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Gold vs. DOW

  • Pepe le Moko
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2 years 3 months ago #1 by Pepe le Moko
Gold vs. DOW was created by Pepe le Moko
the DOW/Gold ratio has turned around.



Look for a DOW/Gold ratio of ~5
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2 years 3 months ago #2 by darioj
Replied by darioj on topic Gold vs. DOW
It looks like 1930s or 1970s? Debt deflation or inflation?
To me it looks like the 30s, anyhow we should get a nice leg down ;)

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  • Michael Gebhart
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2 years 2 months ago - 2 years 2 months ago #3 by Michael Gebhart
Replied by Michael Gebhart on topic Gold vs. DOW
It is funny how it got more volatile after the mid 20's.

You guys might find Jordan Roy Burn's work from TheDailyGold.com useful:

This one shows gold top metrics of S&P500 and gold percentage of financial assets:
Last edit: 2 years 2 months ago by Michael Gebhart.

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  • Pepe le Moko
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2 years 2 months ago - 2 years 2 months ago #4 by Pepe le Moko
Replied by Pepe le Moko on topic Gold vs. DOW
The DOW has a 100+ year history of conforming to a nice exponential:

Obviously if you pick a point on the red line it is not going to be very close to the actual DOW. It looks to me like the blue line is making waves around the red line and that the red line should actually be more banana shaped than straight. Moreover that blue line looks like it is going to go down for a while. Never the less guys like Pierre Lassonde can can just pick a point on the red line and BOOM that's the DOW! OK. I can play that game.

This is a spreadsheet I put together of expected returns if the DOW/gold ratio follows the purple crayon line from my top chart. This is pretty much what Pierre Lassonde does in his prediction.
start datecost basisfinal sell price 2020final sell price 2029expected rate of return 2020expected rate of return 2029
2000281.63$2,549.81$9,205.5511.6%12.8%
2005425.31$2,549.81$9,205.5512.7%13.7%
20101,099.83$2,549.81$9,205.558.8%11.8%
20151,188.25$2,549.81$9,205.5516.5%15.7%
20202,549.81$2,549.81$9,205.55 15.3%
20254,953.00 $9,205.55 16.8%

Note that if you hold your gold until 2020 ( with this highly speculative gold projection. ) you will have annual gains of between 8 and 16% This increases to something like 12-16% if you hold until 2029. This would require a superhuman determination to hold in the face of an almost certain turn around of the DOW/GOLD ratio at the orange line. The risk is huge and the returns ( although better than stocks ) are probably not what you had in mind given the risks.
Last edit: 2 years 2 months ago by Pepe le Moko.

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  • Michael Gebhart
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2 years 2 months ago - 2 years 2 months ago #5 by Michael Gebhart
Replied by Michael Gebhart on topic Gold vs. DOW
If Jordan Byrne is right that 42 year cycle gold peaks in summer 2021 then it will hit the bottom of the purple crayon trend channel. I could be wrong but the monetary policy experiment won't end with a crash that far out in 2029. Guessing 2020-1 is a better Dow bottom time frame given recession length history. Tim Wood is expecting a major bear market with a low lower than two previous bear lows for the Dow.
Last edit: 2 years 2 months ago by Michael Gebhart.

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  • Pepe le Moko
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2 years 2 months ago #6 by Pepe le Moko
Replied by Pepe le Moko on topic Gold vs. DOW
The previous low was about 6700 so
6700/5 = $1340/oz
That would be for the orange line. You might note that the lower green line is outside of channel for that time frame. If you want to extend your deadline to 2022 you get:
6700/2 = $3350/oz.
Are these the kind of numbers you where expecting?

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  • Pepe le Moko
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2 years 2 months ago #7 by Pepe le Moko
Replied by Pepe le Moko on topic Gold vs. DOW
I thought I would take a minute to expound on the DOW/Gold ratio chart I posted above. The chart is a ratio chart that uses a log scale. Just think about how strange that is. The guys with a literal, not a figurative, printing press are making their printed products ( stock certificates ) worth more and more each year and Gold the stuff you can't print and that is running out is losing ground exponentially! This the same chart with a linear scale:


You can see that over time stocks are doing a moonshot. This is a simple consequence of dividing one exponential by another e^x/e^y = e^(x-y) but it still strikes me as strange.

The DOW is a managed index. Stocks that under-perform are dropped periodically leading to the impression that "the markets" are always rising. The fact is that if you had bought the DOW components in 1933 and waited until today to sell you would have lost all your money because all of the constituent companies failed. In addition this chart neglects dividend reinvestment. This understates the appreciation of the DOW.

This is belangp on portfolio allocation:


You might also like his "Positioning Based on the Odds"


I just want to add in parenthesis that in the ~10 months since these videos came out he has moved to a 100% gold position.

