A new investment era began in 2000. At that point, a mega shift occurred for the first time in 20 years from financial assets like stocks to tangible assets like gold. This is illustrated on Chart 1.
This chart compares the Dow Industrials to gold since 1919 and it’s one of today’s most important charts in its implications. As you can see, this ratio has been declining in recent years. In other words, stocks have been weaker than gold and, since these mega-trends tend to last for years, this tells us stocks are going lower and gold is headed higher in the upcoming years. Plus, since this ratio is still at high levels it means the decline in stocks will likely be severe.
Basically, the pendulum swung too far in favor of stocks, it topped out in 2000 and it’s now in the process of swinging the other way in favor of gold. When this happens, the pendulum then tends to go too far in the opposite direction, which is what happened in 1933 and 1980, when gold hit $850.
Stocks Still Expensive Compared to Gold
For now, stocks are still expensive and gold is inexpensive with the ratio near 24. If it again drops to near the 2 level like it did at previous bottoms, it’ll mean some extreme moves in these markets in the years ahead. To give you some examples, let’s say the Dow Industrials eventually drops to 7000 – a ratio of 2 would mean a gold price of $3,500. Since that seems unrealistic, let’s say gold rises to $1500 in the years ahead. Unfortunately, that would coincide with a drop in the Dow to 3000.
The bottom line is, you can play with the numbers but we don’t know how they’ll ultimately end up. This ratio, however, suggests that somewhere ahead stocks are going to fall and gold is going higher, and the rises and declines are likely going to be dramatic and perhaps shocking. That being the case, you can understand why we feel it’s important to focus on gold related investments rather than common stocks at this time.
Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, gold shares and the other major markets. For more information, go to www.adenforecast.com.