The Dow to Gold ratio measures the relative value of the Dow Jones Industrial Average (Dow) compared to gold. It indicates the number of ounces of gold it takes to buy the shares in the Dow Jones Industrial Average index. The Dow Jones is a stock index that includes 30 large publicly traded companies based in the United States. It is one of the oldest and most-watched indices in the world. Gold, on the other hand, is a precious metal that has been used as a store of value and medium of exchange for centuries. It is often seen as a safe haven investment during times of economic uncertainty and is considered an alternative to traditional fiat currencies.
The Dow to Gold Ratio provides insight into the relative performance of stocks (represented by the Dow) compared to gold. When the ratio is high, it suggests that stocks are performing well compared to gold, indicating a strong stock market. Conversely, a low ratio indicates that gold is outperforming stocks, which could be a sign of market weakness or economic instability. Turning points in the Dow to Gold ratio have coincided with turning points in market history: The stock market reached historic highs in 1929, 1966 and 1999 as the ratio did the same. Likewise, the market sat near historic lows in 1932 and 1980 as the ratio hit bottom.
The chart below shows the same data on a linear scale.
This chart plots both the Dow Jones and the price of Gold. However, it is important to note that the Dow Jones is a price index in contrast to a total return index. Therefore, it does not include dividends. The effect of dividends is demonstrated here: Stocks vs. Gold and Silver.
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