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  • Pepe le Moko
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2 years 2 months ago - 2 years 2 months ago #8 by Pepe le Moko
Replied by Pepe le Moko on topic Gold vs. DOW
I did some more thinking about the dow/gold thing. It would be possible to have a a diagonal line that passes through both the historic lows and the all time low line while cutting through the mean of the dow/gold ratio best fit line:

The black line shows what I am talking about. The chart is not accurate enough to make precise predictions. It does look good though.

Even if this super optimistic projection bears out what do you think of the expected returns? If the stock market crashes, you can cut those yearly returns in half. What percentage allocation would you put into this and would you use leverage?
Last edit: 2 years 2 months ago by Pepe le Moko.

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  • Michael Gebhart
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2 years 2 months ago - 2 years 2 months ago #9 by Michael Gebhart
Replied by Michael Gebhart on topic Gold vs. DOW
I am expecting the S&P 500 to be somewhere around a 1000 in late 2021. If gold peaks there which have historically been between 4 and 7 times the S&P 500 per ounce then that would put gold between $4-7K.

The video was interesting in pointing out that bonds and gold are inversely correlated and a portfolio of 22% gold/78% 10 year treasury bonds has little volatility.
Last edit: 2 years 2 months ago by Michael Gebhart.

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2 years 2 months ago #10 by Michael Gebhart
Replied by Michael Gebhart on topic Gold vs. DOW
The PM miners are overpriced right now relative to the gold price. Gold could easily retrace to a new bottom as it tends to do every other election cycle since 1976:
stockcharts.com/articles/tac/2016/05/tom...pcoming-in-gold.html

If they bottom again then I'd get in. There is some point probably around when gold hits its previous high the miners will have benefited greatly from margin expansion. At that point it may be better to go into PMs themselves or into something else. Gold doesn't have to make new highs to make money on the miners.

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  • Pepe le Moko
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2 years 2 months ago #11 by Pepe le Moko
Replied by Pepe le Moko on topic Gold vs. DOW
It'll be a cold day in hell before I buy any gold mining stocks. In fact I don't much care for "stocks" period. With bonds at a 5000 year low ( give or take a few centuries ) why do we not hear about shorting bonds as a long term strategy? How do you short bonds? Do you buy an ETF? Like a triple short bond fund?

That was a joke for you guys in the cheap seats.

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2 years 2 months ago #12 by dusty88
Replied by dusty88 on topic Gold vs. DOW
Charts are useful to the extent that they either:
-show a true scientific correlation of cause and effect OR
-adequately use the past to predict the future

I'm sure I'm not saying anything profound ;)
My larger point is whether or not the DOW/Gold ratio holds under the current massive monetary expansion and low growth situation. Both together suggest that the DOW is indeed overvalued by monetary supply. However, if the deflationary effects hit the market suddenly (which is long overdue) we may have a contraction of the money supply and thus not so much of an uptick in gold. For the ratio to bounce back to its low end, enough people have to anticipate this and buy gold before the market crashes (or so it seems to me).

FWIW, I bought into a mining fund in early January. On the short term, this has been a good thing. I would take some profits and turn it into another hard asset but most of our investable money is within retirement funds. I'm not interested in a self-directed IRA. If the farmland bubble takes a big pop though I might pull some profit out and move it to land.

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  • Pepe le Moko
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2 years 2 months ago #13 by Pepe le Moko
Replied by Pepe le Moko on topic Gold vs. DOW
Obviously I wouldn't have posted the chart if I didn't think it was important. Those big saw-tooth waves look a bit too regular to be accidental.




This shows the Gold/Oil ratio. It recently hit a two century high. I think it would be much more, but we have only had oil as an industrial commodity for about 170 years. Oil is cheap. It is the only thing in the world worth buying.

I guess a corollary to this is that gold is overvalued. I'm not contradicting myself am I?

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  • Michael Gebhart
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2 years 2 months ago - 2 years 2 months ago #14 by Michael Gebhart
Replied by Michael Gebhart on topic Gold vs. DOW
Taking some money off the table since a January run up is not a bad idea right now. In my father's IRA I had him get in last fall into the OPGSX, a gold miner fund and last month re-balanced into a short term bond fund back at the previous ratio. That is another option. Short term bonds are kind of like cash. When, or if, the miners go down I'll have him re-balance back to the original ratio; same with other funds like energy and natural resources, though those tend to bottom later in commodity bears.
Last edit: 2 years 2 months ago by Michael Gebhart.

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2 years 2 months ago #15 by Michael Gebhart
Replied by Michael Gebhart on topic Gold vs. DOW
A lot of cheap credit went into commodity production, especially the frackers. It looks like if the saw-toothed pattern continues then the gold/oil ratio won't spike again until maybe next year. That sounds right if oil bottoms seasonally in December to February-ish time frame and gold goes with it.

