STUDY OF HISTORIC GOLD vs. DJIA PRICE RELATIONSHIP By: Leonard Melman (Originally published summer, 2006 - Revised January, 2007) One of the most fascinating long-range studies involving the world of gold is the relationship of the price of gold to the Dow Jones Industrial Average (DJIA). For those who think it has mattered relatively little which side of that investment equation one has ‘placed their bets’, they couldn’t be more wrong. During the past century, the movement of the relationship between the two numbers has been both sweeping and dramatic - and being on the right side of those monumental undulations has been a matter of extreme importance. In capsule form, here is the record: In late 1929, the Dow reached its ‘Roaring Twenties’ climatic high at a peak of near 380 while gold‘s price was held at $21 (all prices US$) for a ratio of 380/21 or 18 ounces of gold to purchase one unit of the Dow Jones Industrials. From that point, the securities markets collapsed, reaching an ultimate low of near 40 in late 1932 and, with gold still at $21, the ratio had plunged to 40/21 or just about two to one. By 1962, the situation had changed dramatically with the Dow peaking near 840 and gold fixed just below $33, leaving a ratio of 25.45 to one in the Dow’s favor, but once again, the markets reversed themselves and by January 1980, the Dow was still in the mid-800s while gold roared ahead to the same number. The ratio had dropped to ONE TO ONE! However, that marked the relative peak for gold, while the securities markets roared ahead in the grandest bull market in history and, in early 2000, the Dow reached 12,000 while gold had declined to the 260 level, resulting in a Dow/gold ratio of FORTY-SIX TO ONE! Since 2000, the securities markets have basically marked time, gold has rallied strongly and, as this is written in January 2007, the relevant numbers are 12,500 and 626 for a ratio of almost exactly twenty to one. Clearly the markets have been able to identify the periods of time when economic prosperity and social stability have prevailed and when they have not. During the former, an investor profited immensely by being in securities over gold while during the latter, the reverse was true. From the end of WW1 until late 1929, optimism reigned supreme and the ratio rose to 18:1. In late 1929, the Great Depression entered with frightening suddenness, securities markets collapsed, gold investments prospered and the ratio plunged to two to one. Despite the advent of WW11, economic conditions gradually improved, abetted eventually by the huge post-war boom and, as a result, both social and economic conditions improved and the securities markets soared, resulting in a rising ratio reaching to 26:1. However, gold then gained the upper hand over securities markets as the first signs of rising inflation came into view, political upheavals such as Watergate and the Soviet incursion into Afghanistan occurred, gas shortages were experienced and feelings of uncertainty became pronounced. Ergo, the ratio plunged. Next came the securities and technological boom of the 80’s and 90’s at the same time inflation appeared to be under control and the message was “Exit gold, load up on securities” and the ratio exploded upward. Finally, we have seen the ratio now returning to lower levels by declining to 20:1 during the past six years. The great question for us at this time is: “Are we on the way once again to the point where the price of gold will equal or exceed that of the DJIA, or is the recent movement just a blip on the road to ever-greater societal prosperity?” As we see it, the growing concerns which have been reflected in a rising ratio for gold over the DJIA during recent years have four main themes: 1 - The rise of international terrorism with the potential concurrent threat of disruption to the world’s petroleum supplies. 2 - Rising fundamental demand for all materials, particularly including petroleum plus base and precious metals resulting from enhanced prosperity in India, China and other nations. 3 - Concern for the stability of the United States Dollar resulting from America’s needs for massive quantities of imported oil and support from the international community for the greenback. 4 - Growing indications that the American real estate boom may be in the early process of imploding, thereby placing the American consumer-driven economy at a heightened level of risk. The question, then, is whether or not the world can solve these and other serious problems in time to avoid dire social and economic consequences. If it is able to do so, the ratio will probably increase once again; if not, we could be headed back toward ONE TO ONE - or even lower.