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Dow to Gold Ratio

Originally posted 06/02/2013 - Last Update & Edit 9/04/2019

The Dow to Gold ratio is an indicator that shows the direction of the stock market and gold.

Dow to Gold ratio

Investors of both assets can use it to determine the direction of the of either market.

To understand the Dow to Gold Ratio completely, we should start from the beginning.

To understand the Dow, to understand anything, the best way to learn about it is to know its History.

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The History of the
Dow Jones Industrial Average (DJIA)

In 1882, three investment writers, Charles Dow (pictured), Edward Jones, and Charles Bergstresser, created the Dow, Jones & Company.

Charles DoCharles Dow

The business opened in Lower Manhattan, in the basement of a Candy Store, which is now the location of the New York Stock Exchange.

Dow, Jones & Company's first publication was called the "Customer's Afternoon Letter," which later became "The Wall Street Journal."

The Customer's Afternoon Letter was a daily journal for investors, in that Charles Dow published the Dow Jones Averages, which contained 9 railroads and 2 industrial companies.

The first Dow Jones Average was later renamed the Dow Jones Transportation Average (DJTA), to date, it is the oldest stock index, still in use.

In 1896, Charles Dow split the Dow Jones Averages into two different
Averages, the DJTA and the DJIA. The new Dow Jones Industrial Average (DJIA) was a broader indicator of the stock market than the DJTA.

The first Dow Jones Industrial Average was based upon 12 stocks it had the initial value of 40.74, currently, the average consists of 30 stocks and averages above 20,000.

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How is the
Dow Jones Industrial Average 

The Dow Jones Industrial Average is calculated by totaling the price of each of the 30 stocks listed on the DJIA, then dividing the sum total price by the "Dow Divisor".

The Dow Divisor is updated every time a stock in the average splits or if a stock is taken out or added to the DJIA.

The Dow Divisor was published daily by The Wall Street Journal for free, it isn't any longer, you can learn more about the Dow Divisor here.

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Understanding the
Dow to Gold Ratio

As shown in the chart below, recently the Dow to Gold Ratio's has been around 20. 

Meaning it would take around 20 ounces of Gold to buy one share of the Dow.

dow gold ratio

chart provided to us courtesy of Longtermtrends.com

The peaks in the Dow to Gold Ratio indicate the times when the Dow was in bubble territory, whereas the extreme lows in the ratio indicate the times when gold was in a bubble.

As you can see in the chart above, the peaks in the ratio were when an investor should have gotten out of stocks and bought gold and other safe-havens.

Whereas when the ratio bottomed, this is an indication that the downward market environment has subsided and it is a good market for riskier assets.

Watching Gold's movement in price is a good reverse indicator of the DJIA.  

Dow to Gold
1 : 1 Ratio

The red shaded area in the chart below is the Dow to Gold Ratio.

The Dow to Gold ratio is the amount of Gold Ounces it takes to buy one share of the Dow Jones Industrial Average.

historic dow to gold ratio

On Jan. 21st, 1980, the Dow to Gold Ratio came the closest to a "1:1" ratio in the history of the DJIA.

On that day, the Dow hit 872.78 and Gold hit $850 a troy ounce.

What some gold investors don't know is that gold's 'famed' high in 1980 of $850.00 lasted for only one day.

January 21st, 1980, was a Monday.

The Friday before on Jan. 18th, Gold was $830.00 and the DJIA was 867.16.

However, the Day after on Tuesday, January 22nd, Gold fell to $737.50 and the DJIA was 866.20.

Gold's price wouldn't hit over $800.00 again for 27years.

Ignorance Isn't Bliss

"A philosopher once said that the most important knowledge is
knowledge of one’s own ignorance."  - Thomas Sowell

Judging the peak or the bottom of the Dow to Gold ratio is nearly impossible.

Gold had gone parabolic in the days before January 21st, 1980, and a parabolic market is the Not when you want to buy.

If you were in the market at this time you would have wanted to sell gold in the days or weeks preceding January 21st.

Since the Dow's inception in 1896, the markets have witnessed three
peaks and valleys in the Dow to Gold Ratio.

Each peak and valley have been an example of over exuberance in the markets, only to be squashed by reality.

In just about every bull market some ignorant investor has mentioned "The Good Times are Never Going to End,"  but eventually they always do.

following the herd

Chasing parabolic markets is like trying to catch flames you're bound to get burned.

You don't want to listen to the hype.

The best way to know what is going on in the market is to do your own homework by reading and listening to many sources as you can.

The Dow to Gold Ratio is a good investment tool to use that can help you recognize when the markets are getting too good to be true for either asset.

Why Investors Diversify
in Gold?

As mentioned above, Charles Dow created the DJIA to give investors a
broad indicator of how the industrial markets are moving.  

Like the Dow, Gold is a good indicator of how the money in the markets is being managed.

Most investors have heard that they should have at least 10% of their portfolio in gold or silver to have a well-balanced portfolio.

Gold is Insurance, a Safe Haven that protects the value of your savings or investments.

In the chart below, investors who invested in just stocks over the last decade did not do as well as the investor who had a diversified portfolio with Gold.

gold vs djia

chart provided courtesy of Valcambi Gold

The chart above and below show you how having gold in your portfolio can help you protect your money.

The updated chart below shows you not much has changed since 2013, when the chart above was produced.

Purchasing Power

In the next two charts below are from this guide's 'Price Inflation' page.

The charts show that Gold's future price looks very bright when compared to today's two most important price inflation charts, those showing you the value of the money in your pocket.

The first chart, below, is a chart of the 'Average Median Income' in the United States. 

dow historical avg

The chart above may look like things are getting better and the value of your dollars are worth more, but before you start to think that, take a look at the chart below, it shows you the actual value of your dollar.

As you can see, the Median income is on the rise, but the dollars in your wallet or bank account aren't worth more, they are becoming more and more worthless.

Whereas, gold and other precious metals are the one asset class that can protect you the most in this type of market environment.

dow historical avg shadowstats

Source: Advisor Perspectives - dshort.com

In closing, the Dow to gold ratio is a very useful investment tool for the stock or bullion investor.

Whether you are new to precious metals investing or not, this investment tool is one that should not be overlooked.

It can definitely help you in timing the market, and help you decide
when and where you want to put your investment money.

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