Gold versus the Dow

The people's insurance against the Inflationist

Gold broke through new highs during trading today.  If comparing asset classes when determining portfolio balance one may think to look at the Gold to Dow ratio.  Over the last 10 years and more specifically since the collapse of 2008 leading to the March 2009 lows in the Dow, this little utilized anachronism of an indicator tells a far different story than the equity bulls and Inflationist monetarist would have you believe.  If we take the price of gold per ounce roughly one year ago at the beginning of June 2009 we see gold was around $950 an ounce then and is now $1,250.  Gold has risen about 31.5% since June 2009.  The Dow at the beginning of June 2009 was about 8,800 and has risen to 9,800 today.  The Dow has risen roughly 11.5% in the same time period.  If we examine this gold to Dow ratio on a 10 year time frame we see much of the same trend indicating that we have really been in one extended Bear Market since the DotCom crash and subsequent asset reflation a decade ago.  Gold was about $300 an ounce in June 2001 and the Dow had just passed 11,000.

If you have been buying and holding gold as opposed to playing a Dow index fund over the last decade there is no question which has the better return over that period.  Gold has quadrupled while in nominal terms the Dow is over 1,000 points lower.  There is nothing fundamentally different in the monetary and fiscal world today to suggest that this trend will reverse any time soon.  If anything, gold will continue to go higher as paper investments sink.  Gold too has traditionally held an inverse relationship with the defacto gold standard called the US Dollar up until recent months and the demise of the Euro.  The fact that gold and the dollar are both rising at the same time should be a real indicator that these manipulated markets are in complete disarray and the time for a flight to safety has not yet passed.  Is gold a panacea?  No, but it is a time tested hedge and a sure fire way to diversify into other asset classes.   Gold bugs traditionally say 15% – 20% portfolio balance with precious metals while the more traditionalist will say 5% tops.

http://www.telegraph.co.uk/finance/personalfinance/investing/gold/7810575/Gold-price-hits-new-record-as-it-breaks-through-1250.html

At about 09.25 GMT on the London Bullion Market, gold hit a record $1,251.85 an ounce.

“Gold rallied to a new all-time high this morning as worried investors continue to pile in to the precious metal,” said Rajesh Patel, head trader at financial betting firm Spread Co.

“We are seeing continued signs of stress in the financial markets and investors, novice to expert are looking at gold now as a hedge against further turmoil.” Gold is viewed as a safe-haven investment in times of economic trouble.

US gold futures for August delivery hit a record high $1,254.50, and were later up $10 at $1,250.80. The precious metal also hit record highs in euro, sterling and Swiss franc terms.

Investors’ concern that loose monetary policy will unleash inflation is among the factors prompting interest in tangible assets such as gold.

Jeremy Charlesworth, manager of the Moonraker Commodities fund, said: “If you mass produce something then it will lose value at some stage. Quantitative easing is undermining the value of Western currencies and assets.

“Yet the European Union has decided that the solution to the debt crisis is even more debt and confidence in the recovery package has now evaporated. When people abandon bonds and Western currencies they will look for real assets, which can’t be created at the touch of a button. The gold market really does have the bit between its teeth at the moment.”

Not everyone shares this bullish view, however. Robert Prechter, the president of Elliott Wave International, who is known for forecasting a big bull market in stocks in 1982 and for getting out before the 1987 stock market crash, told the Reuters Investment Outlook Summit in New York that the gold price could drop by 40pc because of bearish technical momentum and deflation amid a European debt crisis.

“The time to get excited about gold was back in 2001 when no one wanted it,” he said. “And now everyone seems to want it, so I don’t.”

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