Will Gold Rise As Stocks Fall?

03/11/2009 1:00 pm EST

Focus: FUNDS

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says the ratio between the Dow and gold will determine the fortune of the two assets over the next few years.

The Dow/gold ratio is the [relationship] between the ultimate paper asset, the Dow Jones Industrial Average, and the quintessential tangible asset, gold. It is the key to seeing the relationship between tangibles and financial assets.

When paper assets experience a bull market for about 20 years, tangibles will fall. This occurred between 1982 and 2000. Next, tangibles will rally for about 20 years while paper assets will decline. The Dow/gold ratio topped out in 2000 at 43, and it has fallen to a low of 7.5 recently.

With an average cycle of about 20 years, there should be several more years remaining before the tangible asset bull and paper asset bear are over. The Dow/gold ratio will continue down until it reaches 2. In fact, I would not be surprised to see it reach 1 before the great stock market bear of the “ought years” is finished.

I haven’t seen a 2009 earnings estimate for the Dow, but the last one I saw for the Standard & Poor’s 500 index was $32.41. That means if we were to impute a P/E on the S&P of 15x, the average would fall to 480—about 30% lower than it is now. Another 30% drop in the Dow would put it at 4,735. A Dow/gold ratio of 1 puts gold at $4,735 and a ratio of 2 [gets it to] $2,367.

In either case, gold is going much higher while paper assets represented by the Dow and S&P 500 are going a lot lower over the next few years. World currencies are in a race to the bottom, with some falling faster than others. The US dollar is falling the least and, thus, compared to the others, it is looking the strongest. Don’t be fooled by the illusion.

Gold has bumped up against the March 2008 high at $1,000 an ounce, and traders are locking down short-term profits. There is good support at $900. There is also very strong support at $850, but I really don’t expect to see gold fall back that far. If it does, I will back up the truck and pile it on.

I have discussed several ways to buy gold in the past, including Central Gold Trust (Amex: GTU).

Central Gold is not an ETF, but it is a closed-end fund holding gold bullion. The down side is that the trust shares currently sell at about an 18% premium to gold, but we can deal with that somewhat by focusing our buying on technical factors. I expect we will be able to sell it at an 18% premium as well.

Buy Central Gold Trust at $36 or better and use a stop at $32. (It closed above $40 Tuesday—Editor.)

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