When trying to asses gold prices, it’s critical for investors to pay close attention to the Dow-to-gold ratio. At its core, the ratio says how many ounces of gold it would take to buy one share of the Dow Jones Industrial Average. It’s a powerful ratio when valuing gold prices and it isn’t talked about much in the mainstream.
This article is an edited ([ ]) and revised (…) version of the original written by Moe Zulfiqar to ensure a faster & easier read. It may be re-posted as long as it includes a hyperlink back to this revised version to avoid copyright infringement.
Currently, an ounce of gold costs around $1,300 and the Dow Jones stands at around 23,000. With this, the Dow-to-gold ratio stands at around 17.6. As said earlier, it is used to predict where gold prices. You can also see the long-term chart of this ratio below:
Chart Courtesy of StockCharts.com
What Does the Dow-To-Gold Ratio Say About Gold Prices?
Looking at the long-term averages, the Dow-to-gold ratio says there could be a massive move to the upside in gold prices.
The long-term average of the Dow-to-gold ratio since the 1970s is around 13.06. If we assume this ratio comes back to its historical average, and assuming the Dow Jones Industrial Average stays at the current level, then gold prices would have to increase to around $1,750–roughly 34% above where they currently stand. Mind you, this ratio was around 13.0 not too long ago, so it’s not out of the question for it to get there again.
What makes things little bit more interesting is that in 1980, the Dow-to-gold ratio came its closest to 1:1, meaning one ounce of gold was nearly equal to one share of the Dow. If that happens again, gold prices would have to be immensely higher. Even if we assume the Dow Jones drops by a half, gold would have to jump to over $11,000 an ounce.
Realistic Gold Price Targets and Where Investors May Want To Look
…For gold prices to hit $11,000 an ounce, a lot will have to happen. I don’t think it’s possible anytime soon. As I see it, it’s not a realistic target unless there’s a massive shift in the paradigm, be it a major economic crisis, world war, or outright collapse of fiat money. However, a $1,750 gold price could happen. We have seen that price before, and it’s not very difficult for markets to digest; it’s just $450.00 higher from where it currently sits and, as said earlier, it’s just 34% above the current price…A 34% increase in gold prices could cause some gold mining stocks to double or triple, however. That’s where the big rewards could be.
Over the past few weeks, gold and gold mining shares have been getting punished by investors. We are hearing a lot of noise that suggests the yellow precious metal and mining shares aren’t worth holding but…I believe they are presenting a great opportunity that could generate massive returns for investors over the long-term.
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