Dow-to-Gold Ratio Suggests Gold Prices Could Soar
Don’t get too distracted by soaring stock markets and parabolic cryptocurrencies. Pay attention to gold prices. The yellow precious metal continues to present the opportunity of a lifetime.
You see, one of the first rules of investment we often hear is “buy low, sell high.”
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With this in mind, as it stands, gold is selling at a severely low valuation among all the other assets out there and it’s extremely ignored. It could soar.
How to Value Gold Prices
One of the best ways to look at the value of gold relative to stock prices is to look at the Dow-to-Gold ratio. At its core, this says how many ounces of gold it takes to buy one share of the Dow Jones Industrial Average (DJIA).
Look at the chart below. It plots this ratio since 1970.
Chart courtesy of StockCharts.com
Currently, the Dow-to-Gold ratio stands at 19.74. This means it takes 19.74 ounces to buy one share of the DJIA.
The average monthly Dow-to-Gold ratio since 1970 is around 13. So if we assume the Dow Jones Industrial Average remains at the current level (24,800) and this ratio moves toward its long-term average of 13, then gold prices would have to increase to around $1,900.
That’s roughly 50% above the current price.
This ratio has gone as low as 7.5 in 2012 and 1.5 in 1980.
If we assume it hits 7.5 and the Dow remains at the current level, gold prices would have to reach roughly $3,300 an ounce!
Keep in mind, this ratio isn’t the only valuation measure saying gold prices are too low to ignore. If you look at the money supply around the world, the global government debt, derivatives markets, and other factors, they make a strong case for gold trading for pennies on the dollar.
When Will Gold Prices Start to Move Higher?
Dear reader, between 2013 and 2015, gold investors faced a lot of scrutiny. I will be the first one to say; if you were a gold investor during that time, you probably saw your portfolio take a massive hit. It was very discouraging.
But in 2016, gold prices posted their first increase since 2012.
This year, the yellow metal is on track to report another increase.
It’s important to understand investor psychology; investors tend to buy assets rising in value and ignore assets that are relatively flat or declining.
If you pay close attention, this is what’s happening in the stock market, investors are looking at stocks because they have increased significantly. If you look at the valuations, they are extremely high.
Now, here’s what I expect: Going into 2018, we could see gold show up on investors’ radars. It would have increased for two consecutive years with an immense amount of pessimism toward it. So they could be rushing to buy it.
You must understand that the gold market isn’t as big as the stock market or the bonds market. You don’t even need a rigorous sell-off in those markets for gold to move higher. Just a small amount coming from those markets could really impact gold prices.
