Dow-to-Gold Says Buy Gold

This chart tracks the ratio of the Dow Jones Industrial Average to the price of gold. The number tells you how many ounces of gold it would take to buy the Dow on any given day. 

The philosophy is simple: To make money by buying Stocks when they are cheap and then selling them when they are expensive— and avoid imminent Stock crashes.  

As I write, the Dow Jones Industrial Average trades at 28,101. Divide that by today’s Gold price of $1, 963 and you get a Dow-to-Gold ratio of  14.3 times. That means it takes 14.3 ounces of Gold to buy the Dow. That’s a lot of Gold suggesting Stocks are ver overpriced.

DOW TO GOLD = 14.3 TIMES

When the Dow-to-Gold is low, is an x to y range that means you can take your Gold and buy the entire Dow Index of 30 Stocks On the cheap. The ratio says on of three things— sell Stocks, Hold, buy Stocks. Previous  cycle lows have been 1.94 ounces in February of 1933 and 1.29 ounces in January of 1980. 

When the Dow-to-Gold is too high, as it is today— 
Either the price of Stocks are overvalued or the price of Gold is too low.

This long-term indicator suggests reducing your Stock portfolio today and trading  into more Gold.

Pandemic Creates Continuing Financial Crisis

If only the Corona virus were a health issue. If only the economic damage were limited to one county. But, this unique pandemic, combined with the governments’ worldwide response as lock-in and shut-down the economy goes exceedingly far beyond health issues alone.

In today’s Corona Virus/Pandemic Crisis, central bankers and major world governments  are doing everything to prevent a total collapse of the economy. We don’t really need the Dow-to-Gold indicator at 14.3 times to tell us to unload some Stocks and move into Gold. Clearly, we are in an on-going financial crisis that will drive down the DTG for at least a year and it’s negative impact may be felt for a decade.

How Much Stock Risk Am I Willing To Undertake?

For me, the Dow-to-Gold ratio is a barometer to indicate HOW severely overpriced Stocks are relative to Gold. It’s a measure of how much Stock risk I’m willing to take on versus Gold safety and value.

Dow-to-Gold Historical Chart

 

This means that the price of the Dow is too high or that the price of Gold is too low. Over time, this indicator reverts to the middle, the mean average when things are “normal” again.

A Long 30-Year History of Avoiding Stock Losses

I’ve tracked the Dow-to-Gold ratio for 30 years now. Having been in the precious metals industry since 1985. This indicator helped me make business decisions on when to expand our staff, increase vault storage, and lease additional shipping space. I’m retired these days, so watching this key indicator is more about how to anticipate Stock Market Crashes, selling Stocks and avoid losing money.

To individuals, especially those near or in retirement, the DTG says, “It’s time to lower exposure to Stock risks— protect and defend your savings using Gold for stability and security. Gold protects against a falling Dollar, government spending out of control, the coming debt crisis, compounded by all the unknowns of a worldwide pandemic.

Among the most outspoken advocates of the Dow-to-Gold indicator is Bill Bonner, the founder of Agora publications and Bonner & PartnersThe Dow-to-Gold ratio is Bill Bonner’s guide for when to get in and out of stocks. 

When the ratio goes below 5, we buy equal shares in the Dow Jones Industrial Average index (the Dow). When the ratio goes above 15, we sell the Dow and buy gold.

 

 

 

Eventually, I believe the Dow to Gold ratio will come down to between 3:1 and 1:1.

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It feels like a mania. And with valuations near their highest levels in history… a day-trading bubble in stocks like Tesla… and now the beginnings of a downtrend forming, I’d guess we’re very near a long-term top in the stock market – especially looking at it in terms of gold.

 

Trading the Dow-Gold Ratio

You just need $200 and a time machine…

TODAY we take a step-by-step look at the Dow-to-Gold trade, writes Houston Molnar, assistant analyst to Bill Bonner at Bonner & Partners.

To start, let’s go over the rules of this long-term trade.

The Dow-to-Gold ratio is Bill Bonner’s guide for when to get in and out of stocks. When the ratio goes below 5, we buy equal shares in the Dow Jones Industrial Average index (the Dow). When the ratio goes above 15, we sell the Dow and buy gold.

