Ever since the March 2009 crash low, I’ve maintained my view that the Dow Industrials and broad U.S. equity markets were entering a new bull market — and that the Dow Industrials would eventually hit 31,000+. 

One of the major tools I used to come to that conclusion back then was the ratio of the Dow Industrials to the price of gold.

I wrote extensively about it in my July 2008 issue of Real Wealth Report — even before the crash of 2009, which I also forecast — and several times since. Today I want to update that analysis for you.

First some background. At the peak of the ratio of the Dow Industrials to gold in the year 2000, the Dow Industrials would have purchased just over 51 ounces of gold.

During the financial crisis of 2007-09, as equities plunged and gold had rallied (since its bottom in 2000) the ratio collapsed all the way down to the 6 to 7 level.

In other words, in terms of gold — what I like to call “honest money” — the Dow Industrials had lost more than 87% of the entire equity bull market from 1980 to 1999.

 
Click image for larger view

In my Real Wealth Report issue of July 2008, I called for the bottom in the ratio to come in around the 5 to 6 level. 

It bottomed slightly above that level, then retested it with a slightly lower low in September 2011.

Since then, stocks have vastly outperformed gold. Here’s the chart I published back then, but with updated comments and analysis.

As a result, the ratio of the Dow Industrials to gold started widening back out, and also broke out of a resistance level, which you can also see on the chart.

Now trading at about the 14.5 to 1 level, the Dow/gold ratio is set to widen much further.

So what does this all mean? And what does it hold for the future for the Dow? For gold?

I’ll answer those questions now. But I urge you to put your thinking cap on, because the analysis of the Dow/gold ratio is not easy to grasp, yet it’s critically important to understanding the future.

FIRST, the collapse in the Dow-to-gold ratio during the financial crisis was not caused simply by a crash in equity prices. It was also due to a crash in the value of the dollar during that time period, as reflected in the soaring value of gold from the year 2000 on.

SECOND, the breakout in the ratio means that the Dow is now beginning to adjust its value to its ratio to “honest money” — as measured by its value versus gold.

This adjusting of equities is perfectly normal and one of the main reasons I am very bullish equities over the next several years (after a normal but sharp pullback occurs). 

A simple exercise here will show you why. For the Dow/gold ratio to climb back to the 18 to 20 level resistance level you see on my chart, the Dow would have to explode higher to the 23,480 level, assuming gold’s current price of roughly $1,174.

Naturally, the price of gold is not going to remain at $1,174. So let’s run a simple matrix of the price of gold and assume the Dow eventually gets back to a ratio of 20 to 1. 

Let’s say, for instance, that gold eventually falls to $900. At 20 to 1, that would put the Dow around 18,000.

Or take a super-extreme, super bearish price for gold at say, $800. A 20:1 ratio puts the Dow at 16,000.

Clearly, there’s not a lot of downside to the Dow even if gold were to plunge all the way back to $800 (which is highly unlikely).

Now, let’s look at the flip side: What would happen to the Dow Industrials if gold were to move $1,500? Then to reach a 20 to 1 ratio, the Dow would have to explode to 30,000. 

And at $2,000 gold, a 20:1 ratio would see the Dow eventually hit 40,000.

Do this exercise for any price level of gold you wish, and you will see that the downside risk in the Dow is minimal and the longer-term upside potential is enormous. Ditto for gold. 

That’s not to say there won’t be pullbacks in the Dow. There will be. We are in the beginning throes of one now. One which should be avoided, owning as few stocks as possible. 

But given the breakout from the bottom of the Dow/gold ratio in September 2011 … and the normal tendency for all markets, no matter what they are, to retrace good portions of what they have lost …

I believe it’s a very safe assumption to make that the Dow/gold ratio will continue to climb. And that means — longer-term — much higher prices to come for the Dow, and U.S. equity markets in general.

As for gold and silver right now, the bounce you’ve seen is nothing more than a dead cat bounce. The precious metals, and commodities in general, have NOT bottomed. 

But the bottoming process should soon begin. 

As for the Dow Industrials right now, here too, the bounce you’ve seen is nothing more than a dead cat bounce. Stocks will head lower in the shorter-term — before blasting off again to the upside. 

But once the equity markets and gold do indeed bottom — both will be off to the races on the upside, in rip-roaring new bull markets where both equities and gold will soar, together. 

This analysis also shows you why it’s so very important that you think out of the box. Most analysts will say I’m nuts to say gold and equities will eventually soar together. 

But it’s not nuts. And in fact, it has happened before, many times, the most important of which was between 1932 and 1937, when gold and the Dow both soared, together, in the middle of the Great Depression. 

