Gold-Silver Watch by APPROXIMITY

The chart below (click charts to enlarge) shows one of the potentially most important cycles in macroeconomics. It plots the Blue Chips of the U.S. industry (the Dow Jones Industrial Average, "Dow Jones index") priced in ounces of gold. The chart shows that when one real asset (industry) is priced in another real asset (gold), one does not get ever increasing prices, but instead major price CYCLES. The chart implies that the amplitude of these DJIA:gold cycles (possibly due to the increasing degree of leverage in the system) has ever grown since December 23, 1913, when the Federal Reserve Act (read more) established the second U.S. central bank, the "Federal Reserve" as we know it today. A target of the DJIA:gold ratio below 1:1 seems possible.

Click here for an alternative, less Dow-bearish version of this chart: DrBubb's Edition

The next chart illustrates the exponential (in the log-chart: linear) aligning of temporary peaks in the gold bull market since 1999. We find it worthwhile to point out the "Brown Bottom" (announcement of the Bank of England to auction off 58% of the UK gold reserves under Chancellor of the Exchequer Gordon Brown) and the Washington Agreement on the limiting of central bank gold sales (both in 1999; read more).

Gold shows step-like structures.

Click here for an older version of this chart: older version.

The step-/wedge-like structures seen in silver during earlier years have not repeated themselves since 2008 due to the sell-off that followed gold's spike to $1,030 in that year.

Gold:Silver -- the major trend is DOWN. An older version of the chart below can be found here.

The long term picture:

Below a scenario for Gold:Silver at 35:1. Our long-standing old price target was more conservatively at gold $1,050 / silver $30 (see old chart here). The target has now been adjusted for the 2008 correction.

The Silver Sammy Contra Indicator -- he is the guru.

A possible medium term scenario for the EURO and gold.

In the absence of hyperinflation, a repeat of the stagflationary environment of the 1970s (read more) could lead to a scenario similar to the one shown below. However, at Approximity some believe that the DJIA:Gold ratio will dip below 1:1 over the course of this crisis.

Another useful ratio that displays a cyclical structure is the average house price expressed in gold. Below we see the average UK house price in ounces of gold since 1930. Similar to the DJIA:gold ratio at the top of this page, the leverage in the property:gold cycle has increased over the years. Large booms seem to be followed by swift busts.

Former charts of the month

Chart of the month (November 2013)
For a long time our Gold-Silver-Watch page has featured two charts of the Dow-Jones-to-Gold- Ratio: our own, and DrBubb's (a.k.a. Michael Hampton). With the Dow making new highs, it is time to review them again. DrBubb's target area had been hit in 2011 with a low below 6:1, and the DJIA:Gold-ratio has since almost returned to the grey trend line Bubb suggested. This was a fairly precise call, to say the least. So, will it move beyond, and then make new highs? Over the medium term, we don't think so. While Bubb's call was precise until now, we expect history to repeat itself, at least we expect it to rhyme. As in 1976, we might cross the grey trend line, but a swift crash could follow due, pushing the ratio towards our own target area at or below the 1:1-level. As always in finance, there is no guarantee for anything, but is the American economy really in such great shape? We doubt it, and we think that gold's great revival could arrive in the not too distant future.

Chart of the month (March 2013)
Regarding U.K. house prices in terms of gold, we seem to momentarily be stuck in a historical congestion zone around 150oz the average U.K. house. Given the dire economic outlook of the U.K. (and of Pound Sterling) and given the incredibly positive fundamentals of gold, one would expect a swift collapse of the price towards the target area once the present consolidation is over.

