March 20, 2013 | By Tekoa Da Silva
One of the more fascinating reminders of what may be to come for the remainder of this gold bull market, is the charted history of the dow/gold ratio. Below are two charts illustrating the upward potential in gold which remains for the duration of this market.
The first chart is a normal 200-year look at the dow/gold ratio. What’s particularly shocking here, is the staggering levels of volatility injected into the economy and financial system following the US Federal Reserve’s formation in 1913. Now commonly called a “business cycle”, this volatility has wreaked havoc on many, while creating excellent one-way bets for long term speculators. These charts essentially represent, a speculator’s dream.
(click to enlarge)
Furthermore, these wide swings in the dow/gold ratio allow dynastic pools of capital (many multiples of billions) the ability to speculate on economic expansion and monetary confidence while remaining in the largest and most liquid markets. When (and if) Central Banks participate in the dow/gold ratio trade, their monetary toolbox can assist with the timing and severity of the move.
Essentially, the best way to play the dow/gold ratio trade, is to do so with an understanding of the timing of Central Bank participation (through gold purchases & sales), and monetary expansion & contraction.
So where are we at the moment? Just look around. Central Bankers globally are smirking in the face of bearish gold sentiment, with “central bank gold buying in the fourth quarter of 2012 mark[ing] the eighth consecutive quarter of net purchases by the official sector and the highest level since 1964,” as reported by the World Gold Council.
Here is the second and more alarming dow/gold ratio chart, illustrated with a “confidence trend band”:
(click to enlarge)
What these two charts leave to the imagination however, is the extent and severity of the bottoming of this cycle. In looking at the visual trend being set over the last 100 years following the Fed’s formation, one might consider a bottom occurring under a 1-to-1 ratio favoring gold.
A skeptic could also conclude in looking at the first chart, that the majority of the move has already occurred, with only meager gains left remaining.
In response to that, the Pareto Principle suggests that 80% of the gains are found in the final 20% of the bull market. As it currently stands, the dow/gold ratio is sitting at roughly 9-to-1. A move to a 5-to-1 ratio, would require a $2907 oz. gold price, a 3-to-1 ratio $4845 oz., and a 2-to-1 ratio would require a stunning $7268 oz. gold price.
A 2-to-1 ratio move from here equates to a 400% move higher in gold, and of course, a 1-to-1 ratio ($14,500 oz.) would equate to an over 900% move left remaining in the gold bull market.
So is a move to a 2-to-1 ratio or lower in the cards? That’s ultimately for you to decide. But when we look at the climate, it appears that the worst of the financial problems are only just now bubbling to the surface. Additionally, why would Central Banks be acquiring record-setting amounts of gold unless they also expect a powerful thrust downward in the ratio?
Bottom Line: If you expect major fireworks in the future; a jubilee of financial, economic, & social unraveling—then expect the dow/gold ratio to drop lower. Much lower.
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Tekoa Da Silva
Bull Market Thinking