The Dow-Gold Ratio

To find out about whether an asset is overvalued or undervalued it is necessary to compare it with other assets or benchmarks. So the Dow-Gold ratio gives an impression of how gold is currently situated in comparison to the worldwide leading market barometer, the Dow Jones Industrial Index (Dow 30).
The Dow-Gold ratio expresses how many ounces of gold are needed to buy the Dow Jones Index.
During the 20th century this ratio was heavily varying but on both sides decisive extreme points were reached again and again.

The most important turning points were marked in the years 1980 and 1999

On January 18,1980 the Dow-Gold Ratio was at a value of 1, which signifies that one ounce of gold was enough to buy the US stock barometer one time (in those times the Dow Index counted 860 points and one ounce of gold was worth 850 USD). This was a year in which US stocks were cheap and gold expensive.

The other turning point was marked on July 16,1999. Back in those days one had to spend 44 ounces of gold in order to buy the Dow Index one time (the Dow Index counted 11200 points and a gold ounce was worth 255 USD).
This means that US stocks were strongly overvalued in 1999 and gold was correspondingly cheap.

Other decisive turning points

- On November 26,1966 the yellow metal was relatively cheap and US stocks expensive, the Dow-Gold Ratio was at a value of 28

- From autumn 1929 till mid' 1932 US stocks almost lost 90% in value. In turn gold could increase in value which meant that 2 ounces were enough to buy the Dow Index one time. So US stocks were cheap in those times.

By comparing both assets, respectively by comparing the asset (Gold) with the benchmark (Dow Index) one comes to the conclusion that turning points/extreme points were rechead again and again. The last turning point was marked in 1999. 44 ounces of gold were necessary to buy the Dow Jones Index. With current prices of gold being worth 750 USD and the Dow Jones Index counting 9000 points, the Dow-Gold Ratio currently amounts to 12.

Because of an ongoing precious metals/commodity hausse one can proceed on the assumption that the ratio comes back to lower levels, possibly values of 2 or 1.

Also read about: Oil-Silver Ratio , Dow-Silver Ratio , Gold-Silver Ratio , Oil-Gold Ratio