With Gold currently sitting at US$1700 and the Dow at 11,100, we are seeing new lows for the Dow/Gold ratio (in this Gold bull market) which presently sits at a touch over 6.5 (the chart above is not quite live).
To get an idea of where this ratio might be heading we can take a look at the ratio over a much longer time frame:
The Dow ended up hitting its all-time low of 28.48 during the summer of 1896 during the depths of what later became known as the Panic of 1896. The price of Gold at the time was fixed at $18.98, providing a low in the ratio of 1.5 (ounces of Gold to buy the Dow).
At its low in 1932, the Dow Jones was worth just 2.06 ounces of gold. (The Dow was 41.20 and gold was $20 per ounce) However, as Roosevelt confiscated gold and devalued the dollar the following year, using a $35 gold price, the 1932 low actually represented just 1.18 ounces of gold.
On January 21, 1980, the Dow closed at 872.78 and gold closed at $850 USD an ounce on the London Fix, resulting in a ratio of 1.02.
It seems possible that Gold is in the process of breaking out of the 3 year channel that I mentioned in my last post, however I find it highly unlikely that Gold can continue to rise as quickly as it has the last several trading sessions, a rest or correction must surely be close.
What I find particularly interesting about the market activity tonight is that Gold stocks are currently holding up against the massacre being seen in the rest of the market. The Dow, S&P and Nasdaq are all currently trading around 3% in the red with the HUI and GDX both trading at over 1% green. This may sound normal given that Gold is trading higher than Friday close, but the last couple of weeks has seen extreme weakness in precious metal stocks, could we see them start to reflect the high price of the metals themselves? Of course it's still early and we may see changes through the course of US trade.
Current market activity suggests to me that the FOMC may increase the boldness of their statement in relation to further stimulus (QE3) come Tuesday. This statement could easily drive a short term rally in the stock market.
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