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If you think the stock market is rallying, I have news

By September 24, 2010 February 27th, 2017 7 Comments

The stock market is having an up week. Or is it?  Normalized for purchasing power, it is flat in the short-term and down sharply in the intermediate term. The Dow-Gold ratio provides a truer indicator of the health of the stock market.  And that indicator is flashing red.   Take a look.

Long-term Dow-Gold is in a secular bear market
Denominated in gold, the stock market has been in a SUSTAINED bear market since 2000. Surprised?  Take a look at the chart below and you will see that the DJIA never rallied meaningfully since the 2001 crash.  The ratio has fallen from a high of 43.7 to currently about 8.


So what about this week?
The DJIA popped above 10,800 today. Feels like a rally, right? Wrong.   Normalized for purchasing power, the DJIA is at best holding parity.   The trend to a Dow-Gold of as low as 1 or 2 remains completely in tact as the Dow-Gold ratio hugs the 50-day moving average as you can see below.  If the 50-day MA crosses the 200-day MA, I would reconsider. However until then, this looks like a secular bear market with more downside than upside of owning stocks.

Hedge Yourself
On Monday, 9/27, I would expect a volatile day. Why? Monday is expiration day for options, notably options on precious metals which have moved decisively higher in the last month.  Financial institutions that are materially on the short side of the trade will either have to engineer a pullback by Monday close of trading or settle a large tab. Stay tuned.

For an indicator of whether fiat currencies or real assets are winning, I would use silver bullion price as an indicator. It is harder to manipulate because it is an industrial metal and not substantially held in physical form by any central bank.  And earlier this week, it just punched through to a 10 year high.


To see a higher number, you have to go all the way to 1980 when the Hunt Brothers attempted to corner the silver market.

At the Epik DevCon last week, I devoted an entire section to Domain Names as Asset Class in my opening presentation.  The slides for that talk appear on Slideshow.com. You can view them here.

Join the discussion 7 Comments

  • I have followed the pawn sector for several years and am amazed at how long gold has continued to push higher. This has been great for pawn shop earnings as they can scrap unsold jewelry with ease but since the stock market remains depressed, earnings multiples have just compressed while earnings push forward. Of course at some point gold prices stagnant or decline and then become a drag on earnings.

  • Rob Monster says:

    @Leonard – Pawn is a side show here. It is interesting from one perspective and that is that massive amounts of gold is owned in paper form. That gold is as much as 100X levered relative to the physical form. As more and more owners demand delivery, massive amounts of physical gold has to be secured. This is one reason why you see such an active effort by retail buyers. There is not enough physical mining capacity to satisfy short-term demand for physical gold. And therein lies the short-squeeze.

  • martin says:

    In short: the US dollar is weak.

    • Rob Monster says:

      @Martin – Before you get to excited, be aware that gold in Euros is also at record levels. Central banks are debasing currencies across the board in a practice that has come to be called “competitive devaluation”, a.k.a. “the race to the bottom”.

      Also, keep in mind that the Dow-Gold ratio does not actually distinguish between paper/virtual gold and real/physical gold. The premium between paper and physical metal is another indicator to watch closely in the coming months.

  • Mike says:

    very correct Rob on your last comment. people tend to want to own gold as a hedge, accept that if you own it on paper, you are what’s considered an unsecured creditor, meaning that if the company purporting to own/back your gold goes belly up you’ll get virtually nothing as all secured creditors (holder’s of physically allocated gold) must be paid off first. if something like this were to ever happen some people will be in for a shock as the rug is pulled out from under them.

  • TJ says:

    GGN is one alternative for metal players, without complications, have monthly income. They pay a monthly dividend (distribution is the official term). Nice stream of monthly income. They own gold, silver, natural resource company stocks & sell covered calls on the positions.

    For everyone else it’s easy to buy the premiere gold companies and sell covered calls for monthly income. Just buy Larry McMillians classic book (maybe 30-years old now, with updates) “Options for the Strategic Investor”, and a couple others to get the knowledge & an interactivebrokers.com account.

    There are royalty based gold plays to like Royal Gold, who are like a hedge fund and take a position in a company for a percentage of profits – but they aren’t levered with the fixed cost of machinery and personnel.

    It’s usually time to short gold when it’s on the front page of every Smart Money mass media site, CNBC lead story. Until housing prices stop going down, job losses and net incomes stop going down – then in the words of Elliot Wave “we are in a deflationary environment” followed by inflation when things do turn.

    Closed end fund: symbol: GGN: close to a 10% dividend distribution
    Net Asset Value price from prior day’s close: XGGNX
    https://www.cefconnect.com/Details/Summary.aspx?ticker=GGN

    Gold in Canadian Vaults:
    https://www.cefconnect.com/Details/Summary.aspx?ticker=GTU

    Silver & Gold in Canada Vaults:
    https://www.cefconnect.com/Details/Summary.aspx?ticker=CEF

  • “the race to the bottom” = “who can show a lack of integrity the fastest?” or “who can impoverish their citizenry the fastest?”

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