Chart of the Day: The Dow priced in gold

November 11, 2009

Gold’s recent behavior strikes me as similar to oil circa July ’08. With it leaping to another new high today — $1,119 — I thought I’d offer the following chart for reader comments:

(Click chart to enlarge in new window)

dow-vs-gold

Thanks to Nick Laird of Sharelynx for the data.

Comments

“Gold’s recent behavior strikes me as similar to oil circa July ‘08″

The difference is that $147/bbl oil has a massive and direct effect on the actual economy.

$1,100/oz gold, although representative of other issues – not so much.

 

Looks like it needs to fall further. Great chart, thanks.

Posted by Ian | Report as abusive
 

The chart seems to indicate two scenarios can play out: DJIA of 7000 at current $/oz Au or present DJIA level and $1500/oz gold is on its way. The question you will need to ask yourself is, which is most likely.

The powers that be need a raging bull market to sell the ponzi scheme of a “recovery” to the consumers so I suspect a 7000 dow is out of the question. A dow clawing its way back to 14000 (albeit at the expense of the defunct dollar) will mean gold could easily hit $1500/oz at the present 9 DJIA/Oz gold ratio. If the ratio continues to drop according to the slope shown and the “recovery” continues to be sold to the public at the pace from March ’09 to date, a gold price target north of $3000/oz is not out of the question.

Posted by Forgiven | Report as abusive
 

…Now that’s what I call a long term pump.

 

Wasn’t the price of gold fixed for much of this time?

Posted by Andrew | Report as abusive
 

What does 1100.00/gold really mean? Why not devalue the dollar and then back it by gold it would force politicians to control spending if there was a limited amount.

 

Steve you’re missing the point. The value of the USDollar most certainly has an effect on the real economy and that is what the price of gold measures.

Posted by Mike | Report as abusive
 

Mike, I may disagree. It isn’t the raw value of the US dollar effects the economy, it’s it’s value compared to other currencies, and compared to its own historical value. As a commodity item like gold is subject to its own market fluctuations, I don’t see how the price of gold in US dollars effects the economy.

Posted by Dodger | Report as abusive
 

“Mike, I may disagree. It isn’t the raw value of the US dollar effects the economy, it’s it’s value compared to other currencies, and compared to its own historical value. As a commodity item like gold is subject to its own market fluctuations, I don’t see how the price of gold in US dollars effects the economy.
- Posted by Dodger”

Quite frankly, I am uncertain what you mean by “raw value of the dollar”……..”it’s it’s value compared to other currencies.” Sounds like the same thing to me. Semantics.

You seem to misunderstand: the price of gold doesn’t “effect” the economy, it “reflects” the rise or fall of the value of the dollar/currencies being discussed.

You may see gold as a “commodity”, I see it being used as money in the “basket of currencies” the IMF terms “SDR’s”, the internationally accepted funds for settling debt. Which I feel certain were the real circumstances behind India’s “purchase” of billions of dollars of gold from the IMF recently. A debt settlement. And India didn’t want warm Federal Reserve Notes fresh off the press. The world has reached saturation point.

And that is why I am happy to say I bought at $340/oz in 2003: I could “see the sea” of Debt forming a tidal wave……run for high ground.

Take a 1880′s $20 gold coin. What would $20 purchase in 1880′s? The same as $1119 today?

See my point? It’s money. That holds it’s value intrinsically.

Posted by farang | Report as abusive
 

That was one of the original intentions of gold. To hold politicians accountable for spending. You can’t continue to print money (currency) if it’s fixed to a measured weight of gold as stated in our constitution. This means Congress couldn’t spend more money then we had in gold.

The moment the Federal Reserve was created it gave the Fed the power to print and decide the value of the currency. Currency should not be confused with real money, “gold and silver.” Historically, every currency loses value once the government has the opportunity to run the press and then it fails. After all, it’s easy to spend another persons money!

