Thursday, August 23, 2012

Yes, You've Seen This Before

I've shown the Dow/Gold ratio before and discussed the reversion I expect to see back to 1:1 but its always interesting to hear others much smarter than me discuss it. Today Mike Krieger re-examines the ratio. From Zero Hedge:

What this chart shows you are secular swings in the economy.  You see how stocks ran up in real terms into the 1929 crash and then plunged versus gold.  You see how they ran up in the next great post- WW2 period into 1968 when they once again plunged versus gold.  Then you can see the great secular bull market in stocks from around 1982 to the bubble peak in 2000.  In both of the prior two periods (one deflationary and one inflationary) the DOW/GOLD ratio got down to about 1:1.  It has been my contention for many years that we will see that same ratio once again.  That would imply another roughly 75% drop in stocks to gold and I expect that this next leg is beginning now.

At any point in time the market can either make you look like a genius or an idiot. Last Monday I noted in a post that it was a good time to buy gold given that fundamentals were stronger than ever even as the price was two standard deviation below the mean. Gold is up about 3% since that post but is still down 8.8% year over year. My point here is that I have no idea what gold is going to do over the short term. I may look smart one day and dumb a month later, The fundamentals however are unchanged from day to day. Keep an eye on the longer term trends. Namely, keep in mind:

  1. We're still inching closer to a fiscal cliff.
  2. Central banks are still buying gold, especially in the East.
  3. Some form of QE is still likely in some form.
  4. We still have negative real interest rates.
  5. The Euro is still in trouble with members likely to abandon the currency in the next 6-18 months.
I have no idea if this week's rally will continue or not in the short term or not, but I am quite confident that global economic forces are going to push the Dow/Gold ration lower, and quite possibly as far as 1:1. As I've mentioned before,  there will be a time to begin moving from gold back into equities, but I don't expect this to be anytime soon.

Until then, if you must invest in stocks, seek dividend paying stocks. In your 401k they are often called "Growth and Income" funds.

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