Here's an interesting chart that I look at from time to time.
The lower chart illustrates the DOW / Gold ratio for over the last 100 years. If you move your mouse to hover over the lower right corner of the chart an icon appears that enables you to zoom in on the chart (at least in Internet Explorer).
It's informative for several reasons. It shows that prior to a bull market in stocks, the price of gold was relatively close to the price of the DOW. We see this prior to 1929, during the '50s and '60s and then again just before the bull market of the '90s. For example, in 1980 when gold was around $800 and the DOW was around 1600, the ratio was 2 to 1 and one could "buy" the DOW with two ounces of gold.
We also see that during the bull markets the ratio diverged greatly with the last period being the year 2000 when gold was around $265 and the DOW just under 12000. That's a ratio of around 45 to 1. It took almost 45 ounces of gold to "buy" the DOW.
Since 2000 the ratio has been declining again and is presently at around 17 to 1. Over the last 100 years the ratio has always reverted to its mean and it doesn't look like this time will be any different.
What this chart doesn't tell us is what the prices will be for gold and the DOW when the mean ratio of 2 to 1 is achieved again. At today's price of $650 per ounce of gold the DOW would have to drop to about 1300. Not a likely scenario. On the other hand, if the DOW were to stay near 12000 for the next several years, the price of gold would have to rise to about $6000 per ounce. Also not too likely. And for you stock market bulls out there a third scenario is that the DOW goes to 36000 but then the price of gold would have to climb to $18000 per ounce.
The more probable scenario is that they will meet somewhere in between. The DOW could drop to 8000 and the price of gold could rise to $4000 per ounce. Or the DOW could drop to 6000 and the price of gold could rise to $3000 per ounce.
Looking at the chart and the trend that's been in place for the last six years it seems apparent that the mean ratio will be achieved before the next divergence begins causing the ratio to increase yet again.
Given all of this, it certainly appears that $1 invested in gold is a much better play than the same $1 invested in the DOW.
