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XMFSinchiruna (27.97)

Very instructive to track the historical ratio between gold and the Dow...

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February 27, 2008 – Comments (15) | RELATED TICKERS: CEF , GLD , IAU

Again... the chart says it all.... this commodities super-cycle won't be over until we get well below that green zone.  In 1980 we almost achieved parity between gold and the dow, and I suspect we'll get close again this time around... but at least much closer tham where we are now (just over 13)

 

15 Comments – Post Your Own

#1) On February 27, 2008 at 11:39 PM, DMBonedust (65.74) wrote:

Very interesting. I like the chart. This is not the first time I have heard this. Good job breaking it down and explaining.

More directly, what tickers would you suggest for an average player like myself?

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#2) On February 28, 2008 at 12:38 AM, XMFSinchiruna (27.97) wrote:

For gold bullion:  CEF... only... don't touch GLD,IAU, or SLV.  CEF is 1/2 gold, 1/2 silver... best and safest bullion play.  Cheap tomorrow because they just announced a (non-dilutive) shares offering at USD$13.30!

For large-scale producers.... none... skip them.  They've had their run.

Intermediates:  Agnico Eagle (AEM), Yamana (AUY) and Kinross (KGC).  Can't go wrong with that trio.

For juniors, focus on silver, since silver producers have lagged behind gold:  Great Panther (GPR.TO or GPRLF if you son't have access to Toronto exchange).  Endeavor Silver (EXK) and ECU Silver (ECUXF).  For gold juniors, Gammon Gold (GRS) and NovaGold (NG).

That's a dream basket right there, with CEF being 33% of pm exposure, intermediate3s 33%, and juniors 33%.

Good luck!

 

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#3) On February 28, 2008 at 10:37 AM, charlesblazer (99.02) wrote:

A picture is worth 1000 words.  Thanks for the tips!

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#4) On February 28, 2008 at 1:04 PM, leohaas (35.73) wrote:

Indeed, a very interesting picture. However, I really wonder if you are drawing a correct conclusion

 1) What I see is an uptrend. That means that very long term, the Dow outperforms gold. For people with a long-term investment horizon, this means that historically it is better (no, let me rephrase that, WAY better) to be in stocks than in gold!

 2) Stocks and gold a near parity according to the chart, with stocks declining. How do you know that stocks will continue their down trend? The chart shows at least a dozen points where the trendline was a back test... 

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#5) On February 28, 2008 at 5:22 PM, XMFSinchiruna (27.97) wrote:

Well, leohaas... What may look like minor peaks and valleys outside of the green zone on that chart are actually monumental movements that will make or break an investor.  If we know where the dow and gold are trending in relation to each other, and we know why, then there is absolutely NO reason to be in the Dow while we are free-falling out of that green zone and into 1980-like territory and beyond.  Check the dollar index today... fell to new historic lows.

Secondly, with respect, you are mis-reading the chart if you are thinking it says anything about the actual performance of the Dow.  This is simply a chart of the ratio between the gold and Dow, and does not track the performance of the Dow by itself... only in relation to gold. 

 I would love to debate this further another time... I have to run right now... but to be continued.  I need to shrink that image down too, so you all can see the ratio numbers on the right axis.

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#6) On February 28, 2008 at 5:33 PM, XMFSinchiruna (27.97) wrote:

Let's see if this one fits any better...  :)

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#7) On February 28, 2008 at 5:41 PM, XMFSinchiruna (27.97) wrote:

This chart is from 2001, when Dow to gold ration was just under 20.  After huge rises in gold lately, and some correction in Dow, ratio is at 12.95 as of this evening.  Still well within the green zone but dropping fast.  As the fundamental drivers of this phenomenon are unquestionably more virulent than those that caused the 1979-1980 downspike that's so prominent there, you can bet we'll get near those ratio values for the Great Depression and the 1979-1980 dips.

It's easy to say... well the Dow has done great for investors over time... but within these events... how you're invested can make or break a person financially.  And if somehow the Dow stays above 12,000.... great!  That just meand gold will have to move up further to approach the ratios it needs to re-trace before this cycle is over.  :)  $5,000 gold anyone?

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#8) On February 28, 2008 at 5:49 PM, XMFSinchiruna (27.97) wrote:

And last point before I run out the door, leohaas... :)

Don't forget about the impact of inflation on that chart... the ratio is based on the dollar amount of the Dow through time, the value of which dollar amount has been steadily eroded through time by inflation... this chart adjusted for inflation would show a totally different story.

