopted. A resetting of the exchange rate trading bands and the ramifications around it is a possibility.

    Here’s a more interesting discussio. Silver is down 10% today. KABOOOOOM! Stopped out right at a 25 year high.

  39. zack commented on Apr 20

    And days like *that* are an object lesson for why we exercise discipline! And probably the next couple to follow.

  40. kennycan commented on Apr 24

    I am in the camp that thinks the USD is not necessarily going to be replaced any time soon. And I keep coming back to the same question several other people have asked on this thread. Replaced by what? What Central Bank has the credibility and what currency has the trading liquidity and the size of trade necessary to be a reserve currency. Candidates from liquidity and trade standpoints are probably EUR, JPY and CNY. But which of these has any CB cred? Face it, the JPY and EUR CBs have been printing more of their currency since end 2004 than the US has of the $. Which is why both are DOWN vs the $ since then. And the PRC? Printing Press Central!! Why do you think Commodities have been going through the roof. The PRC cap ex has been boomtown to beat all boomtowns these last couple of years.

  41. Richard Wicks commented on Oct 3


    I’ve been going through the posts here, and paying attention to all the people that said that gold was going to get crushed, that silver was on it’s lows, advice to get out now, etc.

    Listen, kids, the US dollar is finished. That’s why people are buying gold.

    The reason the dollar is the world’s reserve currency is because the US was the last nation to have a currency on the gold standard.

    The reason the Federal Reserve tries to keep inflation at 2% is because that’s the inflation rate of gold – 2% more is added to the total supply per year.

    Gold is a heavily manipulated commodity. Central banks literally have tons of the worthless useless metal – why? Because it’s always been money, and it will always be money. Fiat has never been stable, never will be stable, and will always go to 0 the only question is when.

    Gold will never go to 0, and if it does, collect as much as you can because it won’t last long.

  42. gmf commented on Mar 16

    Bwahahahaha X2!

    Gold now over $1000/oz

    What will replace the dead $? Maybe the Amero?

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