Homepage /Bullion Investment Ratios: Dow to Gold Ratio

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Originally posted 06/02/2013                               Updated on  07/26/2024

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Dow to Gold
Ratio

The Dow-Gold ratio is a market indicator that helps investors decide where to put their money and when to do it. 

Investors regularly monitor the ratio because it accurately predicts the optimal times to invest in gold for safety or to take a chance and risk investing in the stock market.

The two assets move in opposite directions; the ratio accurately judges when to stop following the herd by chasing an over-bought market.

The best way to understand how and why the ratio moves in the way it does is to learn about the two assets that move it.

Dow Jones Industrial Average
(DJIA)

The Dow Jones Industrial Average (DJIA) is a stock market index of 30 prominent companies listed on stock exchanges in the United States.

Since 1896, the DJIA has been the second oldest and most commonly followed industrial stock index.  Tracking the Dow removes the guesswork and anxiety of trying to understand how the economy is moving in the United States. 

How is the DJIA Calculated?

The DJIA is price-weighted, unlike stock indices, which use market capitalization.

The Dow Jones Industrial Average is calculated by adding the stock prices of the 30 companies listed on the DJIA and dividing the sum by the "Dow Divisor."  As of July 22, 2024, the Dow Divisor was 0.15221633137872.

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Gold

Charles Dow created the Dow Jones Industrial Average to give investors a broad indicator to help them understand how the industrial markets are moving.

Gold, like the Dow, serves as a broad indicator of how the markets are managing money.

Gold is a decentralized form of money; it's the only reserve asset of central banks that has no governmental or corporate liability.

As any physical asset, gold's only liability that helps or hurts its value is its demand among the masses which causes it fluctuation in price, but it will never be worth zero.

Gold acts as insurance that protects the value of your savings and investments when pessimism is high.

How to Read
the Dow to Gold Ratio

The Dow to Gold Ratio is calculated by dividing the Dow Jones Industrial Average by the price of Gold.

Investors regularly check the ratio because it has accurately predicted when the perfect was to buy gold or stock.

As shown in the chart, as of July 2024, the Dow to Gold Ratio is slightly under 20, meaning it would take about 18 ounces of Gold to buy one share of the Dow Jones Industrial Average.

When the ratio peaks it is an indication that the stock market is in bubble territory and it's time to sell stock and buy gold.

Whereas, when the ratio falls it is an indication that pessimism is high and the market is hitting bottom and it's time to sell gold and buy stocks.

There are many strategies that investors have used to profit from the Dow to Gold ratio, this article "Trading the Dow-Gold Ratio" is about one strategy that would have worked out well if you had a time machine, but is still a good strategy for the future.

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Be Ahead of the Herd

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 has been an example of over-exuberance in the markets, only to be squashed by reality.

In every bull market, some investors have mentioned "The Good Times are Never Going to End," but eventually, they do.

Chasing parabolic markets is like trying to catch flames; you'll miss and get burned; it is virtually impossible to judge when the Dow-Gold ratio will peak or bottom.

The best way not to get burned is to do your homework, learn the markets, find sectors that you like, and focus on them. Keep in mind that the good days won't always last, and when they stop, it's good to have some gold as insurance for your portfolio.

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

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

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History of the DJIA

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

Charles 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 named the "Customer's Afternoon Letter," it was a daily journal for investors in which Charles Dow published the Dow Jones Averages, which contained nine railroads and two industrial companies.

On July 8, 1889, the Dow Jones & Company changed the name of the "Customer's Afternoon Letter" to "The Wall Street Journal."

The first stock average created by Charles Dow was the Dow Jones Transportation Average (DJTA); it held only nine railroad stocks and is the oldest stock index still in use.

In 1896, Charles Dow split the Dow Jones Transportation Average into two investment averages, the DJTA and the DJIA.

The Dow Jones Industrial Average (DJIA) is an index consisting of a broad range of public companies listed on stock exchanges in the United States.

The first Dow Jones Industrial Average consisted of 12 stocks; its initial value was 40.74. Currently, the average consists of 30 publicly listed companies, and as of late, the DJIA has consistently stayed above 35,000.

Note:  All the charts, commentary, and information on this page are in no way an incentive from this guide for how you should invest or divest.

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