Will the 1:1 Ratio Occur?
In Peter Schiff’s excellent book, Crash Proof, he noted that the Dow Jones index and the price of gold had a 1:1 ratio near the bottom of two epic bear markets, the crash of 1929-1932 and the stagflation crisis of the early 80’s. Given America’s soaring debt/GDP ratio, our crumbling economy and inept government action, such a scenario may occur again.
As of the time of this article, Gold is around $930 an ounce and the Dow Jones is 6700. At the time of Schiff’s book, gold was around $700 and the Dow 14000 or so. The two are starting to meet in the middle, largely because of the major market drop.
If the 1:1 ratio occured, or even if it was not quite 1:1 but 1.5:1 or even 2:1, it would most likely be a result of movements by both. Something along the lines of $2500-3000 gold and a Dow in the range of 3000-5000 or so. They could even be even with Dow/gold settling around $4000 each.
Many currently price gold in relation to the S&P. That line of thinking ignores perilous times, like the Great Depression and the inflation of Carter’s regime. Given we are likely seeing a combination of each, the horrible unemployment of the recession and the likely inflation and high interest rates due to the government printing money, a repeat of the 1:1 ratio near the bottom is not at all unlikely.