Saturday, December 21, 2013

how now dow?

every once in a while i trot out my dow/gold ratio chart to see where the economy has gotten to. here's the image:

this ratio purports to measure the value of the stock market in terms of what is considered to be a stable store of value: gold. economists like this sort of chart because it automatically corrects for inflationary effects. a side-effect is that it also corrects for distortions that flow from central bank monetary policies and political policies that fixed the price of gold (such as existed from FDR to Nixon administrations.) historically, this ratio tends toward a value of 20. in exceptionally bad times the number goes into the single digits, in exceptionally good times the number goes into the 30's and 40's. however, i can only produce a chart of the last 20 years in thinkorswim.

as it stands, the ratio has broken into the teenager range that existed prior to the 2008-9 bubble-burst. my expectations are that the ratio could spend some time in the 13-15 range. the probability is good that we will see multiple tests of the 15 level before breaking through. one might consider a pairs trade to short gold and buy the dow.

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