Dow Jones / gold ratio revisited

I earlier blogged about the Dow Jones Industrial Average-to-gold price ratio in this entry.

The graph above is basically the same graph charting the ratio, only the number of years in the dominant trends are delineated (click on chart to enlarge). The duration of an increasing ratio--indicating rising equities markets and a positive slope in the chart, is between 20 and 32 years in the last century. The periods when the ratio contracts lasts about 14 years. We are currently in the midst of a contracting DJIA/gold ratio, currently around 9.

If history is any indicator, the ratio will drop to below 2--or to unity before the downtrend reverses itself. Since the last inflection point occurred in 1999 when the ratio peaked at an all-time high of 44, we can expect the ratio to bottom out around 2013. Gold's nominal low of approximately $250/ounce occurred in 1999 and 2001, inferring this current downtrend has legs until 2013 - 2015.

So unless the DJIA plummets to 2000, expect higher gold prices over the next several years.

See sidebar for disclaimers.

Disclosure: long gold and silver mining shares.