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Originally posted 06/02/2013                               Updated on  01/22/2024


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.  It is calculated by dividing the Dow Jones Industrial Average by the price of Gold.

Dow to Gold ratio

Investors who own Gold and stock on the Dow Jones Industrial Index can the ratio to determine the direction of either market.

Investors have used the ratio for over a hundred years; the Dow has been around since the late 1800s; and gold has served as a reliable form of money for over 5,000 years.

The Dow to Gold ratio helps investors decide where they should put their money by indicating where to invest in what they think is as good as Gold.






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 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.

How is the DJIA Calculated?

The Dow Jones Industrial Average is calculated by totaling the price of each of the 30 stocks listed on the DJIA, then dividing that sum 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 Wall Street Journal used to publish the Dow Divisor for free. Now, you have to be a subscriber to know it. You can learn more about the Dow Divisor here.





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.

As shown in the chart, the Dow to Gold Ratio is at or around 20, meaning it would take nearly 20 ounces of Gold to buy one share of the Dow.

Dow to Gold Ration - 100 year longtermtrendschart

"Click" the Chart or the following link for more information Longtermtrends.com

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

As you can see in the chart above, the peaks in the ratio happened when an investor should have been cautious of stocks and bought Gold and other safe-haven assets.

Whereas, when the ratio bottoms and gold peaks, it indicates that riskier assets, like stocks, are oversold and more attractive to investors and will become more in demand.

Whereas, when the ratio bottoms and gold peaks, it indicates that riskier assets, like stocks, are oversold and more attractive to investors and will become more in demand.

Trouble may be around the corner when the DJIA and Gold are high at the same time. Something isn't right in the market, and some insurance or low-risk investments, like Gold or similar assets in your portfolio is good.

As of today, January 22, 2024, the DJIA and Gold are consistently hitting new highs; this is a sign that there is a lot of imbalance in the markets, and something will likely break.


The Unknown

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.

following the herd

Chasing parabolic markets is like trying to catch flames; you'll likely 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


1 : 1 Ratio - Dow to Gold

The red shaded area in the chart below is the 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 while gold was $850 a troy ounce.

Gold's 'famed' high in 1980 of $850.00 lasted for only one day.

January 21st fell on 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 27 years.


Why 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.

Like the Dow, gold is a broad indicator of how the markets are managing money.

Investors should have at least 10 to 20 percent of their portfolio in gold or silver to have a well-balanced portfolio. Precious Metals act as insurance, a safe haven that protects the value of your savings and investments.

In the chart below, investors who invested in just stocks over the last two decades did not do as well as investors who had a diversified portfolio with gold in it.

chart provided courtesy of tradingview.com


Gold's Purchasing Power

The next three charts are from this guide's 'Price Inflation' page; they show that your money is losing value.

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


The chart above may look like things are getting better and the value of your dollars is worth more, but look at the chart below; it shows you the actual value of your dollar.

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, as the Median income is on the rise, the dollars in your bank account are losing purchasing power.


Source: Advisor Perspectives - dshort.com

Whereas, in the next chart, gold and other precious metals are the one asset class that can protect you the most in an inflationary market

In closing, the Dow-to-gold ratio is a very useful investment tool for all investors because it can help you time the market and decide when and where you want to put your investment money.





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