Dow to Gold Ratio

The Dow Jones gold ratio expresses the price of the DJIA as a multiple of the price of one ounce of gold. For example, if the DJIA is trading at 15,000 points and the price of gold is $1,300 per ounce, the Dow Jones gold ratio is 11.5, or 15,000 divided by 1,300. The ratio has fluctuated widely over history, trading as low as 1.0 during the stock market crash of 1980 to above 40 during the dot-com bubble of 2000.

The Dow Jones gold ratio can provide investors with valuable insights. First, it tracks how the precious metal has performed relative to a representative swath of corporate America. Second, it can be used to help determine whether the stock market or gold bullion is underprice or overpriced, as when the ratio is out of kilter. However, there is no guarantee that the past relationship between these two assets will persist in the future.

 

Gold to Oil Ratio

looking only when the gold-oil ratio has exceeded 30:1 (i.e., oil is cheap relative to gold), crude has returned 32% on average over the next twelve months (over four times its long-term average), while gold has returned 4% on average. Oil was lower only 13% of the time (70% less often). On average, oil outperformed gold by 28% during these periods compared with 2% normally.

At the other extreme, when the gold-oil ratio was less than 10:1 (i.e., oil was expensive relative to gold), crude lost 7% on average over the next twelve months and was negative nearly 60% of the time. Gold returned 18% on average during these periods, outperforming oil by 25%. Since 80% of all observations occur when the ratio is between 10 and 30 you should expect the relative returns of both gold and oil to be like their long-run averages and that is exactly what occurred. When the ratio was between 10 and 30, oil returned 5% on average in the following 12 months, and was lower 41% of the time while gold returned 4% and was lower 33% of the time, roughly in line with long-term averages.