Why the Dow Industrials will eventually see 31,000+

Larry Edelson

Ever since the March 2009 crash low, I’ve maintained my view that the Dow Industrials and broad U.S. equity markets were entering a new bull market — and that the Dow Industrials would eventually hit 31,000+.

One of the major tools I used to come to that conclusion back then was the ratio of the Dow Industrials to the price of gold.

I wrote extensively about it in my July 2008 issue of Real Wealth Report — even before the crash of 2009, which I also forecast — and several times since. Today I want to update that analysis for you.

First some background. At the peak of the ratio of the Dow Industrials to gold in the year 2000, the Dow Industrials would have purchased just over 51 ounces of gold.

During the financial crisis of 2007-09, as equities plunged and gold had rallied (since its bottom in 2000) the ratio collapsed all the way down to the 6 to 7 level.

In other words, in terms of gold — what I like to call “honest money” — the Dow Industrials had lost more than 87% of the entire equity bull market from 1980 to 1999.



Click image for larger view

In my Real Wealth Report issue of July 2008, I called for the bottom in the ratio to come in around the 5 to 6 level.

It bottomed slightly above that level, then retested it with a slightly lower low in September 2011.

Since then, stocks have vastly outperformed gold. Here’s the chart I published back then, but with updated comments and analysis.

As a result, the ratio of the Dow Industrials to gold started widening back out, and also broke out of a resistance level, which you can also see on the chart.

Now trading at about the 14.5 to 1 level, the Dow/gold ratio is set to widen much further.

So what does this all mean? And what does it hold for the future for the Dow? For gold?

I’ll answer those questions now. But I urge you to put your thinking cap on, because the analysis of the Dow/gold ratio is not easy to grasp, yet it’s critically important to understanding the future.

FIRST, the collapse in the Dow-to-gold ratio during the financial crisis was not caused simply by a crash in equity prices. It was also due to a crash in the value of the dollar during that time period, as reflected in the soaring value of gold from the year 2000 on.

SECOND, the breakout in the ratio means that the Dow is now beginning to adjust its value to its ratio to “honest money” — as measured by its value versus gold.

This adjusting of equities is perfectly normal and one of the main reasons I am very bullish equities over the next several years (after a normal but sharp pullback occurs).

A simple exercise here will show you why. For the Dow/gold ratio to climb back to the 18 to 20 level resistance level you see on my chart, the Dow would have to explode higher to the 23,480 level, assuming gold’s current price of roughly $1,174.

Naturally, the price of gold is not going to remain at $1,174. So let’s run a simple matrix of the price of gold and assume the Dow eventually gets back to a ratio of 20 to 1.

Let’s say, for instance, that gold eventually falls to $900. At 20 to 1, that would put the Dow around 18,000.

Or take a super-extreme, super bearish price for gold at say, $800. A 20:1 ratio puts the Dow at 16,000.

Clearly, there’s not a lot of downside to the Dow even if gold were to plunge all the way back to $800 (which is highly unlikely).

Now, let’s look at the flip side: What would happen to the Dow Industrials if gold were to move $1,500? Then to reach a 20 to 1 ratio, the Dow would have to explode to 30,000.

And at $2,000 gold, a 20:1 ratio would see the Dow eventually hit 40,000.

Do this exercise for any price level of gold you wish, and you will see that the downside risk in the Dow is minimal and the longer-term upside potential is enormous. Ditto for gold.

That’s not to say there won’t be pullbacks in the Dow. There will be. We are in the beginning throes of one now. One which should be avoided, owning as few stocks as possible.

But given the breakout from the bottom of the Dow/gold ratio in September 2011 … and the normal tendency for all markets, no matter what they are, to retrace good portions of what they have lost …

I believe it’s a very safe assumption to make that the Dow/gold ratio will continue to climb. And that means — longer-term — much higher prices to come for the Dow, and U.S. equity markets in general.

As for gold and silver right now, the bounce you’ve seen is nothing more than a dead cat bounce. The precious metals, and commodities in general, have NOT bottomed.

But the bottoming process should soon begin.

