Adapted from a BMG Report – Commentary by John Fisher
Many of today’s investors are experiencing something they’ve never seen before: an extended period of negative portfolio returns. It is critically important to understand that the long bull market that began in 1982 and ended in 2001 was not the norm, it was just a market cycle. Have we entered a long-term bear market? The answer to that question can be found in the Dow:Gold Ratio.
The Dow:Gold Ratio (see graph above) is a reliable method of “taking the temperature” of the markets, and also a leading indicator that a cyclical trend change is occurring. The Ratio tracks multi-year market trends going back a century and longer. Because gold is negatively correlated to stocks, when the Ratio is rising, it is time to buy stocks and when the Ratio is falling, it is time to buy gold and precious metals. As the chart clearly shows, the Ratio has been falling since 2000, indicating we are in a bear market cycle. And that means it is time to buy gold.
How the Dow:Gold Ratio is Calculated
The Dow:Gold Ratio simply represents the number of ounces of physical gold bullion it would take to ‘purchase’ one share of the Dow Jones at any given time. Currently, the chart indicates that the Dow:Gold Ratio is about 10 to 1, and more importantly, continuing to fall. Over time, there have been cycles where stocks outperform (bull markets) followed by cycles where gold outperforms (bear markets). When stocks peaked in 2000, for example, the Ratio was a staggering 40 to 1. When stocks plummeted during the bear market of the 1970s, the Ratio shrank all the way down to 1.6 to 1.
Whenever the Ratio slumps, as it is now, it is telling us that portfolios should be overweight in gold and precious metals. The 20th century’s three major stock market bubbles (1929, 1965 and 1999) ended with the Dow:Gold Ratio ballooning above 18 to 1. During the two major bear markets of the 1930s and the 1970s, the Ratio shrank closer to 1 to 1. This means now is the time to increase your portfolio allocation to gold and other precious metals.
Most investors wait far too long to change their asset allocation…
We are only in the middle of gold’s multi-year uptrend. In a bear market cycle such as we have entered, no amount of diversification within the three conventional asset classes (stocks, bonds and cash) will prevent portfolio decline. A portfolio allocation of 10 percent or more to physical bullion will reduce overall volatility, improve returns and provide excellent portfolio insurance.
We would all like the economy to continue growing and for our investments to continue appreciating. But financial markets are cyclical. The total amount of above ground gold is valued at approximately $3.5 trillion. In contrast, the world’s financial assets are valued at approximately $120 trillion. If just 10 percent of these paper assets were reallocated to gold, the upside appreciation would be staggering.
All Things Considered – John’s Commentary
The Dow:Gold Ratio is completely unbiased. It is not partial to either asset class. It does follow a historical precedent as shown in the chart. Always invest with the primary trend. Currently that trend favors being over-weighted in the precious metals sector.
People also ask all the time, “How will I know when to sell?” The Dow:Gold Ratio sheds further light. Sell your gold when the ratio is 2:1. What would we buy? Probably stocks and real estate.
Action to take: Slow and steady accumulation. No one knows when this market will break through the current trading range. What I ask everyone is, “Will gold be higher or lower 5 years from now?” If your answer is “higher”, then continue to accumulate and don’t become overly concerned about short term price fluctuations.
What to buy now: Low premium! Over time all premium disappears. When melted down, no matter what type of metal you purchased, it all looks the same… and it’s all worth the same. We have several very low premium recommendations.
Quote of the Day: “Until government administrators can so identify the interests of government with those of the people and refrain from defrauding the masses through the device of currency depreciation for the sake of remaining in office, the wiser ones will prefer to keep as much of their wealth in the most stable and marketable forms possible – forms which only the precious metals provide.” – Elgin Groseclose