Best wishes, 

Larry

Canadian Election – “Sunny ways my friends. Sunny ways”

“The Sunny Days unfortunately will not appear.”

The Canadian elections are on par with the world trend – whoever is in office, throw the bums out. They took place on Monday, October 19th, the anniversary of the 1987 Stock Market Crash. The Liberals in Canada toppled the Conservatives as many Canadians saw their head of state Mr. Harper as a dictatorial heavy-handed politicians following in the footsteps of the US NSA in one way. The Conservatives were reduced to 99 seats from 159 in the last Parliament, according to preliminary results and Harper conceded a demoralizing defeat.

Justin Trudeau will be 44 on Christmas Day and is to become Canada’s second-youngest prime minister in history showing there is indeed a generational shift taking place in politics of a global scale. He is pledging change with the slogan “Sunny ways my friends. Sunny ways.” However, there are those who will remember his name for it was Trudeau’s father, Pierre Elliott Trudeau, who also was catapulted to power 47 years ago. Trudeau captured 184 of the 338 seats in the next House of Commons when to have a majority one need 170.

The polls were showing a Liberal lead, but it was marginal. The results at the end of the day was rather conclusion. We should expect the same to emerge in the United States come 2016. We are headed into this period of civil unrest that began in 2014 and this trend will be manifest also in politics with many upsets and separatist movements.

The election really became a East v West confrontation. The Western region of Canada tends to be more conservative than the East and Harper was seen as a Western Conservative who only focused on their concerns. Harper’s home town was Calgary. There was the scandal over Conservative senators’ expenses; anti-terrorism measures that made Harper look like a stooge of the US NSA as he even attempted to ban the wearing of face veils known as niqabs during citizenship ceremonies. Harper even committed the Royal Canadian Air Force fighters to the multinational campaign against the Islamic State. Harper also pushed for Canadian to adopt the same US law that they can throw anyone in prison without lawyers or a trial which was championed by Lindsey Graham in the USA.

Then there was the growing pension crisis, the economic collapse following commodities with nosediving oil prices, and let us not forget Harper’s handling of refugees and the Trans-Pacific Partnership trade pact. This pretty much sums up why Harper’s support simply collapsed. It would be nice to see the same thing in the USA for those nutjobs who follow the same path. All of this fused with Harper’s control of even the election process. He spent most of the campaign delivering standard speeches to invitation-only crowds to maintain the image that all was well.

Looking at the the stats on the Canadian election, we can see our model was correct in forecasting a rising percentage of people participating in the election. Our model has been projecting that same trend for the USA come 2016. More and more people will come out to vote because of the declining economic conditions in the US elections. In Canada, the turnout fell to as low as 58.8% during the 2008 election and was in an uptrend reaching 61.1% in the last parliamentary elections during 2011. This election has shown a huge jump to 68.5% of the country’s 25.6 million eligible voters participated in this election. Once again, we are showing this trend on a global scale. As the economy turns down in the USA now, this will be the last nation to join the global recession which began in 2007.

Stephen Harper’ policy and performance has been so off-the-wall goose-stepping with Obama, he had little choice but resign as conservative leader as he asked his party’s national council to reach out to the new parliamentary caucus to appoint an interim leader and implement a leadership contest. He was so off the mark with respect to the trend globally, it is hard to imagine how disconnected he was from reality.

Harper’s hard line approach was very anti-Canadian as there appeared to be a lot of eager, nostalgic liberal talk about returning Canada to a nation of peacekeepers as well as neutral conciliators not to mention environmentally concerned moderates. For years, if you were American traveling overseas and you encountered anti-Americanism, all you needed to say was you were Canadian and a smile appeared on your opponent’s face. You just had to finish every sentence with “ahey!”

The Sunny Days unfortunately will not appear. Canada is part of the global community and it cannot turn its economy up when the world is pointing down.

When we look at both the futures and the cash on the Canadian dollar, it does appear that there will be a shift in trend next year more likely than not with the Commodity Cycle.

Over the last several weeks, I have focused almost exclusively on the potential rebound in the market as we enter into the seasonally strong time of the annual investment cycle. To wit:

“As you can see, the markets did retest the late August lows, and when combined with the very oversold conditions, led to a frantic “short covering” rally back to previous resistance. It is worth noting that the recent market action is very similar to that of the August decline and initial rebound as well.

Of course, the question that must be answered is whether we have seen the end of the current correction or is this just another “reflexive rally” that will fail?”

The chart below is updated through yesterday’s close.”

….click HERE for larger chart and more analysis including Sector Analysis and Year End Rally Coming? (scroll down)