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  • Pepe le Moko
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2 years 2 months ago - 2 years 2 months ago #16 by Pepe le Moko
Replied by Pepe le Moko on topic Gold vs. DOW
I think we might be talking past each other. The Saw Tooth pattern is evident in the DOW/Gold ratio. you can see it at the top of this page.

The Gold/Oil ratio has a similar time scale but looks a lot different.
This is a chart I put together back at the beginning of the year before the ratio spiked over 45 (I'm too lazy to update it):


The ratio has been in a tightly defined channel for more than one hundred years. The way you use one of these ratio charts is you wait until an extreme and buy the cheap one. If you are not at an extreme you do nothing.
belangp has produced a number of videos showing how to use the Gold/Oil ratio to guide portfolio allocation. This is an example :

If you look again at the Dow/Gold ratio:

you can see that we are right in the middle. As a general rule it would be suicide to buy gold ( or the Dow) now. We are not at an extreme. The red line is exactly in the middle of the range. I guess this is a long way of saying that the chart is not predictive. It helps you identify an extreme ( mostly).
Last edit: 2 years 2 months ago by Pepe le Moko.

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2 years 2 months ago #17 by dusty88
Replied by dusty88 on topic Gold vs. DOW
Is 100 year ratio useful? I would say yes, if market forces come back into play. Here is a factor to consider though. We have not had a monetary expansion of this magnitude nor type in the last 100 years, and we at the same time have 50 years of gold being largely ignored in terms of its use as money.

So I question whether those charts will follow similar patterns, until gold is recognized as money again. That would require a deflationary collapse (ie the FED to step aside) or a recognition of money after even more expansion (presumably inflation that is more recognized).

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  • Pepe le Moko
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2 years 2 months ago #18 by Pepe le Moko
Replied by Pepe le Moko on topic Gold vs. DOW
The gulf oil states, in particular Saudi Arabia, never left the gold standard. They only agree to accept dollars in exchange for oil on the condition that those dollars are exchangeable for gold. In turn those dollars are recycled into the US bond market. This is called Petrodollar Recycling. It is the fundamental source of the stability of the modern monetary system. Oil is traded for dollars which requires everybody that wants oil to hold large amounts of dollars. In practice they buy US govt. T-bonds. This both supports the US government and the dollar in international trade. This is why the gold/oil chart remains relevant.

There is a whole school of thought that this system is falling apart right now. You can make your own judgment about that, but the fact is that it exists and is the major defining mechanism in our world.

You can find more info here:

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  • Michael Gebhart
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2 years 2 months ago - 2 years 2 months ago #19 by Michael Gebhart
Replied by Michael Gebhart on topic Gold vs. DOW
That is an interesting petrodollar video though how oil is linked to gold for exchange? Do the countries swap gold reserves held at central banks?
If so, now that the U.S. is producing more of its own oil does that mean it has less need for gold? This could also be a reason for dollar strength as USD's are less common internationally as they are harder to get through oil exports.

Petrodollar is a major reason for U.S. military intervention. Syria may have a big part to do with oil trade as both Russia and Iran as well Saudis and UAE want an oil pipeline through Syria: www.oil-price.net/en/articles/oil-prices...syrian-civil-war.php

If gold does follow oil then It could have one more nasty down move after the driving season which we are already seeing. Frackers will run into trouble at that point.
Last edit: 2 years 2 months ago by Michael Gebhart.

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2 years 2 months ago - 2 years 2 months ago #20 by dusty88
Replied by dusty88 on topic Gold vs. DOW
I'm not sure what the Petrodollar has to do with the fact gold is not viewed as money in most of the world. The Petrodollar is tied to the US $$.

What matters is not that a handful of people use gold, but whether or not it becomes seen more broadly as money. Even if it isn't seen as money by governments, will it be seen as money by people? Or that it might become money later? Or maybe more specifically. ,seen as money by those who hold other assets, financial and otherwise?

That we don't know, nor know what events will affect that.

A hundred year chart isn't very useful when the position of gold has not been remotely consistent during that time. "Gold follows oil" makes sense on the commodity basis. And it makes sense that if there is a severe deflationary event (by itself) gold will fall. But the response to deflation is already happening and continues to happen. I'm not saying I know; I'm saying these charts are not broadly representative.

it would be like charting some characteristic of a man through 100 years of his life. The characteristic is not consistent through that time period.
Last edit: 2 years 2 months ago by dusty88.

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2 years 2 months ago #21 by dusty88
Replied by dusty88 on topic Gold vs. DOW
I'll also add that the current drop in oil prices is another representative of monetary manipulatioin, and not necessarily something that will affect gold prices in the same way.

I'm no expert on the oil industry. However, it seems to me that the price should have risen gradually and slwoly restricted demand accordingly. But the easy, low-interest money encouraged more exploration before the market was really ready to pay for it. If that is true, then when these marginal producers go out of business and the excess supply is used, the price will rebound as high (or higher) than before.

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