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Dow/Gold Ratio: Important Indicator for Gold Investors

News Arnulf Hinkel, Financial journalist – 08.03.2022

Just as the gold/oil ratio serves as an indicator for impending economic crises, the Dow/Gold ratio is considered one of the most important long-term indicators by institutional as well as private gold investors. It enables the recognition of trends regarding the economy and the future development of the gold price. The underlying Dow Jones Industrial Average Index comprises the 30 most important US companies and, as the oldest stock index in the world – established in 1896 – is particularly suited for long-term comparisons with the gold price.

A simple yet effective mechanism

The Dow/Gold ratio shows the correlation of Dow Jones Index points with the gold price. Its calculation is quite simple: how many ounces of gold would it take to buy the share basket? The higher the value of the Dow/Gold ratio, the higher the index is valued compared to gold. The lower the Dow/Gold ratio, the more expensive gold is compared to the most important US stocks. The major advantage of this indicator is its long-term nature, allowing for forecasts about upcoming trend changes in the gold price. Especially in emerging markets, a stable economy with rising wages across the board can lead to a flourishing stock market with a simultaneous increase in gold demand. However, far-reaching, often global crisis situations most profoundly boost the gold price and cause the Dow/Gold ratio to drop.

Since 2000, the Dow/Gold ratio has declined 54 per cent

The Dow/Gold ratio reached its historic high of almost 45 in July 1999, when the dotcom bubble was at its maximum expansion. The previous ratio lows were at the height of the Great Depression in 1932 with a value of 2, and in 1980 when it dropped to 1: a single ounce of gold was enough to represent the basket of stocks. Since the turn of the millennium, the value of the ratio has continued to decrease. Whereas in 2000, one share of the Dow Jones Index would still have bought 38.65 ounces of gold, at the beginning of March 2022, the Dow/Gold ratio stood at a mere 17.51.

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