Wednesday, December 2, 2009

Gold $1200: Is It Too Late To Buy?

No!  NOT EVEN CLOSE!!   But that DOESN'T mean that the price of Gold won't be subject to sharp downward moves from time to time.

Now, I don't pretend to KNOW, with any degree of certainty, what level the "yellow metal" will ultimately reach, but we CAN review history to provide some guideposts.

One involves the ratio produced when the Dow Jones Industrial Average is divided by the price of Gold. Let's call it the DGR (Dow-Gold Ratio).  Yesterday's ratio was 8.725 (10,471 divided by 1200). When the Dow is HIGH, while GOLD is LOW on a relative basis, this results in a HIGH ratio. Therefore, it's A LOW ratio that indicates that Gold is relatively expensive to stocks. 

The DGR has bottomed at about 2.5 during the Great Depression and in 1900.  However, the ratio fell to as low as 1 in 1980!  At that time, Gold was in the terminal phase of a genuine mania.  My belief is that history is in the process of repeating itself.  Therefore, based on yesterday's Dow close of 10,471 a top for Gold could range from as low as $4,000 to $10,471!  Of course, the market may decline or rise, so these are moving targets and certainly NOT guaranteed by any means.

Another approach would be to "inflation adjust" the last mania peak of $850 for Gold, which occurred in 1980.  Using the calculations provided by the Bureau of Labor and Statistics, this prior peak would be equivalent to about $2,400 today.  However, as discussed in prior blogs, the methodology for calculating the rate of inflation has been altered since then.

A man named John Williams, who has a fantastic website (,  specializes in computing various statistics like inflation in a manner similar to that used in 1980.  If HIS calculation of inflation is employed, the "inflation-adjusted" price of Gold projects a top of more than $7,000.

As to Silver, using Williams' number, its $50 peak, also reached in 1980, extrapolates to a top of over $400 per ounce.  Or, more than 20 times the closing price yesterday!

It's vital that I re-iterate what I said yesterday in my essay regarding the possible reasons for the current strong stock market rally.  No one truly knows where any market will ultimately peak or bottom, nor when.  That is only known in hindsight and ususally well after the tops or bottoms occur.  The most famous investor, Warren Buffett, avoids timing the market as much as possible and has accumulated his enormous wealth through a very simple "buy and hold" approach.

I hope you like this piece, find it informative and invite you to make comments, pro or con. 

Marko's Take

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