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Identifying trend changes of the Dow-to-Gold Ratio using the MACD Indicator
The 1929 peak
The Dow-To-Gold-Ratio peaked in August 1929, with a value of 18.36.
The relationship between the Dow-To-Gold-Ratio and the two moving averages is shown in the next chart (from July 1928 through December 1930).
In order to fully understand the dynamics around the evolution of the Dow-To-Gold-Ratio across the entire period, we will split the period into three periods.
(a) July 1928 through August 1929
Looking at the graph, one can observe that during the period of July 1928 through August 1929, the DTG consistently registered higher values than both STMA and LTMA. At the same time, STMA was constantly above LTMA, indicating a constant bullish trend.
Looking at the MACD & Signal Chart (next chart), we can observe three different developments:
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MACD and the Signal Line were parallel between July and Nov 1928, both with positive values. This basically indicates a steady trend, with no significant changes.
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MACD moved above the Signal Line between Nov 1928 and May 1929. This indicates , accelerating the increasing trend.
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MACD and the Signal Line were parallel between May and Aug 1929, showing slowing momentum.
The histogram chart (next) illustrates the momentum dynamics. The low momentum period, July - Nov 1928, is followed by its strengthening [of the momentum] (“2a”) and then by its weakening (“2b”). The final section (“3” – Jun – Aug 1929) shows weak momentum, with negative values.
Bringing all these observations together, the most valuable observation is about the last months of this period, that is May – August 1929: Despite a 40% increase of the Dow-to-Gold-Ratio during these months, the “MACD vs. Signal Line” and “Histogram” charts reveal a weak and even negative momentum. In other words, the Dow-to-Gold Ratio increased significantly, but this increase was not sustainable – something that the following months proved.
(b) August 1929 through July 1930
The next chart shows the dynamics registered between August 1929 and July 1930.
We can notice the following:
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DTG (green line) dropped sharply under both Moving Averages (Aug – Nov 1929).
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This drop was followed by a short time increase (Nov 1929 – March 1930), but this increase was not strong enough to reverse the trend.
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In March 1930, the Short-Term Moving Average moved below the Long-Term Moving Average (aka “Death Cross”), confirming the trend change.
Observing the MACD and Signal chart for the same period (Aug 1929 - July 1930, next chart), one can notice:
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MACD crossed slightly above the Signal Line (Aug 1929), but both MACD and Signal Line continued their parallel evolution.
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In Nov 1929, MACD crossed below the Signal Line (another indicator of a trend change) and continued to stay below it until July 1930.
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In Jun 1930, MACD again moved closer to the Signal Line, but did not cross it.
The Histogram chart (next), reveals clearly the momentum dynamics between Aug 1929 and July 1930:
(1) A slight increase of momentum (Aug – Sept 1929), but this increase does not continue.
(2) A strong negative momentum reversal from October 1929 to January 1930.
(3) A weakening negative momentum between Feb and July 1930.
(4) It is also easy to observe that the momentum does not move into positive territory and reverses after a minimum negative value in June 1930.
(c) July – December 1930
For the rest of the period we analyze (Jul - Dec 1930), the Dow-to-Gold-Ratio and Moving Averages chart indicates a clearly bearish trend, confirmed by:
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Dow-to-Gold-Ratio below both moving averages;
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the Short-Term Moving Average below the Long-Term Moving Average.
(c) July – December 1930
For the rest of the period we analyze (Jul - Dec 1930), the Dow-to-Gold-Ratio and Moving Averages chart indicates a clearly bearish trend, confirmed by:
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Dow-to-Gold-Ratio below both moving averages;
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the Short-Term Moving Average below the Long-Term Moving Average.
The next two charts, “MACD & Signal” and the “Histogram” both show a clear bearish pattern:
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the MACD was constantly below the Signal Line;
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the Histogram was constantly in negative territory.
The next two charts, “MACD & Signal” and the “Histogram” both show a clear bearish pattern:
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the MACD was constantly below the Signal Line;
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the Histogram was constantly in negative territory.
The 1933 trough
The 1933 trough of the DTG Ratio was registered in February 1933, with a value of 1.94. Still, it is important to observe that the evolution of the Dow-to-Gold Ratio during this period is more complex.
Therefore, we chose to look into a longer timeframe, from the middle of 1931 thorough the end of 1935. As the chart below reveals, the Dow-to-Gold Ratio registered three bottom values during this period:
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June 1932, with a value of 2.06;
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February 1933, with a value of 1.94;
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July 1934, with a value of 2.52.
