Saturday, 12 October 2013

Could the Dow:Gold ratio go close to zero? 2013-10-13

The answer is NOT RIGHT NOW! However, this article is looking much further out, maybe 5 to 10 years, perhaps?

Imagine if hyperinflation happens in the US and/or other countries.

Does the stock market go up a lot in nominal terms? [Yes].
Does the stock market keep up with gold? [No.]
Does the stock market protect your wealth? [No.]

For explanation, please see below:

The Dow: gold ratio has varied from 43:1 to 1:1 in the last 85 years but has become increasingly unstable and has made a huge megaphone pattern. I suggested that this megaphone was an indication and a consequence of the increasing confusion of price and value under a fiat monetary system since the Federal Reserve was created in 1913-1914. The instability began in the 1920s and the first overshoot forming the first peak of the megaphone pattern happened at the stock market peak in 1929.

The previous history of the Dow:gold ratio on the Gold Standard (or bimetallism with gold and silver money) in the period 1800-1913 was in a gentle uptrend with various recessions and 'panics' which caused relatively modest fluctuations compared with those in the 20th Century under varioous bastardisations of the gold standard and irredeemable fiat monetary systems.

I suggested that the pattern looks like a positive feedback oscillation which would catastophically fail as the Tacoma Narrows bridge failed in its resonant oscillation some decades ago.

In 2008, I suggested that a breakdown of the megaphone pattern, which could occur if Dow:Gold went below about 0.7 might lead on a log chart to a ratio of 1:88 (or 0.01136:1). That would be on a measured move of a factor of 61 (43/0.7) equal to the difference between the 43 intersection of the upper line and the 0.7 intersection of the lower line. 0.7/61 is about 1/88th.)

It seems outrageous that an ounce of gold might be worth 88 units of the Dow Jones Industrial Average but I postulated that it might occur in a hyperinflation.

Well I have succeeded in getting some stock market figures for the German Weimar hyperinflation, comparing the currency value and price of gold with the stock market index in Germany for 1914 and November 1923, the latter date when the hyperinflation reached its peak.

The stocks:gold price ratio went from 1.448 to 0.0000003091. Yes, that's right, from 1.4 in 1914 to 3 times 10 to the power of minus seven in November 1923!

 Year     German stock market      Gold price in Reichsmarks        Ratio
1914                 126                                   87                          1.448
1923           26,890,000                  87,000,000,000,000       0.0000003091

I obtained the German stock market figures from a fascinating timeline at :

So basically, the stock market:gold ratio went to zero for all intents and purposes, even though the stock market went up by a factor of 212,000x.

Unfortunately, the currency fell by a factor of 1 trillion against the dollar and therefore by a factor of 1 trillion against gold, since gold was fixed against the US dollar at $20.67 per ounce (the Mark went from 4.2 to the dollar to 4.2 trillion to the dollar). The change in the stocks:gold ration was a factor of about 4.6 million, i.e. gold moved up 4.6 million times as much as German stocks!

So under a US dollar hyperinflation, my target of 0.01136:1 for the Dow:gold ratio could be very conservative!

[Chart courtesy of Nick Laird of, to whom I wrote for permission to use it in 2008 and received a positive reply. Thanks Nick for a great website.]

My previous articles on this topic are here:

Happy reading!

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