As for the Dow Industrials right now, here too, the bounce you’ve seen is nothing more than a dead cat bounce. Stocks will head lower in the shorter-term — before blasting off again to the upside.

But once the equity markets and gold do indeed bottom — both will be off to the races on the upside, in rip-roaring new bull markets where both equities and gold will soar, together.

This analysis also shows you why it’s so very important that you think out of the box. Most analysts will say I’m nuts to say gold and equities will eventually soar together.

But it’s not nuts. And in fact, it has happened before, many times, the most important of which was between 1932 and 1937, when gold and the Dow both soared, together, in the middle of the Great Depression.

Best wishes,

Larry

Larry Edelson, one of the world’s foremost experts on gold and precious metals, is the editor of Real Wealth Report and Supercycle Trader. Larry has called the ups and downs in the gold market time and again. As a result, he is often called upon by the media for his investing views. Larry has been featured on Bloomberg, Reuters and CNBC as well as The New York Times and New York Sun.

Comments 40

Jade October 21, 2015

Larry, You say the Dow will go to $30,000 like 1932 to 1937. You could say the rally in the Dow from 2009 to 2015 is like 1932 to 1937 Dow rally. Jade

peter October 21, 2015

Yes well said Jade,. and we missed it,.(RIP RWR)

Will October 21, 2015

What bothers me about this analysis is that there is no presentation to justify that the past ratios used to return to can be used to project the future. Government inflicted distortions are not just a recent thing, and are so complicated that I do not think that you can ever get this right. Granted, recent government inflicted distortions are perhaps more extreme than in the past, but that does not justify ignoring them for the past.

BB October 21, 2015

Larry correctly called the DOW bottom in 2008 ... but missed the entry point back into the market. He kept subscribers in cash and missed out on the great bull run. We've been waiting for a pullback for YEARS ! I don't believe Larry uses any capital flow analysis among his many cycle charts.

$1,000 gold October 21, 2015

the dow doubled from 8,000 to 16,000 in about 5 years. so to go from 16,000 to 31,000 in this secular bull is not a stretch. most likely, the dow will go even higher.

peter October 21, 2015

Of course the dow will go higher,. what, its the end of the world already or somethiing? Point is, what is your time frame buddy?? Larry predicted gold 500-8500 yes true it will,. of course it will EVENTUALLY. but WHAT is the time frame plz?? gold at $1000??,. dream on Larry Lover,.

$1,000 gold October 21, 2015

nothing has changed. does not appear to be any changes in sight for some time to come. more upside for stocks, and more downside for gold. that's all i need to know. no way i'd try and time it.

goldforever October 21, 2015

Larry is wrong because Dow to gold ratio will have to be 1:1 first, which hasn't happened yet. And then the drop of gold price after the peak will cause Dow to gold ratio to 20:1. It's not the gold price reaches $2000 or $5000 and then times 20.

$1,000 gold October 21, 2015

gold can't even break out of the upper side of its downward channel during a correction. i've been waiting a couple years to cover my gold shorts, but gold still looks like toast.

peter October 21, 2015

You think? Try looking beyond the charts,. Times are changing my friend,.

rob October 21, 2015

Why cover your shorts if you are SOOOO sure? Huh>>?

$1,000 gold October 21, 2015

after two years of being short, i thought i'd have a reason by now. that's a long time to short gold. not even this correction is a reason. stocks go up, gold goes down. nothing has changed yet. might as well stay short gold.

John A October 21, 2015

Big whoop. You've been short gold the last two years. Gold is barely down. Why so proud? You could have made more money in bank preferred stocks, LOL. What a waste of time.

$1,000 gold October 21, 2015

i agree john a. gold's bear is less impressive than i expected. i would not waste my time with it if i had it to do over again. but, it ain't over yet. maybe the best is yet to come.

$1,000 gold October 21, 2015

the charts tell the whole story. it my first choice.

$1,000 gold October 21, 2015

i'm underwater on two gold shorts, JDST and DUST. these should be the inverse of the GDX, which is following gold down. contrary to what they are intended to do, these to leveraged funds are going down when they should go up. i did everything right, but these funds don't always work right. they appear to be are flawed instruments. they're also expensive. very frustrating to short gold miners with these things and then watch them go down.

