Sunday, October 2, 2011

Bull Sign: Dow/Gold Ratio Recovery

Today's exercise on the ThinkDesktop is to create a ratio chart for the dow/gold ratio. Start with a simple chart with no studies. Then in the symbol input field type /YM - /GC. That will bring up a chart that displays the difference between the dow and the gold futures. Now click the Edit Studies button (leftmost button on the chart tool bar at top) and add the study called PairRatio. Select Yes in the reverse box, then click Apply and Ok. We are not interested in the price graph of the /ym-/gc difference so click Style/Settings and uncheck Show Price Subgraph, then click Ok . You should be left with a chart that looks like this:

Dow/Gold Ratio Now - 30Sep2011
 This is the Dow/Gold ratio, a widely watched metric that purports to indicate the health and direction of the economy. Save this chart as a grid so you can refer back to it later. This ratio is literally how much gold it takes, in troy ounces, to buy the dow: 6.6431. Economy watchers like to watch this ratio because it is independent of monetary policy. A high value was set at 43.7 in 1999, 27.9 in 1966 and 18.4 in 1929 (according to Fred's Intelligent Bear Site) and it has gotten down to 1 in 1980, although other low points occured in the 2-4 range)

Most significantly the d/g ratio is lifting off a low of 5.7 after breaking below the 6Mar09 low of 7.1:

Dow/Gold ratio circa: 6Mar09

So we may already have had our double dip and most traders haven't woken up to the fact because it didn't repeat the numerical values in 2009 owing to monetary policy changes.

You might say a stealth double-dip.


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