first majestic silver

The Dow in Silver Ounces: Stocks Versus Silver

January 29, 2003

For several years I have been harping about the Dow in Gold Dollars (DiG$). Why? Because valuing stocks in terms of gold gives us a superbly reliable indicator of the trends in both stocks and gold. When we spot extreme highs or lows in the DiG$, it tells us that we can safely switch from one to the other and ride a trend for a long time.

DOW IN GOLD DOLLARS

The DiG$ is simply the amount of gold, expressed in statutory "dollars of gold"1, needed to buy the entire Dow Jones Industrial Average. (A gold dollar equals about 1/20 troy ounce.) For the past 100+ years the DiG$ has ranged from a value of G$20.86 (equals 1.01 troy ounce of gold) at bottoms to G$925.88 (equals 44.79 ounces) at the extreme top in 1999. The DiG$ also gives us one unchanging measure of the Dow back over that century. Look at these numbers

Bottom: August 7, 1896, G$20.86 (1.01 troy ounce)
Top: August 30, 1929, G$380.33 (18.40 troy ounce)
Bottom: July 8, 1932, G$41.63 (2.01 troy ounce)
Top: February 9, 1966, G$587.71 (28.43 troy ounce)
Bottom: January 21, 1980, G$21.22 (1.03 troy ounce)
Top: August 25, 1999, G$925.88 (44.79 troy ounce)

The latest reading is G$456.50 (22.083 ounces on 1/24/03). As Steve Saville noted in an excellent article last June,2 it takes the Dow/gold ratio a very long time to recover from major peaks. The DiG$ did not exceed its 1929 peak until 1959, and its 1966 peak until 1998. You can therefore look for the DiG$ to exceed its 1999 peak some time around 2029.

Although the DiG$ tops in the last century have been rising, the bottoms have stayed flat at 1.01 troy ounce, 2.01 troy ounce, and 1.01 troy ounce. The mean is 5 ounces, so just a reversion to the mean takes the Dow down another 17 ounces.

THE TREND IS YOUR FRIEND

Once the trend has turned, it takes quite a while to change directions. When we can identify those turns, then, the DiG$ offers us quite a profitable ride. It tells us when to swap stocks for gold, or gold for stocks.

How profitable? Look at the chart, Stocks versus Gold, 8/25/99 - 1/24/03,3. If you had swapped stocks for gold on 8/25/99 when the Dow stood at 11,326.04 (when everyone would have called you a lunatic), you would have a 45.5% profit in the gold, and have avoided losing 28.2% in the Dow. In total, by following the DiG$ and swapping out of stocks and into gold at its signal, you would be 73.7% ahead of simply holding stocks.

THE DOW IN SILVER OUNCES

If the Dow in Gold Dollars is so helpful, what about measuring the Dow in silver? Will that give us any clue when we should dump stocks for silver?

Here are past peaks and valleys:
Bottom: Aug. 7, 1896, 30 oz.
Top: Oct. 22, 1915, 196 oz.
Bottom: Feb. 27, 1920, 70 oz.
Top: May 30, 1930, 738 oz.
Bottom: Apr. 26, 1935, 135 oz.
Top: Nov. 24, 1961, 802 oz.
Bottom: January 18, 1980, 18 oz.
Top: June 7, 2001, 2,566.04 oz.

On 1/24/03 with silver at $4.875 and the Dow at 8,131.02, it took 1,667.9 ounces of silver to buy the Dow.

Over the past century silver shows a pattern much like gold's, with three troughs (1896, 1935, and 1980) and three peaks (1930, 1961, and 2001). Silver also repeats but exaggerates gold's peculiar formation: Higher highs and lower lows. In gold's case that is lows at 1.01 oz. (1896), 2.01 oz. (1932), and 1.03 oz. (1980), and highs at 18.40 oz. (1929), 28.43 oz. (1966), and 44.79 oz. (1999).

Gold's peaks increased 2.44 times from 1929 to 1999, silver's 3.48 times from 1930 to 2001. There's more. During the 1970s precious metals bull market, both gold and silver climaxed in 1980 by piercing the very long term trend line to make horrific new lows.

NO RIDDLE: IT'S THE INFLATION

Both the DiG$ and the DiSoz chart show huge growth in the Dow's value. Unquestionably much of that growth shows not an increase in the value of stocks, but a decrease in the US dollar's value. The inflation did it. The Dow's periodic collapses reflect periods when the overvalued paper dollar collapses against the monetary metals, taking stocks with it. It also mirrors the adjustment of gold's value against silver.

AND NOW?

Where does that leave us now? In June, 2001 silver reached its lowest value against stocks ever. It took 2,566.04 troy ounces to buy the Dow. See charts, Dow in Silver, 1998-2002 and Dow in Silver, 7/01 - now. Since then the DiSoz has dropped in a pattern much like the DiG$. However, the DiSoz has not yet broken through the uptrend line from 1896, although it doesn't have far to go - about 1,500 ounces will do it. That breakdown would confirm that the DiSoz has indeed topped, although from where I stand that looks like shooting fish in a quart jar with a .50 calibre machine gun.

Once the DiSoz does break that long term resistance, it should move very rapidly. If it corrected only 50% of the 1980 - 2001 move, the DiSoz would drop to 1,292 oz. If it corrects 75% of that move, it would fall to 655 ounces. If it corrects 95%, it would take only 145 ounces of silver to buy the whole Dow.

But these targets are premature. What is the Big Picture? Stocks have turned down against silver, and for a long time silver will keep gaining value against stocks.

AN ANSWER

Finally, here's an answer for people who bought silver a year ago and are miffed because it only promised higher prices without delivering. Look at the chart, Stocks versus Silver, June 7, 2001 - January 24, 2003. During that time silver has posted a meagre 12.8% gain, while the Dow has dropped 26.7%. So, I will step up to the line and admit that your silver has certainly not set the world on fire yet. But if you had sold your Dow stocks in June 2001 and put the proceeds into silver, you would be 39.5% better off today. If you had sold your Nasdaq 100 stocks for silver, you'd be 62.1% better off.

Where I come from, they call that "easy money." -- Franklin Sanders

For over 20 years Franklin Sanders has dealt in physical gold and silver. He edits a monthly newsletter, The Moneychanger. Visit his website www.the-moneychanger.com . and download a free Gold, Silver, & Platinum Portfolio Calculator. It calculates acquisition cost, current market value, average unit value, and average cost per ounce for gold, silver, and platinum. With the portfolio calculator you will also receive free daily updates for precious metals spot prices and bullion coin and bar prices.


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