Chris’ note: As we highlight the Legacy team’s best of 2020, we had to save room for insight on one of our favorite safe havens: gold.
Our globetrotting analyst Tom Dyson has invested virtually his entire net worth in gold and gold stocks. He’s getting ready for the monster rally he sees coming.
Below, he shares an essay he originally penned in May. As we close out the year, he still has full conviction in his all-in bet on gold. Read on to learn about the surprisingly simple market indicator that fuels Tom’s strategy.
The most important trend in finance is the decline in the Dow-to-Gold ratio.
The Dow-to-Gold ratio tracks the 30 Dow Jones stocks as priced in gold. It tells us the best time to buy gold, and the best time to buy stocks.
It peaked in 1999 at 41. Then, it began what I call its “long walk down the mountain” to where it always ends up. That is, below 5.
Let’s call this the “primary trend.”
But along this primary trend, it got waylaid. It spent eight years backtracking. Eight long years… of fake money and rising stocks.
Now, finally, this most important trend in finance is “back on.”
To my mind – and for my money – it’s presenting the biggest opportunity to profit since, well… I found bitcoin in 2011.
It’s go time. This is it.
I left my job nearly two years ago. We sold all our things. Kate (my ex-wife) and I hit the road with our three kids. We don’t have anywhere to live. And we homeschool the kids.
We left “the matrix” in another important way, too.
When we left America, we drained our bank accounts and retirement accounts of cash, and we converted all our savings into gold and silver.
Why did we do this? We don’t want to be in the system anymore. It’s unbalanced and unstable.
So we’re going to sit on the sidelines, in precious metals, until it’s safe to return to the financial system. When it’s finally safe, we’ll sell all our gold and invest in the top dividend-raising stocks.
Our money will stay there – I hope – generating bigger and bigger dividends for the rest of our lives. (More on this in a moment.)
How will we know when it’s safe?
That’s where the Dow-to-Gold ratio comes in. It’s the ultimate barometer of systemic “health”…
Our Dow-to-Gold trade is based on a simple premise…
You buy stocks when they’re cheap relative to gold. That is, when the Dow-to-Gold ratio is below 5.
Then you sell stocks when they become expensive – when the Dow-to-Gold ratio rises above 15. At that point, you return to gold.
Over the course of the last 100 years, you would have made only six trades. But you would have also handily beaten a “buy-and-hold” approach.
The chart below shows it all. The towering peak in 1999. The countertrend rally from 2011 to 2018. And if you look carefully, a recent reversal…
I interpret this recent reversal as the Dow-to-Gold’s primary trend reasserting itself, getting back on track, and once again marching back down towards single digits.
This next chart shows the zoom-in on the last two decades or so…
The ratio topped out at 22.36 in October 2018. It’s been falling since… and I speculate it’s about to head much lower.
Of course, if I’m wrong, and the Dow-to-Gold ratio isn’t ready to resume its primary trend lower, the market will let us know.
How? By making a new high, rising above 22.36, and invalidating the downtrend. (It’s why I set our “stop-loss” at 22.36.)
But I’m willing to bet that’s not going to happen…
The ratio likes to move in big, clear trends. And once it’s in motion, it tends to stay in motion.
Its drop in 2018 implied to me that gold would start outperforming the stock market… possibly for as much as the next 5 or 10 years.
I immediately drained my bank and retirement accounts and put everything into gold and silver. Then, I started nagging my friends and family to do the same.
Remember, the ratio peaked in October 2018 at 22.36.
My hypothesis is that the Dow-to-Gold ratio is now back on its way down… to a level somewhere below 5. Legacy cofounder Bill Bonner calls this its “rendezvous with destiny.”
I’ll hold my gold until then, at which point I’ll sell it all and invest the proceeds into the stock market.
In the meantime, I’m keeping an eye on the Dow-to-Gold ratio.
Editor, Postcards From the Fringe
Chris’ note: At writing, the Dow-to-Gold ratio is 15.98. So Tom is still waiting to trade in all his gold for stocks. Tom tracks gold’s moves… and shares his family’s travel adventures… in his daily e-letter, Postcards From the Fringe. Keep up by subscribing for free here.