Thursday, September 10, 2009

Dow:gold ratio revisted

I've posted the Dow:gold ratio many times along with my feeling that we will eventually see this ratio drop to or near 1:1 just like it has during almost every commodity bull market.

I think there's a good chance that the Dow:gold ratio has completed the correction from March and is now about to begin the next leg down. So far the trend line has been broken and at the moment is forming a small bear flag.

Now I don't know if stocks are going down or if gold is just going to rise much faster. Either one of those scenarios would send the ratio lower. If I had to guess I would say gold is going higher while stocks stagnate or rise sluggishly.

One of the great investing truths is that liquidity will eventually find its way into undervalued assets. Over the last 6 months the stock market has risen by about 50% while gold traded sideways. I suspect it's now time for liquidity to drain out of the stock market and back into precious metals.

Once the ratio closes back below 8.5 I think we will have confirmation that the secular trend is back in force.