first majestic silver

Dow Gold Ratio Revisited

August 15, 2013

Gold in relation to the Dow Jones Industrials (DJI) has taken a bit of a beating over the past few months. The DJI/Gold ratio rose from 7.82 as at December 31, 2012 to a close of 12.18 as at June 30, 2013 an increase of almost 56%. Gold fell from $1,674 to close at $1,223 (-27%) while the DJI was rising from 13,104 to 14,909 (+13.8%) during the same period. The DJI/Gold ratio hit its low in August 2011 at a low of 5.81. That was down from the all-time high of 45 set in August 1999. The ratios all-time low was set in January 1980 at 1.06.


                                                                                Charts created using Omega TradeStation 2000i.  Chart data supplied by Dial Data

The prime trigger for the collapse of gold was the unprecedented offer of upwards of 400 to 500 tonnes of gold via the futures markets (paper gold) on April 12, 2013 at or near the open. Prior to that there had been numerous examples of unusually large sell orders since October/November 2012 often in the early hours of the morning in Asia or at or near the open of New York trading. The selling was usually always made into thin trading markets overwhelming bids at the time. The sellers remain unknown. The strategy worked and gold as noted fell 27% in the first half of 2013. Since then gold prices have recovered $111 or 9% but remain down 20% on the year.

Just prior to the April gold collapse Goldman Sachs and Societe Generale issued sell recommendations for gold. It was unusual to say in the least, as Goldman in particular was not known to signal its trading positions in advance. The reasons given for the selling were that there were fears that central banks in Europe were going to sell their gold to cover their huge debt positions; there were fears that the Federal Reserve was going to “taper” its QE program or even end it; and, finally with seeming improvement in the US economy gold was no longer needed as a safe haven as investors moved into the US$ and US Treasuries.

The collapse in gold prices seemed to put to rest the notion that gold was a hedge against rising US debt and the rising US monetary base. US debt has grown roughly $450 billion in the first six months of 2013 to $16.9 trillion while the US monetary base has grown to $3.4 trillion a rise of $760 billion or almost 29% in 2013.

The collapse in gold prices also brought out suggestions that this was manipulation. Given that major financial institutions (banks) have paid huge fines for manipulating LIBOR rates, currency rate settings and energy prices and are currently under investigation for the manipulation of a number of metal prices it would not be surprising that they have also manipulated gold and silver prices as well. The banking institutions have paid large fines (but small in relation to their profits) with no admission of guilt.

All of this has come against the backdrop of strong physical demand for gold in the first half of 2013. The World Gold Council has just released its latest “Gold Demand Trends” for Q2 2013. In order to illustrate the changes in the first half of 2013 vs. 2012 a table is presented below.


Gold Demand/Supply (tonnes)



First Half 2012

First Half 2013


% Change

Total Demand




















Investment – Bar & Coin





Investment – ETFs





Central Banks















Mine Production





Recycled Gold





Source: World Gold Council


What stands out is that while ETFs were down as expected with a disinvestment of 578.7 tonnes in the first half of 2013, it was almost made up for in the increase in demand for Jewellery and bar and coin investment that was 2,040.2 tonnes. Lower prices triggered increased jewellery and investment demand particularly in Asia (India and China) while shaking out primarily western investors in the ETFs.  The other number that stands out is the drop in recycled gold. This shift in focus from west to east is a theme that has been going on for the past few years. Central bank demand slipped but overall remains within the band it has been in now for several quarters. Central bank demand has been positive for 10 consecutive quarters following years of decline.

Overall, the downward trend of the DJI/Gold ratio remains intact. The current downtrend line is near 13.65. The ratio has broken above the 4 year MA and the faster moving 18-month MA has crossed over the 4 year MA. Certainly, the pace of the decline of the DJI/Gold ratio had slowed during the period 2008 to 2012. However, the pattern on the charts of the ratio during that period was not conclusive that it might break out to the upside. Instead, it had the appearance of a forming bearish descending triangle.

Some have compared the rise in the DJI/Gold ratio over the past several months to the big jump in the ratio from 1974 to 1976. After Richard Nixon took the world off the gold standard in August 1971 gold prices rose from $67 to $190 by December 1974 (Note: the official price of gold in August 1971 was $35 but was trading higher in markets). By August 1976, gold prices had fallen to $101.50 and everyone was declaring that gold was dead. Instead, that proved to be its nadir and over the next three years gold soared to $875 by January 1980 until Fed Chairman Paul Volker hiked interest rates to 20% thus killing the reason to hold gold. A chart of that period is below.


Charts created using Omega TradeStation 2000i.  Chart data supplied by Dial Data

July 2013 was a reversal month for the DJI/Gold ratio as the ratio made a new high then closed lower on the month. Thus far, in August the ratio has continued lower. It would probably take at least three consecutive monthly declines to suggest that the ratio is turning once again to the downside. Weekly indicators for the DJI/Gold ratio have turned down although monthly indicators remain in an up mode.

I leave you with one more chart of the DJI/Gold ratio.  This one is interesting as it shows 200 years of the DJI/Gold ratio. Ever since the formation of the Federal Reserve in 1913 and the move to first a partial fiat currency system then to a full fiat currency system in August 1971 the ratio has become considerably more volatile. If the expanding formation remains true to form then the ratio could fall below 1 before it finally bottoms. That event may still be more than a few years away but if correct, the case for holding gold over stocks remains intact despite the recent move higher in the ratio.




Copyright 2013 All Rights Reserved David Chapman


[email protected]

[email protected]

David Chapman regularly writes articles of interest for the investing public. David has over 40 years of experience as an authority on finance and investments via his range of work experience and in-depth market knowledge.

The naturally occurring gold-silver alloy is called electrum.
Top 5 Best Gold IRA Companies

Gold Eagle twitter                Like Gold Eagle on Facebook