LONG TERM LOOK AT DOW TO GOLD RATIO

Last week we showed a chart of the dollar to show that President Bush is exactly the opposite of former President Reagan. This week we would like to update our comparison of Bush and the Presidents he most closely resembles from an economic history standpoint.
Readers may recall that we drew a parallel between the Bush and Nixon eras by showing a chart of the Dow to gold ratio in the January 2 issue. We said, “This bear market rally looks awfully similar to that of the liquidity induced rebounds from the late 1960s and early 1970s.” Here we have updated the Dow to gold ratio and made some interesting comparisons.
First look at the bottom graph of the Dow to gold ratio from 1991 to 2005 in log form. Note that the ratio broke below its rising trendline in January 2003 and never recovered despite the liquidity-induced rally of 2003. Some rally !
Second, look at the top chart from 1929 to 2005. Note that the all time high of 42 in 2000 met the trendline from the previous peaks of 1929 and 1965.
Third, the market’s sideways movement over the past two years is basing along parallel trendline support from the 1940s. When this gives way and the Dow to gold ratio is trading below the 2003 low of 21 a major recession should occur in the US.