Where Will the Bear Market End?

November 27, 2008 by  

Market technicians have long observed that market movements contain many patterns that repeat over and over again. One such (very) long term pattern is the ratio of the Dow to Gold. As you can see in the following chart, at the end of the last 2 previous major bear markets, one in 1932 and the other in 1980, the market bottomed when one ounce of gold bought 1 share of the Dow.

The Dow priced in Gold

Will this ratio mark the end of the current bear market? At current gold prices that would put the Dow at 800. Seems like a stretch. Or is it? The chart above ends with 2006 data at a Dow/Gold ratio of 20 (meaning that 20 oz. of gold buys a share of the Dow). Where are we now? Based on closing prices of both the Dow and Gold for November 26, 2008, the Dow/Gold ratio is currently 10.7 (8726/814). That means that from the peak ratio of 40 in 2000, we are currently 75% towards the ‘target’ ratio of 1, where an ounce of Gold buys a share of the Dow.

Now that target doesn’t necessarily mean that the Dow will go to 800; rather, it means that the ratio of the Dow to gold will go to 1. So a Dow value of 3000 and a gold price of $3000/oz will produce the target ratio as well.

The bottom line is that, although we don’t know the nominal value of the numbers, what we do know is that a significant bottom will be reached if we see the value of gold buy a single share of the Dow.

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