DOW GOLD RATIO The past two bear markets of the 20th century, in the 1930's and the 1970's witnessed clear times when gold dominated the Dow Jones Industrial Average resulting in extremely low ratios below 2.0 .

The ratio of the DOW to the price of gold approaches one to one toward the end of periods of financial insecurity brought on by excessive and prolonged inflation or deflation during which owners of capital have sold equities and bonds and purchase gold as a means of capital preservation. During the previous two peaks in the equities markets in the 1920s and 1960s, the ratio was 19 to one and 27 to one respectively.

The recent top in the equities markets marks a new peak in the gold/DOW ratio, in Jan 2001 we saw a peak at 45 to one. The good times for equities are periods of falling, not just low, inflation and interest rates. On the other side of the disinflation/inflation cycle is a period when stocks fall as inflation or deflation and rising real interest rates reduce corporate profitability and innovation. Then investor focus shifts from capital appreciation to capital preservation. Why does demand for gold as a means of capital preservation work in both the inflationary and deflationary case? Because in both circumstances investors are faced with a loss of principle. In the first instance via a loss of buying power of the currency in which assets are priced, and in the second case via default by the issuer.

Projections for Gold and Dow Indicies for Ratio Low of 2.0 within 5 years: Bearish Case - Dow 5,000 / Gold $2,500 = 2.0 ratio Bullish Case - Dow 11,000 / Gold $5,500 = 2.0 ratio Note: Both scenarios for the Dow are bullish for gold at current levels.