Dow/Gold Ratio (plus Dow)
Fascinating chart from David Singer; I am still struggling to decipher just what it means.
The Bar Chart is the ratio of Dow Industrials to Gold; it asks, how much Dow does an ounce of Gold buy? The line on the chart is the Dow.
It makes some sense that there is a parallel between Gold and the Dow, given the impact of inflation and geopolitical risks on both.
The divergence since 2003 -- when interest rates were slashed to generational lows, and the War in Iraq began.
If anyone has another theory or explanation, I am all ears . . .
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The post '03/911 world is also the one when US growth slowed long-term, the world developed 'excess' liquidity for multiple reasons and the level of geo-political risks (especially oil) became clearer. Prior to '03 it looks to me as if gold and the Dow were responding as highly correlated asset classes. Post '03 it looks liquidities, ala Gross, et.al., is driving the Dow up while risks are shifting the relative prices of stocks vs. gold.
If that resonates with anyone then the questions that should be asked are so what and what next ? In other words why are risk premiums so low - did they just get bid away and is risks badly, badly, badly mispriced ? And is so will the re-pricing of risk that should have occurred in sub-prime work it's way thru other assets classes ?
Fascinating chart. Please thank Mr. Singer. Would love to hear his comments and reactions to the risk vs liquidities vs re-pricing issues.
Posted by: dblwyo | Mar 12, 2007 10:14:10 AM
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