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Is Dow/Gold Ratio Signaling a Stock Market Crash?
Investors around the world are currently sitting on the edge of their seats, wondering what’s going to happen to the markets, i.e. stocks,
commodities, currencies, …
Last week, we already gave insight to our thoughts on the currency complex. This week, we want to highlight some of our brainwaves on the stocks/commodity markets.
As we are always comparing both asset classes, our most important
indicator to watch is the Dow/Gold ratio, which measures the purchasing
power of stocks versus gold.
A brief look at the Dow/Gold chart tells us that the ratio is on the
eve of forming a Death Cross, a formation which usually signals a sharp
and fierce decline. We already witnessed a simular event in the same
period last year.
On top of that, different momentum indicators, like the RSI or MACD
(see chart), are pointing towards a potential breakdown of the Dow/Gold
ratio near term.
A setback of the Dow/Gold ratio can be realised either by a rise of
gold, a correction of the Dow Jones index, or a combination of both.
Gold rising further from current levels is possible, but history
clearly shows the yellow metal suffers summer doldrums, which in the
current stage of the secular bull market usually means sideward price
action for the coming months.
A sharp decline for stocks seems more obvious, as investors await
more stimulus from the Fed, but probably won’t get their new dose of QE
immediately, which could lead to a sharp correction.
Furthermore, stock valuations are ballooned, pimped by unusual high profits and extreme margins!
With the steep rise of input costs, due to explosive commodity prices
over the recent months, investors could get very disappointed if their
high expectations aren’t met.
These are just a few risks which could trigger a stock market sell off…
So what can we expect if stocks start to tumble? If the Dow/Gold
ratio breaks down below 8x, we expect an acceleration on the downside,
with a first target being 7x, but probably dropping as low as 6x.
With gold hovering around the 1500-dollar-level, this would result
into a substantial market crash, with the Dow Jones dropping towards
9,000 points: a steep decline of almost 30 percent.
Be prepared to go ‘old school’ — Sell in May!
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Might I interject a slightly new variation on the PM price suppression regime? I think the fantastic short-term run up in silver may actually be part of the plot to scare ordinary people away from owning the metal. If the dollar ever really does go to its intrinsic (paper) value, then silver would be the strongest candidate for a new, sound currency as it is far cheaper than whatever gold would be. But if there is huge volatility, people will back away as it looks like a risky "investment." Buy physical as you are able; trade if you have the stomach for it.
Intrinsic value of all fiat = 0
thanks! and "watch that hi-tech convoluted chitty-chitty bang bang play called Cummins Diesel soar because of IMPENDING DOOM i tell you....DOOOOOOOOOOOMMMMMMMMMMM.
Newbie here. I started reading ZH in Aug. 2010, and have kept reading, not so much for the 'answers', but because peoples here seem to ask the most interesting questions.
As a result my little handful of beans has increased modestly, but more importantly, the beans are now arranged differently, so as to take better advantage of whatever may come. Hat tip to the forum.
Prepared to go Early Renaissance!
Silver Bitchez!
http://www.hussmanfunds.com/wmc/wmc110425.htm
On target? Comments?
Hell, if the system does indeed go to hell, be prepared for the dark ages.