The Dow Gold Ratio

In today’s world of charting, the everyday trader has a bevy of tools at their disposal to analyze the financial markets. I suspect the majority of these tools are used to analyze market behavior in the short-run, perhaps forecasting the market’s direction over the coming days or weeks. Tim Justice chimed in yesterday with a post highlighting a few such indicators like volume, volatility, and ATR. These indicators and many others are covered in one of our Rich Dad Education Elite Training classes – the Master Trader.

But what about the longer-term view? Suppose a trader wanted to analyze different asset classes (i.e. bonds, stocks, commodities) over a multi-year time frame? Outside of viewing a particular monthly price chart which shows multiple years of data, traders also have a few indicators that prove useful when surveying how one asset has compared to another.

The venerable John Murphy – a titan in the realm of technical analysis who has authored a number of trading tomes – uses the Dow Gold ratio to determine when investors are favoring stocks over gold and vice versa. With the S&P 500 Index a stone’s throw away from making new all-time highs (and many other broad indexes like the Russell 2000 and S&P Mid-Cap 400 already there), we’re seeing some interesting developments in the aforementioned ratio.

As shown in the accompanying chart, when the ratio is rising investors are favoring stocks over gold. Alternatively, when the ratio is falling investors are favoring gold over stocks. Throughout the 1990s the ratio was rising aggressively as the raging bull market in stocks gave little reason for investors to move into gold. When stocks peaked at the turn of the century kicking off our current secular bear market with the epic dot-com crash, the ratio reversed into a downtrend. This trend reversal kicked off a major shift that has continued over the past 12 years where gold drastically outperformed stocks. In fact, gold has been the world’s best performing asset during the so-called “lost decade”.

Here’s the interesting part recently noted by Murphy – the ratio has begun to turn higher. While it’s yet to break back above the major down trendline that’s been in place since the 2001 peak, it has breached the trendline from the 2008 peak. A continued rise in the ratio helps support the argument that stocks may have turned a corner and are likely to beat gold’s performance over the coming years.

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Jonas Taylor: Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.