Sunday, May 3, 2009

The DOW and GOLD - Correlation?

Dear Readers,
Today I am posting here an interesting case - the relation between DOW Jones Industrial Average Index (DJIA) and GOLD. Historically, one ounce of gold is enough to buy one set of DOW components, at least when there is a bottom. Today, if we care enough to see, one needs NINE ounces of GOLD to buy DOW Index! This proves that DOW has not hit the bottom yet and there is a long way to go. First, let me put this picture (courtesy Agora Financial):

The above graph shows what has been historical correlation between DOW Index and GOLD. Now, assuming history repeats itself (or as my friend Abhijit says - History may not repeat itself but may do enough to make you feel nostalgic), I have following points to consider:
  • Dow goes to 3000 and Gold moves up to $3000. Then One Ounce of GOLD for ONE DOW can be done.
  • Dow Goes to 1000 and Gold moves up to ONLY $2000. Then two ounces of GOLD for ONE DOW.
  • Dow Goes below (well below) 1000 and GOLD stays where it is today. This will fulfil Deflation expectations and also prove Robert Prechter of EWI fame correct. EWI (Elliott Wave Internatonal) predicts DOW at 400!
  • Dow stabilizes here and GOLD shoots up to 8000+. This will be dream come true for those who see HYPERINFLATION in near future.
  • Dow moves up as it is doing these days and GOLD stays near this level (sub $1000). This menas majority of economists of today who say BOTTOM IS HERE, prove right (VERY UNLIKELY).
If you ask my opinion, I don't think DOW is the right choice to look at as it is neither a weighted index, nor it is inclusive (it has only 30 big companies and that too change arbitrarily). It would be better if someone could produce GOLD Vs S&P 500 Index.


  1. Thanks for posting interesting information related to dow jones Industrial average index (DJIA) and GOLD. I have found a website link as a beginners guide to investing. they explain about the investing basics, and makes investing be easy and simple even for beginners.

  2. I've been doing some research on GOLD and DOW for the last three hours... Even though this is an old article, I really enjoyed it ;-)


  3. Thanks Saamy,

    Although I am not actively updating my blog for some time, I do keep in touch with the trend and I still think Dow-Gold ratio has good chances of reaching parity.

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