Saturday, February 23, 2008

Dow/Gold Ratio: What The Ratio Might Be Projecting

The below chart notes the Dow Jones Industrial Average has been in an eight year bear market since 2000 when priced in gold. Could it be the trend is in the midst of changing directions? Chart of the Day notes:
The Dow currently trades 13% below its all-time record high. For some further perspective into how the stock market is actually performing, today's chart presents the Dow divided by the price of one ounce of gold. This results in what is referred to as the Dow / gold ratio or the cost of the Dow in ounces of gold. For example, it currently takes 12.9 ounces of gold to “buy the Dow.” This is considerably less than the 44.8 ounces back in the year 1999. When priced in that other world currency (gold), the Dow is in the midst of a massive eight year bear market!
(click on chart for larger image)

Certain factors noted below may indicate the strength in Gold prices could be waning.
  • the April 2008 Gold contract settled at $947.80 on Friday. This is down from a high of $958.40 on Thursday. Traders also said technical selling could accelerate if prices fell below major support level at $945 an ounce.
  • the April 2008 crude oil price settled lower on Friday at $98.81. Lower crude prices reduce inflationary pressures and reduce the attractiveness of gold.
  • A steep drop in physical demand due to record bullion prices also hit sentiment. The World Gold Council said India's gold imports in January fell 72% from a year ago to around 24 tonnes.
Although gold is in an uptrend, the below chart notes it is trading at overbought levels.

(click on chart for larger image)

Gold Chart February 22, 2008
Source: Alpha Global Investors

Additional Source:

U.S. Gold Futures Drop On Pre-Weekend Selling
Reuters UK
February 22, 208

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