The Dow’s next big moves …

Larry Edelson

Ever since the March 2009 crash low in the U.S. equity markets, I’ve maintained my view that the Dow Industrials and other broad market indices were entering a new bull market. That forecast has been spot on.

One of the tools I used to come to that conclusion in 2009 was the ratio of the Dow Industrials to the price of gold.

I wrote extensively about it in several issues of my Real Wealth Report. I also reported on it several times in other pieces I wrote. Today I want to update the analysis for you.

First, a refresher. At the peak of the Dow/gold ratio in 1999, the Dow Industrials would have purchased just over 50 ounces of gold. That’s because the Dow was at a high in real, inflation-adjusted terms, while gold was at its bottom at the $255 to $275 level.

During the financial crisis of 2007-2009, as equities plunged and gold rallied (since its bottom in 1999), 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” — at its March 9 low, the Dow had lost more than 87 percent of its entire equity bull market from 1980 to 1999.

Since then, the major averages have vastly outperformed gold, as stocks have moved higher, and gold lower.

As a result, the ratio of the Dow Industrials to gold has widened back out, to about a level of 16.4 today.

Put another way, had you bought the Dow Industrials in 2009 at the bottom and sold gold, you would have made well over 250 percent on your money as the Dow soared and gold plunged.

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

The Dow/gold ratio is not easy to grasp, yet it’s critically important.

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 for understanding the future.

FIRST, the collapse in the Dow to gold ratio was not caused simply by a crash in equity prices. It was also due to a crash in the value of the dollar, as reflected in the soaring value of gold from the year 2000 to 2008.

SECOND, the Dow is still adjusting to how much value the dollar lost between 2000 and 2008.

This adjusting of equities is perfectly normal. All asset classes eventually recalibrate their price levels to the new reality of the purchasing power of the underlying currency, which, in this case, is the dollar.

A simple theoretical exercise here will show you how the Dow will adjust.

For the Dow/gold ratio to climb back to the 50 level — where it was when stocks peaked in 2000 and gold bottomed …

The Dow would have to explode higher to the 58,250 level, assuming gold’s current price of roughly $1,165.

Naturally, the price of gold is not going to remain at $1,165.

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So let’s say gold does indeed fall further now, to say, $1,000 for argument’s sake. Then a 50-to-1 ratio for Dow/gold, with gold at $1,000, would still imply the Dow eventually hitting the 50,000 level.

Naturally, projections like that assume all else remains equal. In other words, the underlying economy, unemployment, international relations, the global economy and a host of other variables.

So those projections are not realistic.

But what is realistic is this: It would not be unusual at all, in fact, it would be perfectly normal if the Dow/gold ratio were to regain half of what it lost since the year 2000 …

And move back to the 25 level.

Then, all we need to do is pop in various prices for gold to get various measurement of how high the Dow can go. Assuming gold does bottom at $1,000 and then begins its next bull market, we can then come up with a grid that looks something like this:

Gold Price Dow/Gold Multiplier Dow Industrials Price
$1,500 25 37,500
$2,000 25 50,000
$2,500 25 62,500
$3,000 25 75,000

Put any number in the first column for gold, and you can come up with any slew of other numbers for the Dow.

It’s certainly not hard to see why the Dow also has huge upside potential going forward and that its downside is limited to mere technical corrections!

Factor in the war cycles and other geo-political forces that are driving capital to the U.S. stock markets …

And you can easily see why I remain very bullish long term on the U.S. stock markets and why my long-term target of Dow 31,000 may actually end up conservative.

Lastly, an important point: As you can tell from this exercise, the monetary system has changed dramatically.

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So much so that it’s also inevitable that at some point in the not-too-distant future, the dollar-based reserve system will have to change.

Even as the dollar now rallies, the system is so broken and so out of date with the rest of the world and the emerging economies and Asia, we will eventually need a new reserve system with a globally neutral reserve currency.

