Why You Should Care About DJIA Priced In Gold

The Market Oracle ^ | 1-9-2010 | EWI

[blam]

Why You Should Care About DJIA Priced In Gold

Commodities / Stock Markets 2010
Jan 09, 2010 - 08:34 AM
By: EWI

"The Real Dow" has proven to be a good leading indicator for nominal DJIA.

Vaid Pokhlebkin writes: The following article is provided courtesy of Elliott Wave International (EWI). For more insights that challenge conventional financial wisdom, download EWI’s free 118-page Independent Investor eBook.

Of the many forward looking market indicators we at EWI employ, one of the most interesting tools (and least discussed in the financial media) is the DJIA priced in gold -- "the real money," as EWI's president Robert Prechter calls it.

We've been tracking the Dow/Gold ratio for many years and it has serves our subscribers well. It's not a short-term timing tool, yet in the longer term, as our January 6 Short Term Update put it, "the nominal Dow eventually plays catch up to what is transpiring in the Dow/Gold ratio."

Here's a good example. Remember when the nominal DJIA hit its all-time high? October 2007, just above 14,000. At that time, most investors expected new highs still to come. But our Elliott Wave Financial Forecast warned five months prior, in May 2007:

One key reason [for a coming top in the DJIA] is the undeniable bear market status of the Dow Jones Industrial Average in terms of gold, the Real Dow...

Notice, by contrast, the relative strength of the Real Dow versus the nominal Dow, the index in terms of dollars, from 1980 to 1982. By August 1982 when the Dow denominated in dollars bottomed, the Real Dow was rising strongly from its 1980 low... The nominal Dow soon played catch-up, and they both rallied more or less in sync until 1999.

Now, instead of soaring the Real Dow is crashing relative to the nominal Dow. In fact, it’s barely off its low of May 2006. This dichotomy reveals the weakness that underlies the financial markets’ push higher. When mood turns and credit inflation reverses, the ensuing drop in the nominal value of the market should be dramatic.

[snip]

[screaminsunshine]

Hope nobody catches on too soon. There are still blithering idiots thinking they can retire on the 401k and social security. If this gets out there will be hell to pay.

[Ghost of Philip Marlowe]

Retirement: soon to be nothing more than a sabbatical for the elderly elite.

For the rest of us, kiss that part of the American dream good-bye.

And make sure you spend part of your time ruining those who are ruining us.

[FromLori]

http://www.marketwatch.com/story/gold-rises-as-jobs-data-hit-dollar-2010-01-08

[blam]

U.S. Dollar Against Stocks Correlation Still Exists

[bigcat32]

Here’s a link to a site that some here may consider interesting:

http://www.inflation.us/

[Presbyterian Reporter]

The numbers are worse than the graph.

As of Friday it takes 9.3 ounces of gold to buy one unit of the DJIA.

The graph shows it takes under 20 ounces of gold to buy one unit of the DJIA

[Gadsden1st]

What bothers me is that the DJIA is a moving target because the components keep getting replaced. No one ever brings that up. Its like adding and deleting items to the CPI.

[NVDave]

Yes, this is a very great issue.

It is called the “Dow Jones Industrial Average,” right?

There’s hardly any industrial companies in it any more. There’s GE (who makes a big chunk of their profits from financial activity), Cat (likewise), Boeing, 3M and UTX bring a bit of industrial flavor in their operations.

That’s hardly an “industrial” average, whereas the DJ Transportation Index has maintained its transportation focus all along.

So things like Dow Theory starts getting very odd when we look at the DJIA and see that the component companies are a) not all that industrial anymore, and b) the most recently removed & replaced companies were heavily weighted towards financial operations and financing in terms of the profits of the component companies than the index companies are now.