The Dow / Gold ratio

The Dow / Gold ratio, spot price of gold, 2002 to 2012, monthly

Since the onset of the credit crunch central banks globally have injected unprecedented amounts of liquidity into the global financial system. Buy doing so central banks are trying to stimulate the well known “wealth effect” which entices folks to increase their spending simply because they feel wealthier as their portfolio’s increase in value.

Even though we have seen improvements in the prices of selected assets, one really has to look at relative valuations for context. The chart above show what is known as the The Dow / Gold ratio, effectively the value of the Dow Jones 30 Industrial Average divided by the price of gold (black line) compared to the price of gold (red line) over the past ten years measured monthly.

Clearly any increase in The Dow are much smaller in relative terms than the price of gold. Also keep in that central banks purchased a total of 440 tons of gold in 2011 (2010 purchases ran at 77 tons) , and are on track to acquire almost 500 tons in 2012. Paper assets are under performing, and as The World Gold Council suggests, “The trend in central bank buying is expected to continue given the lack of decisive action in dealing with the underlying issues both in Europe and the U.S., as well as the low relative allocations to gold among emerging markets”.

Comments are closed.