$1,000 gold October 21, 2015

i'm not so sure, rob. i've always got one finger on the sell button.

$1,000 gold October 21, 2015

if gold can't muster a decent rally now, of all times, during a correction, what will happen when the fed raises rates? its coming. we all know it. gold is toast.

$1,000 gold October 21, 2015

it's only money. i can always make more. how about you?

Tim October 21, 2015

The problem with this analysis is Larry is not including data from 1915 to 2000. The low in the ratio was 1979/1980 at 1.8. Over the last 100 years the Dow/Gold ratio has been under 5 for 50 years, or half the time. With all of the fiat currency, larger poplulations, and scarcity of Gold, one can argue that it is more likely that this ratio would trade towards the bottom of the range. The 1932-1937 ratio was approximately 3. I like Larry's passion, but I believe the ratio is likely to head down toward the lower end of the range over the next 5 years with Dow 12,000 and Gold at 2,000, or a multiple of 6

Puter October 21, 2015

Two reasons why I don't buy this theory especially when comparing the gains against Gold. 1. Everyone knows that the USG openly allows gold manipulation so as to preserve the value of the dollar. 2. Even with this manipulation, gold is closer $1,200 - which when adjusted to the unusually high Dollar value against other major currencies (because of global turmoil), the actual value of gold can be considered much higher. For example, the USD is 30% higher than the CDN$. Until fairly recently it was near par. The Canadian currency came down because oil came down due to recessionary conditions faced world wide. On the other hand, the US currency went up because it is a Reserve Currency and people all over the Western world feeling the heat of recession, feel that their capital would be safer in US treasuries (an incorrect assumption in my humble view). If one purchased gold in other currencies and its value is measured against a basket of most used currencies, Gold prices have actually risen substantially higher than where it currently sits. In other words, anything measured purely in USD provides a distorted picture. I would further add that the DOW could well move to 50,000 (not 30,000 as Larry suggests) if you consider loss of purchasing power of the Dollar in the next few years. This will likely happen in due course when foreign governments move away from use of the USD and the US losses its status as a primary and sole Reserve Currency.

rob October 21, 2015

Move over Larry,.

Robert P October 21, 2015

This earnings season started out awful!! Companies were missing estimates and, if they had any visibility into the future, the view was not pretty!! BUT, the markets were still going up, and only the companies that missed were being taken to the woodshed. Now, suddenly, it's like a whole different world! Companies reporting are meeting or beating their estimates and have much better forward guidance! ...seems VERY suspect..... Is that books I smell cooking....??

rob October 21, 2015

A different world or the same world with a spin?? Company's have been laying off staff and cutting costs like there's no tomorrow since the crash,. The only problem with that philosophy is that there is a tomorrow!,. Debt is still going up even with the company cutbacks!,. How long before it filters down to bottom line? From a consumer point of view (because 'stuff' is getting cheaper) Why buy now?,. Yes pile into dow and get the momentum started,. just what is wanted/needed/engineered,. personally i don't believe the hype,. but at the end of the day i guess it will be the counter trade that wins,,. dow 7500 within 2 years anyone? ($1000 gold)??

rob October 21, 2015

($1000 gold) - Hey bud,. comment appreciated!,.

jrj90620 October 21, 2015

Since gold and stocks are priced in Dollars,of course they both will appreciate,since there is a 100% chance the Dollar will decline in the future.Since the Dollar's decline seems to be tied to govt's deficit,I'm thinking that decline should accelerate,when the Fed has to create $trillions more to bail out govt and all other debtors,next recession.

UDO October 21, 2015

Where is Larry's : DOW to 13,9327 by Oct. 21 2015 .............never mind DOW to 31,000

Bobby October 21, 2015

You are correct Larry's computer which crunches 10 gazillion data points per second showed this week to be the bottom. If the DOW continues he'll just say it's a cycle inversion instead of admitting he was wrong again. And keep investors on the sideline for 2 years waiting for that 14K LOL!