One last note: Although the Dow has now given me a monthly buy signal by closing above 18,500 …

A pullback, possibly a very sharp, drawn-out one, is way overdue. I do NOT recommend loading up on stocks here. Not yet. Also, gold and silver remain in a funk, deeply oversold. There too, it’s not yet time to get aggressive.

We may indeed see gold and silver a tad lower early next year, but they are scraping the bottom now and deeply oversold, ready for a rather big bounce.

Best wishes,

Larry

P.S. Time to Pack Your “Bug-Out Bag” and Run? Or Would You Rather Get Rich? Well, some people have built a little cabin in the woods. They’ve stocked it with food, guns, and ammunition. They call it a “bolt hole.” You know what? It’s not such a bad idea! But it’s not for everyone. I’ve got a better way to protect myself. And you do, too. The answer is to get rich. Rich enough to weather the storm and keep your assets out of danger. The best defense, in other words, is a good offense. And guess what? The K Wave itself will give you the perfect way to do that. Make sure to click here to download my new free report Stock Market Tsunami!

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.

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Comments 41

Dan W. December 7, 2016

Larry, You've had some good calls on the metals/dollar (except for your silver short call at $19...when it went to $50)...but you have also been calling (a couple of years back) for the Dow to have a major correction (I think below 10,000 if I remember correctly). So go easy on tooting your own horn here. Also, your mental exercise assumes a gold price of 1000/oz. If gold fell back to $750 (not saying it will), the multiplier of 25 would give us a Dow of $18,750; below where we are now. Gold at $800 x 25 = 20,000 (almost where we are now).

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Sandor December 7, 2016

Sub $1000 gold into 2017 is now on the table according to your mentor Martin Armstrong.

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Will December 7, 2016

Dear Larry, I enjoy you columns and am a member of two of your newsletters. You give me investment insight that I can trust and don't get elsewhere. I have also started using the Weiss ratings for my 401k investments and subscribed to that service again for which I am very grateful.

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Will December 7, 2016

If gold and silver are oversold at the present level, then how will gold drop to $700 or $450 an oz? If we are going to get rich to weather the storm then the key is timing, and that is the hard part. I prefer to just accumulate as much gold as possible each time gold is down, and avoid the risk of trading in and out. You may make money by trading in and out but you ignor systemic risks that can bring huge and sudden changes that you do not expect; and you could then well give it all back in spades in a hurry. I love waking up in the morning well rested and ready for a new day.

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Paul Flood December 7, 2016

Agree with the overall trending thoughts but that ratio is meaningless. Gold market is too much bigger with different factors affecting value. Anyway, great subscription; please keep it coming; I read it all!!

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Ryan Griswold December 7, 2016

Using gold as the point of reference, you saw how much was dumped on gold futures when Trump was elected. This squashed gold. So your basis is on a bank or Fed or whoever it was that dumped like 3000 tons of futures on the market to control the next bull run? Just curious on your take. I hear crash and deflation and inflation from people that say this old trick is almost over played and will not work for much longer. Thoughts?

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ragnar1 December 7, 2016

the arguement makes no sense! who is going to pay all that money for us stocks?boomers?they're dying and selling what will our paycheck have to be to cover that ? what will our housing costs be?the paychecks won't go up;we have less workers,smaller families who are the buyers ? it's the funny money princoiple, like zimbawe or argentina>

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Andy December 8, 2016

The buyers will be the central banks. Once they have printed and bought all of the debt (bonds) they will move onto the stocks to 'stimulate' the economy. However, the bond and stock assets will be as worthless as the fiat digital or paper they are buying with.

Peter December 7, 2016

All rules are meant to be broken. The ratio of silver to gold used to be 15 to 1. That rule is long gone and probably will never be seen again. So I wouldn't put too much emphasis on the gold/DOW ratio. Also, this commentary does not take into account P/E ratios. Will corporations increase their profits now? Yes, the market can drop at any time but why will it drop? It will drop because of structural global economic problems that are very severe. Yes, we will see very good times in the future but not now. We need tax reform first. The Fair Tax will propel the DOW to new heights.

