Why I’m Sticking With Gold |
By Tom Dyson, Editor, Postcards From the Fringe
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The Ultimate Barometer
The Dow-to-Gold ratio is the ultimate barometer of systemic “health.”
It tracks the 30 Dow Jones stocks, as priced in gold. And it tells us the best time to buy gold… and the best time to buy stocks.
You buy stocks when they are cheap relative to gold. That is, when the Dow-to-Gold ratio is below 5 (when it takes five ounces of gold or less to buy the entire Dow).
You sell stocks when they become expensive – when the Dow-to-Gold ratio rises above 15 (when it takes 15 ounces of gold or more to buy the entire Dow). So you sit in gold until stocks become cheap again (in gold terms).
Over the last 120 years, whenever the system “reset,” the ratio went below 5. Stocks were cheap, relative to gold.
On the flip side, when things were ripping – as they were in the late 1990s, for example – the ratio got as high as 41. Stocks were expensive, relative to gold.
And the thing about this barometer is that once it begins a trend, it tends to stay in that trend for many years.
It’s all in this chart of the Dow-to-Gold ratio from 1900 to 2020…
Notice how well this chart lines up with the valuations chart I showed you earlier. For example, the high in the Dow-to-Gold ratio in 1999 (when it took more than 40 ounces of gold to buy the Dow) mirrors the towering peak in stock valuations… right before the dot-com crash in 2000.
At its most recent high in October 2018, the Dow-to-Gold ratio was just above 22. It’s been falling ever since… a signal that the system is going to break soon. Maybe it’s started to break already?
Since the outbreak of the coronavirus pandemic, the government has gone into hyperdrive trying to “manage” the economy – with more financial engineering, more unsound money, bigger deficits, and more soothing words…
As I write, the Dow-to-Gold ratio is at 13.9. I expect it to fall below 5 – what Bill Bonner calls its “rendezvous with destiny” – in the next five to 10 years.
Until then, we’re sticking with gold.