Gold bullion showing Dow a clean pair of heels

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My bullish stance on gold is old hat by now, but that does not take anything away from my excitement to keep riding this profitable play.

I have also for a while been favoring gold bullion relative to US industrial stocks, actually relative to most mature-market equities. As a matter of fact, I took Richard Russell to task on July 25, 2007 on his argument that gold’s outperformance of the Dow Jones Industrial Index might have been reversing when viewing the ratio’s long-term trend line. Let’s see how this has panned out over the ensuing few weeks.

The chart below shows the gold price relative to the Dow. A rising trend line indicates gold outperforming industrial stocks, and vice versa.

1909-1.jpg

Source: Market Master

The yellow metal has undoubtedly had the better of the Dow since breaking out of a two-month sideways pattern in mid-July. Running a MACD oscillator on the relative chart still shows gold outperforming, but it is starting to look somewhat toppish and the yellow metal may first catch its breath near-term before the outperformance trend is continued.

Just to put things properly in perspective, here is the long-term chart of gold relative to the Dow.

1709-3.jpg

Source: Plexus Asset Management (based on data from I-Net Bridge)

For my money this is a primary trend that is not about to be reversed in a hurry. (Short-term counter-trend movements are, however, quite likely from time to time.) Place your bets and let your profits run.

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3 comments to Gold bullion showing Dow a clean pair of heels

  • they say you should keep 10% of your assets in gold. considering the fact that the dollar was so overvalued, i should’ve put 20% into gold. unfortunately I only put in about 7% :-(

    atleast I got in comparitively early.

  • Neil Wallace

    No Doubt a fundamental Bull market but as always volatile and not to be traded unless an expert. Buy and hold good unhedged shares, coins and Gold Etf’s.
    Watch Silver as well.
    I believe that 20% of investable assets should be in PM’s in a world of inflation and Fiat currencies

  • stevo

    While gold may make a further, interesting speculation if it can break through resistance at 750 (and it will), it would be a very reckless act to restore this metal to international currency status. In the 1800s, the gold standard was a method for rich countries, such as England, to maintain their imperial dominance over the less-rich nations. Countries lacking and unable to acquire adequate gold reserves were in perpetual servitude to their gold-bearing masters. Since the middle classes, anywhere, have never had the resources to acquire much gold, engineered shortages of this metal were reasons for commercial crises, bankruptcies, and property foreclosures.

    Gold is an extremely inelastic currency. When an economy is growing at a healthy pace, if the necessary increase in the gold supply cannot keep up, then the economy becomes starved for a shortage of funds. The country may possess vast wealth, but be unable to access this wealth due to insufficient money in circulation. Gold is never wealth — the wealth of a nation is the productivity of its people, technology, and natural resources. Money is really a representation of labor performed.

    Every monetary system that has ever existed was a failure, excepting the present one — for now. The gold standard failed due to its inelasticity. Do you remember Coxey’s army, or Bryan’s “you shall not crucify mankind upon a cross of gold” speech, or why Keynes referred to gold as a “barbarous relic”? These folks were responding to real problems in the operation of gold as currency. A gold standard has always promoted the interests of the rich over those of everyone else — and would do so in the future, if revived. Also, does anyone really know who possesses the bulk of the world’s gold today? A US Treasury spokesperson recently reported that much of the gold in Fort Knox is “less than investment grade!” Just who would really benefit from a return to the gold standard? Could it possibly be the international mega-bankers who have been consistently accruing greater power and wealth over the past 400 years? If we ever return to a gold standard, I am certain that it will not be to the benefit of the average person!

    The best monetary system would be that proposed by the likes of Franklin, Lincoln, and many others: a commerce-based fiat system, such as the one that worked so well for the Colonies before being forbidden by Parliament. It would expand and contract according to the dictates of trade. There would be no unpayable, national debt and its accrued interest, because the Treasury would issue the currency directly. The obscene Federal Reserve system would be exposed to light and end with a wooden stake driven through its shrivelled heart.

    Unfortunately, however good the system proposed and put into operation, money is a subset of economics — and the real name for economics is “political economy.” Politicians will always determine how a monetary system operates. These historically incompetent, venal, self-serving “solons” will always be guaranteed to wreck any operative monetary system against the rocks benefitting their rich patrons. Having honest individuals in political office is notably more important to overall social welfare than something as manipulable as money.

    Gold as a speculative medium — Si!; as a universal currency — No!

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