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carl fedele December 7, 2016

I think your explanation is well done. I look forward to your comments.;

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Paul December 7, 2016

Larry....is now the time to short oil? Thanks... Paul...

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Dick Braatz December 7, 2016

Fascinating. Wonder what the average Dow to gold average has been for say the last 25 years, since 1995. If I inderstand all this, gold should be much lower, about $800. Dent's forecast.

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Scott Hartzler December 7, 2016

the stock market is extremely bullish but a pullback is way overdue. nothing like both sides against the middle.

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$1,000 gold December 7, 2016

edelson is one of the few analyst to see the inverse relationship between gold and stocks. in a nutshell - stocks go up, gold goes down. so, if the dow goes to 30,000, where does that leave gold? it would not surprise me to see the bottom in gold go below $1,000.

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$1,000 gold December 7, 2016

excellent articles by edelson lately on gold, war, and stocks. thank you, larry.

Tony Gault December 7, 2016

You predicted when the Dow is above 18500 at month end, we would be a long term bull market with the Dow soaring to 31,000 with normal correction cycles. Also, you have predicted gold after the current correction will increase to $5000 per ounce. Your explanation of the Dow/Gold ratio seems to be inconsistant with these two predicts. Please explain

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Vincent December 7, 2016

But if gold goes down to 750 the DOW should be at 18750 (is a 25x)(DOW now at 19267) But if gold goes all the way down to 250 lets say by 2020 the Dow should be at 6250 ! anyway this is also a possibility (maybe contrarian)

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Vincent December 7, 2016

anyway , to be clear, i hope not!

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vince December 7, 2016

All of your historical ratios were when interest rates were 'normal'. The current and continuing low interest rate environment is totally clouding the ability to compare today to past times. In the current 'bubble' environment, a ratio of 50 is as you say totally unrealistic. To simply halve it to fit your conjecture of the rise of the DOW is convenient but statistically and historically useless.

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Michael December 7, 2016

No correction in stocks and gold looks beaten. The mantra is be in stocks no matter what happens. This action is not following your comments.

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$1,000 gold December 8, 2016

valuations are getting high, dude. lest we not forget - buy low, sell high.

Rob Lee December 7, 2016

""system is so broken and so out of date with the rest of the world and the emerging economies and Asia, we will eventually need a new reserve system with a globally neutral reserve currency."" How about SDRs?

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Nick December 7, 2016

This is great cycle work Larry. I just wish it could be turned into wealth in Super Cycle Trader as it was intended. The movements have been very large in Stocks, gold, silver and commodities since 2015. Yet, none of us working with your SCT trading service has made profits, all positions value considered. It seems that all your predictions are about 6months off, whether this is due to manipulation (which you do not believe in) or something else none of us are smart enough to figure out, the fact remains, you have not been able to consistently profit from it, except in the Real Wealth service. ( a long term service.) I for one, have been moving my money to that portfolio, especially lately, since the prices are now even more favorable than they were in spring. In Syracuse hoping for SCT boom.. love to hear how we might make up for the losses in 2017.

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Al McNal December 7, 2016

Larry thanks for changing direction as it is warranted by your studies. My studies also indicate many factors which foretell less optimism, a downturn in overbought large caps and a fall in the dollar and interest rates in response to a rise that was too far too fast on a short term basis.

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Al McNal December 7, 2016

There is also an ending diagonal formation which has formed over the last 10 months in the Dow and other large cap indexes which foretells stalling enthusiasm and a impending downturn in the Dow.

