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DJIA-Gold Ratio as a Stock Market Indicator

| | Posted in: Equity Premium, Gold, Technical Trading

A reader requested a test of the following hypothesis from the article "Gold's Bluff - Is a 30 Percent Drop Next?" [no longer available]: "Ironically, gold is more than just a hedge against market turmoil. Gold is actually one of the most accurate indicators of the stock market's long-term direction. The Dow Jones measured in gold is a forward looking indicator." To test this assertion, we examine relationships between the spot price of gold and the level of the Dow Jones Industrial Average (DJIA). Using monthly data for the spot price of gold in dollars per ounce and DJIA over the period January 1971 through March 2020, we find that:

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