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The Correlation Between CAPE and the Dow vs Gold Ratio

Discussion in 'The Economy' started by Chris C, 6th Mar, 2009.

  1. Chris C

    Chris C Well-Known Member

    2nd Apr, 2008
    Brisbane, QLD
    I was just posting in the thread on whether CAPE is a better indicator than regular PE ratios and it just struck me just how similar the 10 year CAPE and Dow Gold Ratio have been over the last 100 years. I know a lot of people love looking at PE ratios as being good indicators of value in the market, and talk of Gold to Dow ratios are largely passed off as rhetoric, but upon closer examination there is a large historical correlation between the two that I think is worth considering:



    I should point out the Gold to Dow Ratio chart I ahve used is a little old, though the trend has very much continued, but the Gold to Dow ratio now sits at 7 rather than the 18 suggested by the chart. Though what is more interesting is the striking similarities between turning points...

    10 Year Cap Peaks: 1929, 1966, 2000
    Gold v Dow Ratio Peaks: 1928, 1965, 1999

    Obviously a reducing CAPE represents either a drop in earnings or share price so it's not too much of a stretch to expect a that this would (holding gold value stable) equate to the Dow to Gold Ratio also dropping.

    Though with that said the degree to which the Dow to Gold ratio has dropped is significantly greater than the rate at which share price drops signifying strong growth in gold price at the same time.

    I don't think many people are willing to call a bottom at this stage, and rightly so, but if people really want to look at history for some guidance I don't think it is too much of a stretch to expect Gold's Dow purchasing power to double, treble if not quadruple over the next 12 months.

    I should note at this point that I'm not expecting the price of gold to quadruple over 2009, though I am expecting there will be some strong growth in the price of gold coupled with further deterioration of the Dow (which will extend itself to the ASX as well).

    Anyone care to discuss?