Will October 21, 2015

Larry, your biggest problem seems to be that you try too hard. We are not an easy lot to impress, so relax and don't wear yourself out trying to pat yourself on the back too much. Better to feed us facts rather than conjectures; and let us draw the wrong conclusions. The hardest part that we can use help with is to: Get the facts man, get the facts. You can feed me facts all day long, but please let me make the wrong conjectures. Better someone straighten me out if I make a wrong comment; my comments are made free, without charge.

Bill October 21, 2015

Larry, A better analysis is the Long Depression of 1873 to 1896 not the Great Depression. You are comparing against the wrong backdrop. Also the Great Depression brought stocks down 90% not 60% like during the Great Recession of 2008. Therefore, using your own VERY basic logic the DOW is over valued. The Great Depression of 1929 took 25 years or until 1954 to break back to even. Even if I agree with your thesis, your math is wrong.

Jay October 21, 2015

Larry, i have been following your every newsletter and update. I have lost complete confidence in your theories. You could not anticipate the stockmarket decline of 24th August and rather you have been sending newsletters claiming that the economic calamity of october 2015 would start from 7th October and stocks would bottom our along with gold on 21st October 2015. I guess you need to recheck your calculations because the markets are behaving exactly the opposite of what you have been predicting, making most people following your advise look like fools and losing a lot of opportunities Jay

peter October 21, 2015

Ever since the March 2009 crash low, I’ve maintained my view that the Dow Industrials and broad U.S. equity markets were entering a new bull market — and that the Dow Industrials would eventually hit 31,000+. SO WHY DID YOU TELL EVERYONE TO TELL EVERYONE TO STAY OUT THE MARKET? EVERYONE WHO FOLLOWED YOUR RECOMMENDATIONS WOULD HAVE TOTALLY MISSED THE 5 YEAR BULL MARKET,. THINK ON LARRY LOVERS,. ""even before the crash of 2009, which I also forecast — "" AS AN UNFORTUNATE RWR MEMBER AT TIME,. I CAN TELL YOU THIS STATEMENT IS BLATANTLY UNTRUE,. PLEASE,. REPUBLISH LARRY,. I COULD WITH ANOTHER LAUGH,. So tell us Larry,. when was it that you recommended buy Silver Wheaton Corp (SLW)?,. Sruely not on the duoble top?,. @MoneyAndMarkets admin (Free speech n all that,.) Please dont remove my posts,.

Frank October 21, 2015

I remember Larry told his subscribers to short the double bottom in gold in 2013 - which was wrong! Then he said he was 99.999999995% sure the bottom was in after the power rally and told subscribers to buy Iamgold - wrong again! Horrible moves like that is enough to wipe someone out. And there as simple a technical analysis as it gets. But hey he advertises himself as calling all the tops and bottoms in gold since the 70's - as he knows no one can verify that. So whose next on the edelson conveyor belt ready to chop up their portfolio.

peter October 21, 2015

Nice one Frank,. Hey Larry,. There's a really good fortune teller at the end of Black Pool pier,.

peter October 21, 2015

here we do again,. Anyone remember gold to 5000 - 8500,. What happened to that one, Hey Larry??,.

peter October 21, 2015

SPEND TOO MUCH TIME LOOKING IN THE REAR VIEW MIRROR AND YOU WILL CRASH,. Past performance is no guarantee of future performance. If you are in any doubt you should consult a financial adviser.

rob October 21, 2015

And if you don't believe its all going crazy in the world, think on this,. our UK electricity company (EDF) is German owned,. and we're being advised by a German company (EDF) to subscribe to our nuclear power plants being owned by the Chinese,. You couldn't make it up if you tried,.

rob October 21, 2015

WOW,. how many negative posts today? Where are all the positive Admin posts for balance?? Just a matter of time before they disable to option to post again!,. Come be nice people,. i look forward to my weekly Larry bashing,.

$1,000 gold October 21, 2015

there's many larry bashers but it appears to be only one bad apple using different monikers. bdf, heide, manny, were, come and go at the same time and give support to each other. bash larry all you want, i don't care. but you're not fooling anybody.

rob October 22, 2015

LOL,. are you Larry??