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#9) On February 28, 2008 at 5:52 PM, XMFSinchiruna (27.97) wrote:

And last point before I run out the door, leohaas... :)

Don't forget about the impact of inflation on that chart... the ratio is based on the dollar amount of the Dow through time, the value of which dollar amount has been steadily eroded through time by inflation... this chart adjusted for inflation would show a totally different story.

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#10) On February 28, 2008 at 10:37 PM, leohaas (35.73) wrote:

sihchiruna, you talk nonsense. Especially, your comment #9 shows a lack of understanding, because the gold price is just as much affected by inflation as the DOW. The chart shows DOW divided by gold price. If you take inflation into account above the divider and below the divider, it evens out.

Bottom line: if I would have converted my gold when the ratio was 1 into the DOW, and convert back into gold today, I would have 12.95 times as much gold than if I would have just held the gold. 

Maybe short term gold will outperform the DOW, but long term NO WAY. Just look at your own chart. 

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#11) On February 29, 2008 at 5:03 PM, XMFSinchiruna (27.97) wrote:

Leohaas,

I concede that I shouldn't have posted #9 in such a hurry without taking the time to more carefully state my case.  I assure you that I do not suffer from a lack of understanding.  :)  I was trying allude to the well-documented issue of manipulation of the gold market since the 1980 spike, which led to gold failing to provide a hedge against inflation.

Second, I did not mean to suggest that the Dow has not been a more profitable place to be than gold over the entirety of that 200 year period.  I recognize that fact.  It is only during periods of rising inflation that gold becomes a far better play than the Dow.  Indeed, I intend to switch out of gold and silver and back into the Dow the moment I see signs of a reversal in the current trend... I just think we have a lot further to go before that time comes.

I don't think we disagree.  The Dow is a better play over the long haul.  Gold is attractive now because of the events unfolding in the financial markets and the inflationary policies of the Fed and the reckless spending by this administration.  The US Dollar is in serious trouble!

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#12) On March 01, 2008 at 5:30 PM, leohaas (35.73) wrote:

So, we end up agreeing! I surely had not expected that when I first responded. Fool on!

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#13) On March 01, 2008 at 10:54 PM, XMFSinchiruna (27.97) wrote:

Isn't CAPS Great?!  :)  Fool on!

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#14) On March 04, 2008 at 11:07 PM, jester112358 (29.01) wrote:

Excellent post.  As you correctly recogonize, we are in a "commodities bull market of a lifetime" as George Soros or Jim Rogers would say.   Have you had a chance to read Jim Roger's book on commodities?  Another interesting historical fact.  Commodiites and equities are always negatively correlated.  This would make a nice graph and is shown in Roger's book.  So, commodies are a great real life hedging mechanism with the advent of ETFs in commodies.

My major issue regarding gold is the supply demand  ratio.  There's just not as much demand industrially (mostly jewelery which is pretty elastic in a recession/depression scenario) as for other metals like Pt or Pd.  Even the demand for Cu, Pb and Fe are likely to be stronger long term.  But I agree, both Au and Ag have a long way to go up histrorically when adjusted for inflation, and may indeed reach levels seen in the Carter era, when the money supply got totally out of control.   We also have a credit fear factor based on overlevered unsecured debt that Soros calls the worse since WWII, and there is no better market timer than Soros.   If the Fed keeps cutting, creating more $, I'll keep buying commodities and those companies which efficienctly produce them.   Too many $ chasing too few commodities.

May I suggest the DBP ETF which also invests in Ag and Ag futures in roughly equal amounts.

 

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#15) On March 07, 2008 at 1:20 PM, XMFSinchiruna (27.97) wrote:

Hi Jester... thanks for your great comments.  I'll check out Rogers' book.  :)  As a proportion to available supply, I think the recession-resistent industrial applications for gold are fairly numerous and create a bullish part of my forecast for $2,000 gold.

 Interesting that when I posted this just over a week ago, the Dow:Gold ratio was 13.  Today it's at 12.3.  When gold breaks through 1,000, this ratio will be moving very quickly.  If the market were permitted to run its course, I think the ratio would correct pretty close to the 1:1 area... but at least to 3:1 based on previous cycles.  But it's entirely possible that we'll see monetary intervention before we get to that point... including even the possiblity for the issuance of a new American currency... or a North American currency... something.

I have added your DBP find to my CAPS portfolio.  Thanks for the tip.  I had seen Deutsche's new DGP, which seeks 2:1 leverage to spot price... which if they can deliver that will be very nice.  :)  Because DGP deals heavily in futures, though, I would only recommend it as a small speculative position within an otherwise balanced gold/silver basket that includes more conventional gold/silver bullion ETFs, Canada's CEF, and a basket of miners focusing on intermediate producers and junior producers.

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