The Federal Reserve act was originally formed to make sure we maintained a sound dollar. Slowly we moved off the gold standard , and the dollar has slowly devalued since.

The value of the dollar can be measured only be the full faith and credit of the United States Government. You and I. We (the taxpayers) are the ones which assume the debt which is printed by the Federal Reserve 1 We assume the debt 2 and then it’s sent to the Treasury to be circulated 3. This is also why when we print money to chase bad debt the dollar continues to fall in value. After all, the more dollars in circulation the less a dollar is worth. Technically you could say it’s measured by the USDX, but if you look at that it also started at 100 and is now a hair away from the all time low.

If you think dollars are money and are satisfied with a dollar with ink on it which you work for on a daily basis. Hold dollars and watch as it takes more dollars to buy any given product. Dollar devaluation. This is called debasing a currency. The same reason the change in your pocket is no longer gold and silver, but copper clad. We as a nation can not spend our way into a recovery. Remember, it’s not that gold is actually going up, but that the dollar is going down in value. Gold just preserves wealth which is taken by the taxpayer indirectly.

Would you have a house without insurance? Would you hold dollars without having gold?

No matter your thoughts on the dollar it’s going to be an interesting ride.

Posted by Kins | Report as abusive
 

This graph is a bit misleading.

1) it’s not a logarithmic scale – so it massively exaggerates movements when the dow is high.

2) The graph excludes dividend income. Including compounded dividends, conservatively the ratio would be about 20 times higher today – say 200. Quite a different graph.

If the maker of this graph doesn’t want his dividends, can he please contact me, I can arrange to have them paid into my bank account?

Posted by Andrew | Report as abusive
 

What this shows is that the dot com boom bust was really the beginning of the great depression and the fed housing market created bubble by reducing interest rate extremely at the time of the dot com bust in 2001 was recognized by the gold vs dow chart as just a construct.

In a way this means we are really in the tenth year of the financial collapse which is either good or bad if you think this depression will match the 10 or 15 years of the one in the 1930′s.

The dow curve now has almost exactly matched the proportions of the 1920-30′s . Amazing.

 

Gold has nothing to do with inflation/deflation. The price of gold is a function of credit market uncertainty.

All other arguments are masturbatory.

Posted by JT | Report as abusive
 

QUESTION …I AM HOLDING BOTH GOLD AND SILVER , ..THE REAL STUFF !…HOLDING IS THE KEY WORD HERE …WILL I BE OK IN A YEAR OR SO ??…IF I DID SELL , ALL I WOULD GET ARE PAPER PIECES….RIGHT ?…WILL ANOTHER CURRANCY BE ANY SAFER THAN GOLD-SILVER ?..TIA

Posted by BONBON | Report as abusive
 

Here is a logarithmic chart:

http://www.sharelynx.com/chartstemp/DowG oldRatio.php

By my reckoning that green line represents an average 2% compounded annual growth. (Notice how much more unstable the graph looks after the creation of the Federal Reserve: a symptom of “Monetary Mischief.”)

I once calculated the annual return on Procter & Gamble shares over a 30 year period and it came in at 4% when measured in gold. (Measured in USD it was about 12%.)

In my book, an investment earns money, and money is gold.

 

Gold has been a store of wealth for over 5000 years of history, the dollar (Federal Reserve Note) less than 100 years. When the price of gold goes up it means that the dollar has lost it’s value (buying power). Steve says he only worries about the oil price, but when the dollar has lost it’s buying power oil prices, and other commodities will all rise. So oil will rise with the price of gold.

This chart is excellent because it shows that even though in dollars the price of the Dow might be up; it has in actuality gained little real value.

Gold is money. It is honest money. The politicians and central banks (ie Federeal Reserve) cannot fool us when we look at what they are doing to the price of gold by inflating their fiat currencies.

Hold gold, silver, and specie. It is real unlike our paper money backed by nothing.

