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Thursday, May 20, 2010

The Dow/Gold Ratio to drop to 7 this year NIA

The Dow Jones declined by 376.36 points today to 10,068.01, but to us it is meaningless what the Dow Jones gains or loses in nominal terms. The number NIA cares most about is how the Dow Jones performs in terms of gold or the Dow/Gold ratio.
One of our top ten predictions for 2010 that we announced on December 21st, was that we would see a sharp decline in the Dow/Gold ratio from 9.3 to below 7.

Two weeks ago with the Dow/Gold ratio at 8.7, NIA said, "We expect this downward trend in the Dow/Gold ratio to accelerate in the weeks and months ahead." Today the Dow/Gold ratio finished at 8.5.

The Dow/Gold ratio chart shows the cyclical nature of the battle between paper assets like stocks and hard assets like Gold. The Dow/Gold ratio trends upward during secular bull markets in paper assets when everybody is fixated on growth. The Dow/Gold ratio trends downward when the growth phase ends, and everybody's concern is to conserve their wealth.
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After the inflationary crisis of the 1970s, the Dow/Gold ratio reached a low in 1980 of 1. NIA believes the inflationary depression that we are currently in will not be over until the Dow/Gold ratio reaches a bottom of 1. This means we expect to see another 88% decline in the price of stocks in terms of gold.

The second most important number NIA cares about is the median U.S. home price/silver ratio. The national median home price is currently $166,100 or 9,400 ounces of silver.

When silver reached its all time high in January of 1980 of $49.45 per ounce, the median U.S. home price at the time was $62,900 or 1,272 ounces of silver. We expect the median U.S. home price/silver ratio to return to that level by the time this inflationary depression is over. This means we expect to see another 86% decline in the price of Real Estate in terms of silver.

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