Wednesday, 4 June 2008

Mega-move from Dow:Gold megaphone! 2008-06-04

Wednesday 4th June 2008: Mega-move from Dow:Gold megaphone!

Last time, I discussed the Megaphone Top Chart Pattern with regards to the Dow:Gold ratio. Look at that pattern at the link above and see if it is not almost exactly the same as the pattern of the Dow:Gold ratio in the last 70 years. Well, it is!

Now, time for the kicker. What's the measured move from this pattern breakdown? Note that it's said to be a bearish pattern. This is being calculated using at a Log scale chart.

The measured move, as often the case, is from the breakdown point downwards, by an equal amount to the distance from the points where the price hit the upper and lower trend channels on the last previous occasions, (according to the explanatory link above).

This is what it looks like for the Dow: Gold ratio:

That would give a Dow:Gold ratio of 0.0114:1 or put another way, a Gold:Dow ratio of 87.75 to 1; about 88:1.

Now that would be a turn up for the books.

"Impossible!" you say? Think 1923 Weimar Germany. What did they get? One million marks an ounce, one billion marks an ounce, one trillion marks an ounce? Where did it stop?

Here is a super article by Julian Philips that I read a few years ago: The Quintessential Inflation - The Great Weimar Inflation.

The answer to the above question is in Table 7 of that article. The table is entitled 'Desperation' - an exchange rate of 18 trillion marks to the British pound. Britain was on off the gold standard in 1923 but back on in 1925 and issuing gold Sovereigns with 0.2354 ounces of gold, so let's use that figure. The mark:gold exchange rate was 18 trillion / 0.2354 = 76.5 trillion marks per ounce!

Could we safely ignore this Dow:Gold ratio pattern? Well, I don't think so, unless you dump the entire idea of technical analysis of market charts in the trash can.

One feature of the Dow:Gold ratio is that it is not affected directly by currency debasement - both the Dow and Gold are measured in US dollars, so debasement of the dollar is cancelled out in the ratio. The trend is therefore not skewed as with stock and bond price charts by changes (usually drops) in the value of the currency in which they are measured. The Dow:Gold ratio is 'dimensionless' as a scientist would say, i.e. it's not valued in US$, but it's a pure ratio. Perhaps technical analysis is more valid in this case, rather than less?

Text Copyright 2008. D. Bellamy.

1 comment:

goldintheuk said...

An additional point to this: In Germany in 1913-1923, gold outperformed the stock market by a factor of about 4 million times. German stock market up 212,000x, gold up 1 trillion x.