In my interview in
the October 13th issue of Barron's, I said:
"One of my major
contentions has been that you are better off holding gold than the Dow
Industrials. That surely has been the case the past few years and that trend
is only beginning."
Given the strength in
the stock market over the past few weeks, I thought that it might be useful
to explore this relationship between gold and the Dow Jones Industrials
Average, which I use as a proxy to represent the overall market. The
following chart presents a long-term view of the Dow in terms of goldgrams.
It is useful to study
a long-term chart because it is the major trends that are of greatest
importance, and we can see on the above chart the great bull market in
stocks. The Dow Jones Industrials Average was rising not only in terms of
dollars, but goldgrams as well. Stocks were becoming higher priced in a bull
market that ran from the early 1980's until...
Well, here's the
first point I would like to make. In dollar terms the Dow Industrials peaked
in January 2000. Its weekly closing high was 11,723 on 14 January 2000. But
in terms of goldgrams, the Dow Industrials peaked several months before - at
1,369gg on 16 July 1999. This bearish divergence was an early indication that
gold was about to reverse a two-decades old trend and begin outperforming the
Dow. That early warning signal was confirmed last year.
We can see that after
making its peak in July 1999, the Dow formed a 'head-and-shoulders' top (the
neckline is the horizontal red line). As we all know, the Dow was slammed in
2002, but not only in dollar terms. It also fell in goldgram terms, and in
that collapse the Dow broke through both the 22-year uptrend line from the
1980 low and the neckline of its head-and-shoulders top. The Dow continued
lower to 661gg on 7 February 2003, a 52% decline from its 1999 peak.
Given the severity of
that decline in such a relatively short period of time, it is not
unreasonable for the Dow to consolidate, which is in fact what it has been doing.
Note that the Dow has formed a 'pennant' pattern (drawn in black on the
Pennants tend to be
continuation patterns. In other words, they do not typically mark a trend
reversal. Usually, after a protracted move the price will consolidate within
the pennant, and eventually the major trend reasserts itself. If this result
were to occur on the above chart, the goldgram price of the Dow Jones
Industrials would continue to fall, which raises an interesting question.
Will the Dow be
falling in dollar terms, or will the $/gg exchange rate rise to cause the Dow
to fall in goldgram terms? The answer is that it doesn't matter. Because the
major trend of the above chart is down, you are better off holding goldgrams
instead of the Dow Industrials. In other words, your purchasing power is
being maximized with goldgrams, regardless what happens to the Dow in terms
of dollars. And given that the Dow appears 'capped' by the big rounding top
seen on the above chart (noted by the curved red line), it is probably safe
to assume that this trend favoring goldgrams over the Dow will continue for
Despite its big run
this year, the Dow on October 17th only closed at 813gg, well below its 1999
peak. So we can assume that the Dow is making a bear market rally because the
major trend continues to point lower. How much lower?
Again referring to my
interview in Barron's:
when it takes less than 100 grams to purchase the Dow, gold's purchasing
power is at a high point. So, we have got a long way to go down when you look
at the stock market in gold terms."
Clearly, the Dow
still has a long way to fall before we reach even 100gg, let alone the 33gg
low on 18 January 1980. But if history is any guide, we can conclude that the
Dow Industrials are over-valued and gold is under-valued, so the conclusion
is simple. Buy and hold goldgrams, not stocks, excepting of course the stocks
of gold mining companies - but that's another story.
Turk is the founder of GoldMoney
(www.goldmoney.com) and the co-author of The Coming Collapse of the Dollar (www.dollarcollapse.com).
© 2007 by James Turk. All rights reserved.
Copyright © 2008. All rights reserved.
Edited by James Turk, firstname.lastname@example.org
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