Gold/Dow Ratio: Where Are We Holding?

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...The Fed’s new “reflationary melt-up” is clearly designed to keep stock prices buoyant. But it’s only adding to the case for gold, too. “I would be very surprised if the Dow Jones industrials/gold ratio didn’t decline to between 5-10 within the next three years,” said Marc Faber of The Gloom Boom & Doom Report recently. If that call proves right, it might come thanks to gold prices doubling, or stock prices halving, or more likely some combination of both.

...Crude oil, rice, gold, the euro, wheat, emerging market bonds, copper...anything that’s not stamped with the all-seeing eye of the dollar looks like a great bet once again. The Federal Reserve has seen to that, driving the real returns paid to cash down toward a three-decade low.

Sinking to minus 2.05 percent in March, the real rate of interest nearly equals the very worst returns to cash paid during the Great Greenspan Reflation of 2002-2005. This latest slump in real interest rates also comes thanks to “emergency” rate cuts.

Plus, of course, the worst run for consumer price rises since the start of 1992. And I think the two are more closely related than the Olsen twins. ...

But the sudden bull market in everything really stands out in dollar terms. And hoarding cash — the true meaning of “deflation,” as well as the root cause of the current worldwide crisis in banking — has become a sure route to the poorhouse again.

How to choose the best escape route for your savings and wealth? Clearly, real estate’s doomed, for the short to midterm at least. Government bond yields are now so far underwater you’d be killed by the bends if they tried to come up for air.

That leaves commodities and stocks, the classic refuges for inflationary crises. And one way of judging the Dow — free from all dollar distortions — is to measure the index in terms of gold ounces:

Dividing the Dow Jones industrial average by the price of gold gives you a rough idea — over time — of where the real value might lie. It shows how many ounces of gold you would need to buy one unit of Dow stocks...

The Fed’s new “reflationary melt-up” is clearly designed to keep stock prices buoyant. But it’s only adding to the case for gold, too. “I would be very surprised if the Dow Jones industrials/gold ratio didn’t decline to between 5-10 within the next three years,” said Marc Faber of The Gloom Boom & Doom Report recently. If that call proves right, it might come thanks to gold prices doubling, or stock prices halving, or more likely some combination of both. But while the three peaks to date — of August 1929, January ‘66, and then late ‘99 — took the Dow/gold’s top higher, the floor only held steady, down there at 2 ounces of gold and below.

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