I think the discussion in my last gold post was rather heated, so let me address this problem once more. Here is 104-year chart of Dow Jones vs. Gold (please click for full image, picture taken from http://www.chartsrus.com/):

dow gold 104 years

I think the conclusion is pretty simple:

  • The ratio makes wild but periodic swings, pretty well synchronized with Kondratieff wave
  • In general stocks outperform gold, but the counter-trend moves are wild and can kill you
  • Stocks also pay dividends that are not reflected on this chart, so it’s clear that on the long run gold doesn’t makes any sense as an investment, only as a swing speculation
  • If you account for dividends Gold was outperforming Dow for only 20 years during the last 107 years, i.e. time statistics is also strongly against a gold investor
  • Right now we are in the counter-trend move, when gold is doing better than stocks
  • Just looking at the chart the counter-trend moves down take from 3 years back in 1930s to 15 years 1965-1980
  • The current move is 7 years old and is at 16 (the chart ends in 2004)

Those were indisputable facts. Now will be my opinion:

  • I don’t think the current move will take 15 years, more likely 10, i.e. Dow/Gold ratio will bottom in 2010
  • I don’t think it will bottom all the way at 3 like in previous times, I would say around 6-8 is more realistic
  • I think the bulk of this move will be done by Dow decline, not gold increase
  • If Dow will bottom around 7,000-8,000 then Gold will top between $900 and $1300. In this scenario shorting Dow is much more profitable than going long Gold
  • At the extreme case, to get to the ration of 3 the Dow will need to get down to 6,000 and gold to $2000, but I consider this very, very unlikely

Disclaimer: I have no position in Dow nor in Gold, I have tons of better ways to invest my money