Dow to Gold Ratio - Part Deux

Most mainstream media tend to focus on the primary index performance while analyzing and reporting the day's activity and trends. We like to look under the hood, to understand what's really happening.

One such ratio - we love to look at is the Dow to Gold ratio. The ratio tells us a lot about the investor appetite and preference. Dow30 represent a proxy for paper assets and the value investors are willing to pay for it, while Gold Price represents a class of hard real assets investors are valuing.

If the ratio is consistently moving lower (as was the case during the bear cycle Oct 2007 to March 2009), it shows the preference of investors is clearly towards hard assets, away from the paper world. After a brief 5 month bear bounce (during which investors were snapping value picks and then chasing momentum), we are of the opinion that the ratio has made a high for the year and is again headed lower (telling us that investors are again preferring real hard assets to the paper assets... and the tacit truth may be that they dont trust the underlying values of the paper assets...)

In Today's action,

1. Though DOW had a positive close, due to a super final hour, the DOW-GOLD ratio today was still lower than yesterday. (#chart 1 below)
2. Momentum in Gold, continued to take it closer to the elusive 4 digit mark. This despite a not so weaker dollar (#chart 2 below), which reflects the underlying strength in Gold momentum. We think Gold will surpass previous highs of 1007 to create new highs for the year. Whether previous highs of $1033 will be taken out depends on the momentum once the first highs of 1007 are taken out.

Smart money will be looking to see a day where gold gaps up at the open and sells into the day to close on the lows of the day; that will be a tell-tale sign to close your long positions, while the mainstream media will be going gaga with $1200 odd price targets for the yellow metal...

#chart 1


#chart 2

Dow to Gold Ratio

Take a close look at the chart below. This is a chart of Dow Jones Industrial Average (DJIA - DOW30) to price of Gold in terms of Dollars per Oz.

Right through the bear market cycle from Oct 2007 to the bottom in March 2009, the ratio had fallen from a high of 21 odd levels to just below 7 (6.86 to be precise). In the 5 month bounce the ratio has moved back again to 10 odd levels... and over the course of last few days, has started the descent back down...the move down can be precisely monitored in the daily charts...

DOW-GOLD - Weekly chart



DOW-GOLD - Daily chart



With Gold's breakout today and the headwinds in Dow entering the weary months of September / October, we believe we have seen the highs of the ratio for the year. Investors can position themselves to profit from the trade by going long gold and shorting DJIA - using any available and preferred channel - ETFs (Long GLD or DGP, Short DIA,DDM or Long DXD) Futures, Options etc.

This trade requires patience as the trade takes time to make itself profitable and the ratios may snap back for brief periods of time, but the patience will be truly rewarded and satisfying.

More on the ratio in upcoming posts...