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Identifying trend changes of the Dow-to-Gold Ratio using the MACD Indicator
What is Dow-to-Gold Ratio?
The “Dow to Gold Ratio” (DTG) is a number that tells us how many ounces of gold would be necessary to buy the Dow Jones Industrial Average index (DJIA) at any given time. The calculation is made by dividing the value of the DJIA to the ‘spot price’ for gold.
Why look at the Dow-to-Gold Ratio?
A legitimate question is whether following DJIA and Gold price enables an investor to define the best strategy? One of the advantages to using the DTG ratio is eliminating currencies out of equation. DJIA is calculated based on stock prices of 30 major companies listed on New York Stock Exchange. Gold spot price is determined in the futures market, where no physical delivery of the metal is required.
During the 20th century, money lost its property as being a ‘store of value’ and became currencies, used only as a medium of exchange, without any intrinsic value. Both DJIA and Gold price are expressed in currencies. Because currencies represent imaginary value, there is no limit to how much of a currency can be released into circulation. Therefore, currencies are subject to inflation, making them very volatile and an ideal tool for speculation.
When calculating the DTG by eliminating the immaterial currency in between, we compare directly two asset classes (stocks and precious metals) that are both based on material substance and labor.
Can the Dow-to-Gold Ratio be used to develop investment strategies?
When used correctly, the Dow-to-Gold Ratio proves to provide returns superior to any other index-based strategies, be it 100% allocation in equities (stocks) or precious metals. This is because this strategy allows for positioning on the bullish trend not only when stocks are favored, but also when investors are looking for safe havens and precious metals become the darlings of the market.
Is there a historical evolution pattern of the Dow-to-Gold Ratio?
The 100 years Dow-to-Gold historical chart shows a clear cyclical pattern, with an evolution in waves. This means that every time the trend shifts, there is an excellent opportunity to change allocation from stocks to metals and back, and benefit from the coming bullish trend.
Is your method new or ground breaking?
No. Our model is a simple and straightforward application of the MACD (Moving Average Convergence Divergence) model. MACD is a widely used indicator to study trends. In order to find out what makes our method different, please see next FAQ.
What makes your method different?
While we do not alter the basic concepts of the MACD, our method is differentiated by the settings we are using. The most used settings are (12, 26,9), that is 12 periods for the Short-Term Moving Average, 26 periods for the Medium-Term Moving Average, and 9 periods for the Signal Line. We are using different settings (currently not disclosed).
We are also applying the method to three sets of data – daily, weekly and monthly. In this way, we determine the short-term trend (daily closing values), the medium-term trend (weekly, closing values at the end of Friday trading day) and the long-term trend (monthly, closing values in the last trading day of the month).
Is your method suitable for Intraday Trading?
The MACD can be applied to any data series, including very short periods (hours or minutes). Still, intraday trading has never been our focus due to extreme volatility during the day. Intraday trading requires constant monitoring of the price moves and, although technology makes it possible to automatize the tasks, the amount of time dedicated to trading is significant.
Our purpose was to find a simple method that would give a potential investor a tool to help with making decisions for the longer term. Using daily values, a Buy or a Sell order is normally placed once every few weeks. Using weekly values, a Buy or a Sell order is normally placed once every few months. Using monthly values, a Buy or a Sell order is normally placed once every few years.
Can your method predict the direction for next period?
No. It is important to be aware of the fact that MACD is an excellent indicator for eliminating noise and identifying trends. Still, it is a lagging indicator, being based on historical data. Therefore, MACD cannot be used to predict or anticipate the direction of the market for the next period (day, week, or month).