Chart of the month (January 2013)
They say history does not repeat, but it rhymes sometimes. If, for the purpose of this little column, we assumed that gold price history rhymes from time to time, we would possibly first note, that ever since gold assumed its multi-decade low in 1999 (the infamous Brown Bottom) and then, a year or two later, started its rise in a now more than a decade long bull market, there have been five prominent price spikes: on 2001-05-21 with $288.35, on 2003-02-05 with $385.00, on 2006-05-12 with $725.75, on 2008-03-17 with $1,023.50, and on 2011-09-05 with $1,896.50 (prices are LBM AM Fixings). If we number these price spikes from 1 to 5, we can see that 1 and 2, respectively 3 and 4, are closer to each other. Expressed differently, they seem to come in pairs. Further more, the rise within the pairs (1 to 2 and 3 to 4) was 34% and 41%, while from one pair to the next (2 to 3 and 4 to 5), if we assume that the most recent fifth spike belongs to a pair as well, it was 89% and 85%. If we take the middle of these respective moves, and also extrapolate the times between them into the future, we could try and guess what a sixth (second spike in a third pair) and a seventh price spike (first spike in a fourth pair) could look like (see also chart below). Our guess would be 2013-06-24 with $2,603.37 (spike 6) and 2015-01-29 with $4,865.73 (spike 7). So, should you be surprised if you would see a $1,000 move in gold in the first half of 2013? We think you shouldn't.
Best wishes for 2013 from the Approximity Gold Team!

Chart of the month (May 2012)
It is interesting to see how the DJIA:Gold chart seems to acknowledge technical levels, despite of it being no directly traded asset but instead the ratio of the prices of two very distinct market objects, namely gold and the Dow Jones Industrial Average. The ratio now stands at the 8.0 level, and it will be interesting to see whether it will be able to go higher, or whether it will be reflected downwards to indicate a worsening economic reality in the U.S. As a comparison, a chart since 2008 shows how the 10.0 level played a similar role for the ratio back in 2009 (click here).

Chart of the month (September 2011)
As you guys know, one of our favourite charts is the one that shows the average U.K. house price in ounces of gold. Look at the latest version below. The simple fact is that the amount of gold that would have been a 20% down-payment in 2004 buys the whole house today. Also, to read the latest MoneyWeek article on U.K. house prices by Dominic Frisby click here.

Chart of the month (May 2011)
The gold:silver price ratio has dropped from approximately 68:1 down to 31.44:1 over the past eight months. This is a drop of 53.82%, the biggest spike down in the gold:silver ratio since the Hunt spike in 1979. Read more here.

Chart of the month (October 2010)
"Watch out for inflation." This chart needs almost no comment. What you see is the annual growth rate in the price of gold compared to the annual CPI rate in the U.S.

Chart of the month (July 2010)
"The awakening of the little gold investor." This month we feature a chart that shows that the average turnover per transfer in the London Bullion Market has fallen substantially since 1999. However, at the same time, the number of transactions has increased considerably. This could be interpreted such that the average gold investor nowadays is less wealthy, but there are many more of them when compared to ten years ago. This is the sign of a slowly developing bull market.

Chart of the month (June 2010)
"Gold Price Explosion." The economic crisis of 2007-20XX has exposed weaknesses of the European single currency. Gold in Euros has taken out all-time highs and the "psychologically important" EUR 1,000 barrier.

Chart of the month (May 2010)
"Spot the difference."
Different political parties (here in the U.K.) may follow different monetary policies. Is the Bank of England now really independent of the U.K. Government? We will see.

Chart of the month (March/April 2010)
"Long-term development of GBPUSD."
Will the exchange rate hit the lower boundary of the channel (the $1 level) anytime soon?

Chart of the month (February 2010)
"Interest rates peak with house prices."
At least in the UK, this seems to hold as the chart below shows. Lower rates create inflation in house prices, until the Bank of England steps on the emergency breaks and deflates the bubble in real terms. The lower and lower interest rates over more recent years have created a bubble bigger than ever before.

Chart of the month (January 2010)
"Dow up = Gold flat. Dow flat = Gold up."
An interesting chart on the gold-DJIA relationship is the one below. It seems to be such that phases of DJIA stagnation mean a rise in gold, and vice versa. The DJIA seems to stay flat for around 20 years in the stagnation phases.

Chart of the month (December 2009)
"The top callers in gold have not done their homework. The comparison shows that the recent increase in the gold price can not even compare with the rise in the early 1970s."
A comparion of year-on-year rates with day-to-day rates.

Chart of the month (November 2009)
"The time to be in gold is when you can't earn money with a savings account that pays the Federal Funds Rate."

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Last update: August 26, 2014 (Approximity)