The top chart below of the DJIA/Gold Ratio defines very clearly the most recent cycle that commenced in 1982. The expansion phase came to an abrupt ending, as it always does, in mid-1999 (while we were all jacked up on dotcom stocks!). The bottom chart, the Dow Jones Industrial Average (DJIA), presents a very interesting contrast. For several years while the ratio begins to collapse, the DJIA recovers from the Dotcom crash and regains it's upward trend. This, my friends, illustrates the power of the Federal Reserve and aggressive "money printing". The patient is dying on the table, and doctors Greenspan and Bernanke keep it alive for a little bit longer. How long do we really want the patient on life support? If death is inevitable, lets make peace with the patient and let nature takes its course.
As we all know, the patient begin to have convulsions and seizures in late 2007, a major heart attack in 2008, and here we are in early 2009 with the doctors attempting a heart transplant. The medical team has been expanded with the addition of Paulson, Bush, Obama, Dodd, Pelosi, Frank, and Geither.
The chart below presents a short term detailed representation of the ratio over the past three years. Capitulation is in full force.
The most significant aspect of this attempt of financial manipulation is that the U.S. dollar is being destroyed. The chart below illustrates the divergence in the advancement of the DJIA in comparison to the destruction of the dollar. The Fed is attempting to create some short term gain by artificially stimulating the DJIA, but the damage will be the long term destruction of our currency. This will lead to massive hyperinflation which will last for a long time.
In summary, the DJIA/Gold Ratio presents an excellent short and long term tool for modelling the asset classes in one's portfolio. The ratio presented a signficant inflection point in mid-1999, and the contraction phase is playing out. Most importantly, it is NOT TOO LATE to re-model your portfolio. Remember, some jumped in lifeboats off of the Titantic. Some boarded early and some late, but those that did, saved their lives.