Gold to Dow Ratio, an open window to ...

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Adam Brochter speaks about the Gold to Dow ratio (GDR). His blog and approach revolves around the idea that the GDR tends to unity on the long run.  If you are not familiar with the GDR, start with this link for background information.

In Brochter's opinion the GDR is a good indicator of the value of the dollar and, as he mentions, allows to pin point inflationist and deflationist periods. He also advocates for people to get in charge of their own retirement plan by balancing their portfolio between Gold and stocks by basing his analysis on charting the GDR.

Brochter forecasts the Gold to Dow Ratio to increase over the next years from a value close to 0.1 to a parity value. He recommends therefore to sell stocks today, buy gold, hold 5 years and buy stock again.

However Brochter warns also against the current situation of the Gold bull market that will suffer corrections the coming years.

"When one thinks in terms of Gold versus Dow, the inflation versus deflation debate becomes much less meaningful in a practical sense. We have reached the stage where Gold is doing well because of loss of confidence in Wall Street and government policies. This loss of confidence, which will reach critical mass during the next leg down in the stock market, is what will continue to fuel the Gold bull market."

Basically two things can happend from four different reasons: GDR increases or stays low.
On one hand, if the GDR increases it can be because, ceteris paribus, the value of Gold increases, or that the Dow  value decreases. On the other hand the GDR could stay low which means that the Gold and the Dow changes in the same proportion. But is the Dow or the Gold good indicators of the Economy of the U.S?
Is the Dow a legitimate proxy for the capital market? Is gold a good proxy for the value of money? What is GDR telling us about? Doesn't it also tells the story about gross domestic product growth ? What are the consequences of a low GDR?


PS:  Some Critics about the Dow:

"The Dow is criticized for being a price-weighted average, which gives higher-priced stocks more influence over the average than their lower-priced counterparts, but takes no account of the relative industry size or market capitalization of the components. For example, a $1 increase in a lower-priced stock can be negated by a $1 decrease in a much higher-priced stock, even though the lower-priced stock experienced a larger percentage change. In addition, a $1 move in the smallest component of the Dow has the same effect as a $1 move in the largest component of the average. As of September 2009, IBM and Chevron are among the highest priced stocks in the average and therefore have the greatest influence on it. Alternatively, Alcoa and Pfizer are among the lowest priced stocks in the average and have the least amount of sway in the price movement. Many critics of the Dow recommend the float-adjusted market-value weighted S&P 500 or the Wilshire 5000, the latter of which includes all U.S. equity securities, as better indicators of the U.S. stock market."

The most expensive market?

A brief look at the Operating Earning / Price ratio  (the data can be dowloaded here SP500 Report) let me astonished of how high the market is valued.
Here is a graph to illustrate my point.

Not only the operating earnings are low but the price of SP500 has been rising along with optimistic forecast about economy recovery. Alarmist and deflationists anticipates a drop in the SP500 value in the coming weeks or months that will revert the SP500 value to its 12 month average mean, but it may not happen ...or may be it will. The question is, can the investors do better than a random walk?

Gold spicked, Oil Increased, Stocks climbed and the Dollar slumped

Gold reached the value of $1,045 an ounce, which is in line with the fact that the value of the dollar decreased and that price of stocks spiked. Analysts believe that Australia increase in interest rates explains the weakness of the dollar. But, is it the reason? Is it the only reason?

The loss of value of the dollar points towards an inflationary area that may start this quarter. But is it true? Is the socioeconomic environment ready for an inflationary and growth period? Are we not looking at indicators of a deflationary period?

I engage my reader to think about inflation and deflation, and invite him to read some authors - Prechter, Schiff, Chandler, Holmes-  that have taken a clear position about inflation or deflation, and to understand their arguments.

Ghandi's Birthday - India the Emerging Giant

Today it was Mohandas Karamchand Gandhi Birthday, a man of great importance, integrity and who had reached a spiritual understanding of mankind that made him a leader for India during the Indian independence.

For me, it was also the opportunity to research and read about Indian Economy. I went through the reading of India: the Emerging giant. I am really impressed by the growth and the governance of India in terms of its economy and the measures taken in Education, Agriculture modernization. However, I believe India still has a big challenge ahead in terms of transportation and water management.

I welcome my reader who would like to share its thoughts with me to do so.

Meanwhile, have a great day of non-violence!