JANJUAH: THE DOW/GOLD RATIO WILL HIT 1:1
Well known permabear Bob Janjuah of Nomura has been vindicated (to some extent) over the last few months as the global recovery has floundered and double dip fears have re-emerged. But Janjuah is even more bearish than you might think. He says the Dow could hit a 1:1 ratio. Yes, that involves an 85% decline in the Dow or some combination of a massive rally in gold and a collapse in the Dow (a 100% rally in gold in the coming year would still require a 70% collapse in the Dow). In fairness, he does say his S&P 500 target for 2012 is 800/900 (a ~30-35% decline), but if you know anyone who wants to buy a boatload of Dow 2012 1,700 puts, please let me know. Janjuah details his thoughts:
“In terms of the secular outlook, I wanted to do something different, so I have included below a classic Greed & Fear chart. The chart looks at a 90 year history of the Dow, rebased in terms of the price of an ounce of Gold. I am not including this chart to specifically support my secular bullish Gold view or my secular bearish equity view.
Rather, for me, this chart speaks to long-term trends and turns in the Greed & Fear equation, which is a principle driver of market returns. I find this chart stunningly clear and simple in its message: Over the next year or so the Dow can, in Gold terms, hit a ratio of 1. Think about that. Of course I know many folks dismiss such ‘chartlology’ (I have too much respect for the world‟s technical analysts to call my work technical analysis), and I know many folks look at Gold as some barbaric relic. So readers should feel free to dismiss the message from this chart. Personally I think this chart is telling us something very profound – and worrisome. Especially if one shares my view that the latest eurozone ‘solution’ simply clarifies one thing – that full fiscal union in an immediate time frame is OFF the agenda. As a result of which, eurozone policymakers are now all-in and have merely succeeded in giving us an extremely worrying outcome whereby the future of the eurozone now becomes a binary bet on survival vs. breakup/shrinkage. I am convinced markets will soon reach the same conclusion, so this latest plan had better work, because if it doesn’t there is no more credible policy response left. All proposed ‘solutions’ so far are internally inconsistent and unviable as sustainable fixes in my view. The only sustainable fixes are proper default/restructuring and the ejection of some existing members, thus leading to the creation of a neueeurozone (which seems to be not on the cards for now), or full and immediate fiscal union, which for now only remains a distant ‘hope.’”
Source: Nomura
This chart, as is, is rather bullish for Dow actually, as we are closer to the bottom of the long term trading range, no?
With the HUGE caveat of course that such long term charts with scales changing more than an order of magnitude, should be logarithmic, not linear. That would have changed the picture, and possibly the conclusion. But as it stands now, at best it could be right for the wrong reason.
There’s another caveat. The chart doesn’t appear to include dividends, that over that time frame account for a huge additional outperformance.
I’m no goldbug, but gold’s mega cup and handle pattern is hard to ignore.
I think Dow 3000 / Gold 3000 is the most likely scenario (staglation); Deflationary scenario would be Dow 500 / Gold 500; HyperInflationary scenario would be, who knows? Dow 3 million / Gold 3 million?
it’ll go to 2:1 minmum.
for hugh hendry fans:
http://historysquared.com/2011/10/31/china-blowup-could-lead-central-bankers-to-print-cause-hyperinflation/
gold at 10000
I’ll second the 10,000 Dow/ $10,000 Gold
at 16 to 1 historical ratio that makes silver $600/$700
I will second sliver at 16. DOW down, dollar up. It is highly implausible to say the debt burdens will be inflationary
I think 3 to 1 makes more sense and remains bullish on gold in a stagflation environment. $3000 gold is still a very realistic target given IMF creation of SDRs in 2009 timeframe.
To expand on my previous point regarding dividends: the forward differential is almost 3% p.a. (dividends for DOW plus storage/insurance for gold), which means that the no-arbitrage equivalent for the ratio is roughly halving every 25 years or so. Which means that if the ratio is at 1:1 in 60 years one is better off buying the DOW today, not gold. But of course gold bugs will not tell you that when they show you 100 year charts.