In other words, when the entire Dow can be bought for five ounces of gold, we buy stocks. When it takes 15 ounces or more to buy the Dow, we sell stocks and buy gold.

Over the past 100 years, you would have made a total of six trades based on this strategy.

To give you a full breakdown of the trade, we start in January 1918 with 10 ounces of gold, which cost us $206.70 ($20.67 per ounce).

Note: Bill’s original calculations, starting in 1999, did not account for reinvested dividends from stocks purchased. But to give a fuller picture of the trade, the below calculations are based on the total return.

January 1918
Dow: 76.68 points
Gold: $20.67 per ounce
Dow-to-Gold Ratio: 3.7
Action: Sell Gold, Buy stocks

In January 1918, the Dow-to-Gold ratio is below five. Based on Bill’s rules above, we sell our 10 ounces of gold for $206.70 and invest in the Dow, which stood at 76.68 at the time.

February 1929
Dow: 310 points
Gold: $20.63 per ounce
Dow-to-Gold Ratio: 15
Action: Sell Stocks, Buy Gold

In February 1929, the Dow-to-Gold ratio hits 15. We sell our investment in stocks for $1463. This is a return of 608% – including reinvested dividends – since our initial investment in 1918. (The return excluding dividends is 310%.)

We then take this capital and buy 71 ounces of gold, which is priced at $20.63 an ounce.

September 1931
Dow: 99.80 points
Gold: $20.63 per ounce
Dow-to-Gold Ratio: 5
Action: Sell Gold, Buy Stocks

Between 1929 and 1931, the price of gold doesn’t move. But by getting out of stocks in February 1929, we have avoided the worst stock market crash in history in October 1929.

Then, in September 1931, the Dow-to-Gold ratio falls below 5. We sell our 71 ounces of gold for $1463.

We then buy the Dow in September 1931 when the index is at 99.80.

September 1958
Dow: 530 points
Gold: $35.10 per ounce
Dow-to-Gold Ratio: 15
Action: Sell Stocks, Buy Gold

In September 1958, the Dow-to-Gold ratio hits 15 once again. We sell our Dow shares, with the index at 530. This gives us $31,084, a return – including reinvested dividends – of 2,025% from 1931. (The return excluding dividends is 430%.)

We then buy 885.58 ounces of gold for $35.10 per ounce.

April 1974
Dow: 839.96 points
Gold: $169.50 per ounce
Dow-to-Gold Ratio: 5
Action: Sell Gold, Buy Stocks

In April 1974, the Dow-to-Gold ratio hits 5. It’s time to get back into stocks. We sell our 885.58 ounces of gold for $169.50 per ounce, which gives us $150,105.

We buy back into the Dow at the index level of 839.96.

July 1996-Present
Dow: 5729.98 points
Gold: $382
Dow-to-Gold Ratio: 15
Action: Sell Stocks, Buy Gold

In July 1996, the Dow-to-Gold ratio again hits 15 – time to sell stocks and buy gold.

We sell our Dow shares at an index level 5729.98 for $2.57 million. This is a 1,614% return – including reinvested dividends – from when we purchased the stocks in April 1974. (The return excluding dividends is 549%.)

We take this capital and buy 6,734 ounces of gold, priced at $382 an ounce.

By getting out of stocks and into gold in July 1996, we sit out the current bull market in US stocks. But we also completely avoid the dot-com bust in 2000 and the crash of 2008.

We also get into gold right before gold’s bull run from 1999 to 2011. Our final gold ride from 1996 to present returns 226%. That turns our $2.57 million into $8.4 million.

From our $206.70 in 1918, we end up with $8.4 million a century later. That’s a total return of 4,058,169%. The annualized return on this strategy would have been 11.19%.

By comparison, a simple “buy-and-hold” investment in the Dow from 1918 to now would have yielded an annual return of 10.44% with dividends reinvested. The gain on this trade would have been $4.26 million.

Similarly, if we had held gold from 1918 to today, our original 10 ounces of gold would now be worth $12,310.

Bill’s strategy is based on a simple premise: You make money by buying stocks when they are cheap and selling them when they are expensive. And that’s how you turn $206 into $8.4 million over the long haul.