Dow to Gold Ratio

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

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.

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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 is published daily in The Wall Street Journal - here.

Dow to Gold 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

1 : 1 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 high price in 1980, of $850.00 lasted for only one day.

January 21st, 1980, was a Monday, the Friday before on Jan. 18th, 1980, Gold was $830.00 and the DJIA was 867.16.

However, the Day after on Tuesday, January 22nd, 1980, gold's high was $737.50 and the DJIA was 866.20.

Gold's price wouldn't hit over $800.00 again for 27years, so judging
the top or the bottom of the ratio is almost impossible.

Gold had gone parabolic in the days before January 21st, 1980, and a parabolic market is the last place where 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.

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

following the herd

This shortsightedness happened during the boom of the late 1920's, the post-war markets of the 50's and 60's and during the and housing bubbles of the late 90's & 2000's.

Fact is; nobody knows when exactly a market will fall or rise.

If you only listen to the talking heads on TV or someone representing an investment firm, then you're bound to get burned.

The best way to know what is going on in the market is to do your own homework.

The Dow to Gold Ratio is a good reference tool to use to help you recognize the good times or bad times in the market and when it is a good time to invest in gold or the stock market.

In the video below, Mike Maloney, of explains the Dow to Gold ratio.

Why Should 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.   And 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.

This balance is to protect your money in good times and in bad. 

Gold acts as Insurance for the Value of your savings and investments.

In the chart below, provided to us courtesy of Valcambi Gold, investors who were invested in just stocks over the past decade did not do as well as the investor who had a diversified portfolio with Gold.

gold vs djia

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

In addition to the constant over-extension of sovereign debt.  What we've seen over the past decade is continually happening today; extended low-interest rates caused by an over protective Federal Reserve.

The chart below is a updated chart dated since early 2000 to February 2015.

golds percentage return over the dow 17year chart

the chart above is provided courtesy of

Was Gold in a Bubble?

As shown in the chart below, provided to us courtesy of Valcambi Gold, the Dow to Gold Ratio's was 10.08 in 2013.  Meaning it took 10.08 ounces of Gold to buy one share of the Dow.

dow gold ratio

Over the last few years, the dow to gold ratio has been moving between 10 thru 15.

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

As you can see in the chart above, the peaks in the ratio would have
been when to get out of stocks and buy gold. Whereas when the ratio
bottomed, this is when the bullion investor would want to sell precious metals and buy into real estate, stocks or other assets. 

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

In 1980, gold holdings by the retail investor were over 25%, today that number is below 2%, in the western world. 

When the Federal Reserve starts to lose Confidence in the markets and the stock market turns negative, investors in the Western Hemisphere will gain more interest in gold and other precious metals. 

Whenever this inevitable future passes, the price of gold will certainly start to move in a positive direction.

Gold's Future...

In the next two charts below, provided to us courtesy of Valcambi Gold, the future price of Gold still looks bright when compared to today's inflation comparison charts.

The first chart below, shows the US government's current CPI inflation statistics compared to Gold's highs in 1980, in today's dollars.

In Valcambi Gold's charts, gold's $850 high in 1980 would have to reach over $2500.00 today to be compatible with today's dollar.

dow historical avg

In the next chart from Valcambi Gold, they used John William's stats from as a source to find the Real Rate of Inflation.

To understand this chart, you first need to know that the U.S.
government no longer calculates inflation like they use to in the past.

Shadowstats uses a broader inflation indicator than the U.S. Bureau
of Labor and Statistics currently uses.

dow historical avg shadowstats

In this chart, Valcambi Gold compares gold's 1980 high of $850.00 with
Shadowstats broader rate of inflation.

If the inflation rate reflected more of the market like it did in the past, gold could easily be over $9000.00.

Clearly, gold has a long way to go before it can be labelled a bubble.

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

Whether you are new to bullion 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
where you want to put your investment money.

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