Soon people will begin to realize that dollars are worth nothing; then everyone will rush to buy something real with the worthless money. Prices will rise causing inflation. The everyone begins to realize it the fast the inflation will happen. The people holding gold will have the same value stored up in it as when they bought it, those holding something real will be the winners after this huge wave of inflation that is on the way will pass.

Posted by Howdo | Report as abusive
 

JT, I agree and disagree. These arbitrary comparisons and links between economic indicators or drivers, and investments are simplistic and even invalid. May I adapt your sentence ? ‘Gold has nothing to do with inflation/deflation, it has to do with emotion. The price of gold is a function of capital and credit market uncertainty.’ There are no commodity cross rates, only currency cross rates. Look at the Africa web page to see which commodities are doing the rounds.

Andrew, good points, everybody is avoiding these issues and option analysis like H1N1.

Dodger, on the other hand, if you sit with large gold holdings, it strengthens your capital account, allowing top-up transfers to the financial and current accounts. It really depends on what your target WACC is, so that investment decisions are sound and separated from financing decisions. Wars are not good investments, commodity hoarding is.

Posted by Casper | Report as abusive
 

Peter Schiff predicted that eventually the Dow will be equal to 1 oz. of gold. Whether the price of gold would go up to 10,000 or the Dow would go down to 2,000 he didn’t know. This is very revealing that although the stock market appears to be going up, when adjusted for inflation which is what you do when you price it in gold, it is actually crashing. Gold is still undervalued even though it’s at an all time high. Silver is an even better buy when you look at the gold/silver ratio.

 

The Fed is pure EVIL.

 

“Gold is money, and nothing else.” — J.P. Morgan
The old banker’s words are as true today as they were when he spoke them.
The idea that gold is just another commodity is a delusion fostered by those who profit under the current paper currency regime. That delusion is evaporating along with the perceived value of paper currency.

Each of the violent boom-bust cycles shown in the graph represents a looting of America by Federal Reserve and its controlling shareholders, the big banks that are receiving trillions in bailouts. To end the looting we must end the Fed.

Posted by MarkV | Report as abusive
 

So what you’re saying is, once DJIA hits 7,500 and gold hits $2000, you’re going to be holding a bag of illiquid schtuff, while the stock market takes off without you.

Posted by Peter Piper | Report as abusive
 

Does this chart mean that the DOW is relatively undervalued, even with its recent meteoric rise?

The other thing I’m curious about is how valid the relationship is between inflation and gold. There are a lot of posts here (and on many web sites in general) that claim that gold price is driven by monetary supply inflation. Yet, I looked up a chart of gold price vs inflation (government-produced inflation figures, which are probably even understated), and there wasn’t a strong correlation between the two over the last 40 years or so. It seems gold fluctuates as a function of its own market – above and beyond inflation – which probably introduces elements of manipulation and other external influencers.

Thus, I wonder about the value of using gold as the sole benchmark against which to measure the real value of the dollar and the stock market. Perhaps they should be measured against the basket of all available commodities instead?? I’m not sure on the answer, just wondering out loud.

Posted by thebigcicero | Report as abusive
 

Eventually, One ounce of gold will buy one share of DJIA.
You heard it here first.

 

If congress continues to use fake terror to destroy the Constitution, and every staged shooting to justify taking our arms, if they ignore illegal immigration and sponsor socialized medicine then it will become apparent to all Russians and Chinese included that the Republic truly is dead.

http://www.InfoWars.com

Posted by Delphi | Report as abusive
 

The US gov. continues to manipulate the gold price through lending some of their 8,000 tons to the Majors part. Morgan.
Kind of the reverse of the contango run by Barrick who just absorbed a chunk of write-off on their books and have much more to go.
Price is presently driven also by Public demand with the Indian 200 tons bought from IMF just a symptom.
This is likely to end badly as the US did make it illegal to own or hold gold in the 30s under Roosevelt.
The Debt levels are out of all sight historically or should we say hysterically, fundamentally totally out of control.

 

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