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howard December 7, 2016

I have been a member for many years now and as I find you honorable and very knowledgeable I have a few bones to pick. You often take credit for 50-50 forecasts without being precisely clear on what you believe. Instead of standing up and making a clear statement whether right or wrong make a stand on what you believe. Too many times what i hear from you is hindsight of why something happened rather then saying this is what i believe will happen. Rather then stand up and being counted you hide behind how you saved us money but many times it was at the cost of losing out to huge rallies in gold and stocks. If you look at recent events no money has been made at all with the real wealth newsletter and in truth if one followed you accurately would have been in wrong positions at the wrong time. At least if you are wrong please stand accountable and if you predict accurately then take the credit. To always seem to stand in the middle and take credit after the fact does an injustice to what and who you are. I will continue with you to see if at least you listen to the words of myself and others who may see the same thing.

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Steven Pierce December 8, 2016

There is always a logical, convincing reason why the predictions of others do not materialize as they said they would. However, the best reason is that no one knows the future until it arrives.

Dan December 7, 2016

Larry, You have been calling for a pullback on the Dow since January when the Dow was at 15,500. Now approaching 19,500. I invest in SPY's. I missed a ton.

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peter nitzschke December 7, 2016

Larry...you say, that you were "spot on" with your forecast of a new bull market in 2009. Granted, that was a good call, however, at the same time you have been predicting a major correction and warned us , not to invest. Anyone heading your advise on that call, would be out of major gains in the meantime. What's your argument? Peter

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Dora Gerken December 7, 2016

Larry, Yamana Gold is transferring Brio Gold Purchasing Rights to buy Yamana Common Shares. I can also purchase additional shares. I can purchase 20 common shares with my current 321 Yamana shares. What is your opinion?

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Paula December 7, 2016

Now is the time to sit tight and see what the markets have to say. Watch how the economy reacts to the new presidential administration and the swirling rumors.

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Jan.b December 7, 2016

Hi Larry, Your analysis holds good for conditions going back 50 years for the relationship of gold to the dow. However if you were to go back to the 1920-30 economic times, then things were quite different and gold went south with the dow. My long term analysis predicts that we are entering an economic situation not unlike the 1930's which means that the current relationship of gold to dow may be terminal. My Economics degree was in long-term economic cycles.

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John Thumann December 7, 2016

Another scenario ? : The Dow remains at 19300, the multiplier remains 25 and the value of gold decreases to $772 per oz.

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Emil Kosmina December 7, 2016

Hi Larry I will have to read it a number of times so it sinks in and thanks for your info. Regards

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Jim December 7, 2016

Not everyone has $1,000 to take a chance with

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Richard Bosshardt December 7, 2016

Larry, a lot of comment on the Dow going much higher, but then you drop the comment: " a sharp drop correction will come".. !!!! what's the timing ????? Thanks, Richard

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Lea Simenson December 8, 2016

When next year do you think Gold & Silver will rally? Thanks

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Eric December 8, 2016

So ride the bull Hang on if you can. Remember Gold has no intrinsic value, except what people will pay for it. So couple with the long thought that since the 90 s Equities have been overvalued really got to be on top of your game meaning that some speculative attitudes will have to be in play along with the factors that compel you to buy a investment. Larry s projection are relationship valued, liking all the methodology to how the irons in the fire will get hot or what factors will cool them off. Daily media inputs may very well cause some shaky ground. It s like everything whats your appetite for risk and are you a trader or long term investor.

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Nagarajan December 8, 2016

Gold is being confiscated everyday somewhere in india. Gold will be made unattractive for investment in india, it has got no scope. Indians have enough gold to last long for decades . There can be a cap on gold possession say 500 GM per married women.

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Sha-shok December 9, 2016

Larry, You have called oil will drop to$ 25.0 from current price , seems is going up now, all the oil companies are rallying , do you still think oil will touch 25.0 ? Thank you.

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joan December 11, 2016

Hey Larry the crude price is going up up and away, not heading down into Jan as you expected. . Have the recent OPEC and non OPEC agreements changed your mind?

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