The Long-term Dow/Gold Ratio

If you bought GLD as a longer term investor in precious metals, or are holding on to gold bullion coins, I can give you a good inference on when to sell:

The Dow/Gold ratio contrasts economic growth and prosperity with inflation and an undermined currency.  Despite some commentators opining that the US economy is recovering, the fixed income holdings of the US Government and its on and off-balance sheet liabilities (such as Social Security and Medicare) will prevent the Federal Reserve from tightening monetary policy enough to control inflation.   As a result, we will have negative real interest rates, and inflation hedges will outperform economic growth which will lead to a decline in the Dow/gold ratio, providing significant upside for gold relative to stocks.

Whether stocks fall as gold rises, gold soars as stocks stagnate, or both stocks and gold go up or down together, the ratio will inevitably bottom somewhere between 1.0 and 5.0 much  just as it did in 1932 and 1980.  A safe bet is that this ratio ends at around 5.0 (see lower trend line in chart below).  If the Dow stood still from here, that would mean a gold price of around $2,000 per oz.  Many gold bulls of course are calling for an even higher gold price, but 5.0 seems to be a safe call at the least.

via Sharelynx.com

With the financial and fiscal imbalances of the US what they are today, a decline in the Dow/Gold ratio to that level is logical.