Let’s take a quick look at the history of gold prices and the Dow Jones Industrial Average since 1970.

Dow

After being flat for nearly a decade during the 1970s, the Dow grew at an astonishing 15% a year between 1982 and 1999. After a correction between 1999 and 2001, the average is back up and pushing new highs.

Gold

After going through possibly one of the biggest market run-ups in history, gold went through a 20 year bear market in which the price dropped over 70% between 1980 and 2001. Adjusting for inflation, the purchasing power of gold declined 85% during this time period. Since 2001, the price of gold has increased about 20% annually.

Dow/Gold Ratio

Gosh, I wish I had seen this data in 1999, when the Dow/Gold ratio reached a historical high. Even the current ratio is nearly as high as its level just before gold’s huge 1970s rally. You’ve got to ask yourself whether this ratio will continue its way down or slingshot it’s way back up to 1999 levels.

In my view, 2001 began a gold surge that will last at least a few more years. The ratio may climb up in the near term, but I think the overall trend looking forward has got to be downward.

Summary: I think gold is still a buy relative to US equities. Watch for inflation data to see how gold moves in the short term. More updates in the future…