Thursday, August 04, 2011

Dow/Gold

The Dow/Gold Ratio chart shows the ratio of the price of the Dow to the price of gold. Another way to look at it is the number of ounces of gold it takes to buy one share of the Dow. For example, with the Dow at 10,000 and gold at 500, it requires 20 ounces of gold to buy one share of the Dow, so the ratio is 20. The reason for using gold is that gold is the most unbiased form of money in existence. Fake government paper money comes and goes, but gold has been money for thousands of years. It is the ultimate store of wealth.

The chart shows the cyclical nature of the battle between paper assets and hard assets. Paper assets excel when everyone is fixated on growth. When the growth phase ends, and preservation of wealth becomes the paramount concern, gold tends to excel. When paper burns, gold shines.

The long term trend of the ratio is up at a rate of 1.25% per year. This should be expected as the process of mining gold becomes more efficient and cheaper due to advances in machinery, energy, exploration technology, chemicals, etc. In fact, the advances in mining probably match the efficiency gains seen in the economy in general.

[via pbo]

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