Thursday, October 18, 2012

Gold Will Outperform Dow Says Parets

Those who understand currencies and their responses to stimulus measures by central banks, know that it devalues them, as the Federal Reserve has done from its inception in the United States, whereby the U.S. dollar has plummeted over 95 percent in value since 1913.

Inflation is another major factor, which always follows stimulus measures, or as it's called today: quantitative easing.

While those who invest in precious metals like gold and silver know they are the place to be when central banks go crazy with money printing, there is another metric to check for those that may not understand the relationship between gold and the increase of the money supply. And that is the Dow-Gold Ratio, which measures how much it costs gold to buy one share of the Dow.

According to Eagle Bay Capital hedge fund manager J.C. Parets, it is the right time to rediscover this metric, citing the strength of the data since 1999, when the gold bull run began.

At that time it took 44 ounces of gold to acquire 1 share of the Dow Jones Industrial Average. Parets says that in 1980, one ounce of gold would buy 1 share of the DJIA. So from 1980 to 1999, it went from a ration of 1-to-1 to 44.

In 2011 the ration was 6, and at the time of this writing it has risen to 8.

Since 1:1 has been the historic low of the metric, Parets said there is a long way from 8:1 to that low, and believing gold will undoubtedly outperform the Dow, he sees gold to still be a good investment even beyond the obvious impacts of the effect from overstimulating the economy and the resultant price movement of gold.

This is simply another piece of data to use in our arsenal to measure the price movements and probabilities of gold.

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