Stocks Will Fall 37% or Gold Will Rally 60%

A lot of commentators talk about how gold is near an all-time high and that stocks have fallen 50%, making them cheap again. However from a long-term perspective, gold and stocks are nowhere near their normal relationship.

According to Dr Marc Faber, editor of the Gloom Boom Doom Report, gold and stocks move in distinctive long-term trends. Over the last 110 years, these trends has staged six major phases:

* 1900-1929: stocks outperform gold
* 1929-1932: gold outperforms stocks
* 1932-1966: stocks outperform gold
* 1966-1980: gold outperforms stocks
* 1980-2000: stocks outperform gold
* 2000-???: gold outperforms stocks

Overall, the median stock to gold ratio for the last 106 years is 5.4. In other words, throughout the 20th century, on average 5.4 ounces of gold would buy one unit of the DJIA.

Today, gold trades at $980. The DJIA trades at 8,500. This puts the ratio of gold to stocks at 8.6. Thus, the DJIA needs to fall to 5,292 (a 37% drop from today’s level), gold needs to rally to $1,574 (a 60% rally from today’s level), or some combination of the two, in order for gold to be appropriately priced relative to stocks again.

During the last bull market in gold, the precious metal rose 2,329% from a low of $35 in 1970 to a high of $850 in 1980. However, during that time, there was a period of 18 months in which gold fell nearly 50%.

From mid-1971 to December 1974, gold rose 471%. It then fell 50%, from December ’74 to August ’76. After that, it began its next leg up, exploding 750% higher from August ’76 to January 1980.

Now, in its current bull market (2001 to March 2008), gold rose over 300% from $250 to a little over $1,000. And just like in the mid-70s, it began showing signs of weakness after its first big rally up to $1,014 in March ’08. At one point, it even fell to $700, a 30% retraction. Granted, it wasn’t a full 50% retraction like the one that occurred from 1974-76. But we are experiencing a financial crisis. And gold is the most common catastrophe insurance.

http://seekingalpha.com/article/140776-stocks-will-fall-37-or-gold-will-rally-60

at 6/02/2009 Labels: ,

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