Dow Gold Ratio - Long term bearish

In 1980, the Dow/Gold Ratio hit a bottom of close to a 1:1 ratio with the Dow and Gold around the 850 level. Here is a long term chart provided by sharelynx.com which depicts the downtrend with this ratio since ~2000.

The ratio has pierced the green upwards channel to the downside and is currently at a ratio of ~7.6.  Many believe that this ratio will equal the Dow for a ratio of 1:1.  This may happen when (if) Gold goes into a parabolic frenzy with the Dow flat or dropping.  Gold can be stable with the Dow crashing which is also a possible scenario.

A 3 year chart which shows the decline in the ratio:

Some people are looking at this ratio as a signal to exit the Gold market.  I have heard one CEO of a mining company mention that he will start lightening up on his Gold positions when the Dow/Gold ratio is 2;1, then exiting his remaining position in increments all the way to the 1:1 ratio.

He stated that he would purchase undervalued assets like Real Estate at that time.  Sounds like a good plan, especially if you can pull the trigger and execute.  No one really knows what is going to happen with the price of Gold / Silver, especially when the governments around the world seem to make new laws on a whim. 

Gold Dow Ratio

This chart sums up the Gold Silver market since 2001 and where it will be heading going into 2012 and beyond. Most precious metal analysts predict that Gold to Dow ratio reaches 1:1 just as it did in 1980.  The Silver Gold ratio at that time was around 16:1 for a little while.

3 scenarios from where we are today:

• With the debasement of fiat currencies worldwide, the Dow may continue to head higher (With all of those paper dollars) and Gold will out pace it to eventually hit the 1:1 ratio.

• The Dow can remain in a trading range around the 10,000 area and Gold will continue to rise to reach that level for the 1:1 ratio.

• The Dow can decline and Gold will increase to reach the 1:1 ratio. This scenario has the highest probability of happening.  At a minimum, Gold will reach $5000 and the Dow will drop to 5000.

With Gold at $5000 and a 16:1 Gold Silver ratio, Silver will be at  $312 an ounce in US Dollars.  Who knows what $312 will buy at the time...?   

These are two signals that the Gold and Silver markets have reached their zenith and investors will need to make a decision on what to do with their precious metals. In 1980, both Gold and Silver declined rapidly after the peak. Rob McEwen has mentioned that he will be starting to sell Gold when the Dow Gold ratio is 2:1, then take the proceeds and invest in another undervalued asset like land or real estate.

We are a few years away from the above scenario happening, but it's always good to have a clear EXIT STRATEGY on EVERY INVESTMENT that you have. Remember the saying in the stock market: BULLS make money, BEARS make money and PIGS get slaughtered.