Dow Jones Priced in Gold Long Term View June 9

Jun 9, 2010: 9:00 AM CST

A reader emailed me to ask about the relationship between Dow and Gold, specifically the Dow priced in Gold, which is essentially a relative strength chart of the Dow Jones Index to Gold.

Before you view the chart, a quick warning:  It’s not pretty.

Let’s see the relative strength relationship of the Dow to Gold since the 2000 market top:

In the chart above, the candlesticks represent the relationship between the Dow and Gold ($INDU:$GOLD) scaled on the right, while the shadow gray line – scaled on the left – reflects the price of the Dow Jones Index over time.

The highlighted vertical lines reflect market tops and bottoms – turning points in the Dow Jones.

Let’s quickly review “Relative Strength” charts.

You can create a relative strength chart in by typing in one symbol, a colon, and the other symbol, such as:

” $INDU : GOLD ”  or “MSFT : AAPL” (comparing Microsoft to Apple)

It’s a division relationship, with the first stock (market) being the numerator and the second being the denominator.

If the numerator rises over time, the relationship (trendline) rises and if the numerator falls, the relationship (trendline) falls.

If the denominator rises over time, the relationship (trendline) falls and if the denominator falls, the relationship (trendline) rises.

The first part – numerator rising – is self explanatory, but people tend to get tripped up on the denominator.

It’s just like saying 1/2 – which is .50 – is larger than 1/10, which is 0.10.  A larger denominator DECREASES the relationship.

All that is a simplistic explanation, but it works for our purposes.

So what’s scary about the chart?

Gold has moved from $300 per ounce in 2000 to $1,250 per ounce in 2010.

The Dow Jones Index has moved from 11,500 in 2000 to 10,000 currently.

The skyrocketing price in gold has sent the Dow/Gold relationship plunging over time.

Relative to Gold, the Dow Jones never remotely recovered – not at all.

The Dow/Gold relationship stood at 40 (11,500 / $300) and currently stands at 8 (10,000 / $1,250).

Put in exchange terms, in 2000, it would have taken 40 ounces of gold to buy one unit of the Dow Jones Index.  Now, in 2010, it would take only 8 ounces to buy that same unit of the Dow Jones.  That is an 80% drop in the ‘relative’ price of the Dow Jones over the last decade.

When compared against the backdrop of the surging price of gold over the last 10 years, the Dow Jones (and S&P 500) indexes have been mired in a vicious, insatiable downtrend – that continues to this day.

Corey Rosenbloom, CMT
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3 Responses to “Dow Jones Priced in Gold Long Term View June 9”

  1. Ken Says:

    So,…isn't that going to happen if your government is printing money left and right? I mean, that is a natural, economic reaction since the OVER supply of dollars reduces it's value relative to a precious commodity. Am I missing something? This is obvious…

  2. Corey Rosenbloom, CMT Says:

    True, while it might be obvious to experienced traders/investors, I suspect the general public is unaware of what this means. They look and see the Dow Jones made a new high in 2007 and then recovered to 11,000 recently and they think that's the end of the story. Priced in Gold, the picture is not so rosy. Dow 11,000 in 2000 is not equivalent to Dow 11,000 now.

  3. Ken Says:

    Okay, I thought I was missing some other angle, Corey.

    I'm surprised oil hasn't exploaded, but maybe that would put the final nail in our coffin economically and our government is keeping prices down politically, so that doesn't happen.