With the recent corrections in both Stocks and Gold prices, I think it’s important to bring up something we’ve been talking about here for a long time. The Dow Industrials vs Gold ratio has been in decline for 12 years. No secret there. But are we entering into more of a sideways range between the two asset classes or is the ratio still in free fall – where Gold continues to outperform stocks? Here is the long-term chart to put things into perspective ($DJIA vs $GC_F):
After making new lows in August, this ratio has put together a pretty decent rally. Including a breakout above the critical 6.50 resistance, we have seen a 17% move in 6 short weeks. I don’t think that the major trend has changed and lower prices are inevitable. But I do think it’s possible that we enter into more of a sideways range for a while. The 6.50 level would need to hold on any retests. If this level gets taken out again to the downside, then this trend should continue lower. If support there holds, then you could be looking at another point or so to the upside somewhere near 7.70.
Some investors think as Gold as a “safe haven”. But I can’t imagine something that goes up or down $100 in a day as something “safe”. I think the yellow metal can act as a safe haven sometimes, and other times it becomes a source of funds just like anything else.
The point of this ratio is to point out something that has been working for a long time. There are always powerful trends in place, we just need to find them. We are going on 12 years now where Gold has been outperforming Stocks, and I don’t think that has changed. We are going to continue to give this downtrend the benefit of the doubt, but watch for short term changes. Remember that trends in Gold vs Stocks don’t last for months or years at a time. Historically, these trends last for decades.