There are a couple of long-term charts and ratios that I keep watch on every quarter or so, one such is the Dow/Gold ratio. This ratio is one that always makes me shiver when I see it move lower. See, this ratio is useful because we use gold as the denominator instead of the dollar to price stocks. Why is this useful? Well, the FED can keep their printers running 24/7 for all we care but, what they can't print are gold bars. Powell can't start conjuring gold out of thin air so this ratio arguably gives us the real value of stocks. The important factor of this ratio is that trends don't last for a couple of months, they last for decades.
The chart might be a little difficult to decipher at first but it quite simple. I've added the chart below, I advise on clicking on the chart to enlarge it for easier viewing. The main chart is the Dow/Gold ratio with the clear trends outlined and the breakouts/breakdowns of the major trendlines. Underneath, I've added the RSI indicator. Here's what's interesting, divergences that occur before a break of the major trendlines are massive inflection points that alter the markets significantly.
You can clearly see that in the charts of the Dow Jones Industrial Average and Gold that I have added above the ratio. A declining Dow/Gold ratio historically signaled that Gold is the place to be putting your money to work and that stocks do nothing but move sideways with frequent cyclical bear markets within those periods. On the other side, when the Dow/Gold ratio rises we see huge bull markets in stocks that last for decades.
Now, what's rather interesting is that we've got a divergence in the most recent uptrend and the ratio is hugging that ascending trendline. A break below that trendline has historically signaled some rough times ahead and it wouldn't be a surprise given the current circumstances we're finding ourselves in. Global rate hikes into a slowing global economy, sticky inflation that doesn't seem to ease up, treasury yields at decade highs, housing markets imploding, commodities acting like we're in a deflationary period, and a Russia that seems dead set on destroying peace in the EU.
This potential outcome is further reinforced when you look at Gold individually, which you can see on the chart above. A rounding of the almost decade long sideways movement in the price is a rather bullish long-term sign and when looking at the most recent price action, a channel has formed right underneath the all-time high with price currently sitting at the lower boundary and the four-year moving average which could further spur buying in the precious metal due to its potential to act as support.
I don't want to inject fear in anyone and I don't want you to take this as investment advice to start selling everything and go all-in on Gold. What I do want though is to make you aware of this. I encourage you to ask yourself the question if you're prepared for an outcome that doesn't equal a new multi-decade bull market but a multi-decade secular bear market. In general though, we shouldn't be too worried. We mentioned before that trends within the Dow/Gold ratio usually tend to last for more than a decade. The little info we have seems to indicate that it seems unlikely that we change trends so soon.
Could you handle it? What is your opinion? Am I missing an important variable? You can place a comment below, use the contact form or you can send me a tweet!