What the Dow/Gold Ratio Can Tell Us
Stock prices climb higher over the long term — that is essentially a given. But while stock prices climb higher so do the prices of virtually everything else. So if stock prices are climbing higher and the prices of the things we need to buy are moving higher, how do we know whether or not we are growing our purchasing power when we own stocks? Sure the Dow Jones has climbed from a few hundred points to more than 10,000 points in the past 75 or 80 years, but so has the price of, say, a car.
One way is to look at stock prices in terms of the price of gold. While the supply of dollars is constantly rising at a fairly rapid pace, the supply of gold rises at a much slower pace. Since nearly all of the gold that has ever been mined is still around, a year’s worth of gold production does very little to the overall supply.
By measuring stocks in terms of gold we can better understand whether it is a good time to own stocks or not. When I say that it is a good time to own stocks, I don’t mean that you should own only stocks, or when I say that it is a bad time to own stocks, I don’t mean that you shouldn’t own any stocks. But if you have an idea of how stocks in the aggregate are valued relative to gold, as measured by the Dow Jones Industrial Average for the sake of simplicity, your investments will perform much better.