One of the key elements surrounding the “1933 moment” (and obviously with a great influence over the dynamics of the Dow-to-Gold Ratio evolution in this timeframe) is the Executive Order 6102 of April 5, 1933, signed by the US President Franklin D Roosevelt. This order required all persons to deliver all gold coins, gold bullions and gold certificates to the Federal Reserve, in exchange for a compensation of $20.67 per troy ounce. During the following months, the price of gold expressed in US Dollar was increased in small increments up to $35 per troy ounce, value that was established in the Gold Reserve Act of January 30, 1934.
The relationship between the Dow-To-Gold-Ratio and the two moving averages is shown in the next chart:
In order to fully understand the dynamics around the evolution of the Dow-To-Gold-Ratio across the entire period, we will split the period into three periods.
(a) October 1931 – June 1932
In this period, the Dow-to-Gold-Ratio is constantly below both Moving Averages, while the Short-Term Moving Average is below the Long-Term Moving Average. This illustrates a typical bearish pattern.
As we notice in the next graph, in the period until June 1932, MACD and Signal Line are parallel with each other, both being in negative territory. This indicates that the negative trend, as observed in the previous chart, is not significantly challenged. In March 1932, MACD moved above the Signal Line but there is no momentum supporting this move. The two lines are still close to each other and the distance between them is reduced again in May-June 1932.
The histogram (next chart) confirm the observations made above. The positive momentum building up in Feb, March and April 1932 does not have enough strength to change the trend and it moved back towards the zero line.
(b) June 1932 – Feb 1933
In July 1932 the Dow-to-Gold Ratio started to increase increasing and in August 1932 it crossed above the Short-Term Moving Average, breaking into the “comfort zone” situated between the two Moving Averages. Still, this proves to be unsustainable, as the Ratio falls again below the Short-Term Moving Average in October 1932, continuing the downwards trajectory.
In the next chart we can observe that, while both MACD and the Signal Line are in negative territory (indicating a general downwards trend), the MACD is constantly above the Signal Line. This shows that the distance between the Long-Term and Short-Term Moving Average is constantly decreasing. Being in a general downwards trend, this shrinking distance may indicate a move closer to a throw.
The histogram for this period (next chart) illustrates the momentum dynamic. There is a positive strengthening momentum starting from July until October 1932, followed by a weakening from November 1932.
If we combine the observations made for the last three charts for this period and as we move closer to Feb 1933, we can conclude:
The DTG and Moving Average chart showed a new low, within a downwards trend (DTG below both moving averages and Short-Term MA below the Long-Term MA). The MACD moved upwards closer to the zero line, though with decreasing momentum. All these indicate a throw may be near.
c) Feb 1933 – July 1934
Looking into the evolution of the Dow-to-Gold-Ratio related to the Moving Averages, one can notice that the DTG moved upwards after the throw of February 1933 and crossed above both Moving Averages in June 1933 and remained there until December 1933. The Short-Term Moving Average (STMA) crossed above the Long-Term Moving Average (LTMA) in September 1933, a signal indicating a trend change. Still, the Dow-to-Gold Ratio crossed back below both Moving Averages in January 1934, showing that there is not enough momentum for sustaining the trend change – a situation confirmed by the fact that DTG continued to remain under both Moving Averages until July 1934, and the fact that STMA crossed again below LTMA in May 1934.
Looking at the MACD & Signal chart, we notice first [period marked (1)] that MACD, while constantly above the Signal Line, is moved towards the Zero Line and crossed it in September 1933. Then [period marked (2)], MACD crossed below Signal Line and finally crossed the Zero Line in May 1934.
The histogram (next chart) shows first a period with strengthening positive momentum [marked (1), April through September 1933, with a slight pull back in August) followed by a period with weakening positive momentum [marked (2a), October 1933 through February 1934], and continued by a period with strengthening negative momentum [marked (2b) from February through June 1934].
If we combine the observations made for the three charts for period February 1933 – July 1934, we can conclude:
The DTG and Moving Average chart shows that there was not enough positive momentum to sustain the change of overall trend of the Dow-to-Gold Ratio, from bearish to bullish. This observation is also confirmed by the evolution of MACD, that crossed above the zero line only to return back into negative territory shortly after. Further, the histogram shows not only a weakening positive momentum but also a strengthening negative momentum, leading the evolution of the Dow-to-Gold Ratio to a new throw. The slight reversal of the histogram in July 1934, where we can see a weakening negative momentum, is the first indicator showing that the bottom level may have been achieved. But, in order for this to be the case, it will have to be confirmed in the coming months.
d) August 1934 – December 1935
The evolution of the Dow-to-Gold Ratio during this period follows the clear pattern of a typical bullish trend. It started below both Moving Averages, it moved into the “comfort zone” (between the Moving Averages) in October 1934 and broke above both of them in April 1935, continuing the ascending trend.
Looking at the MACD & Signal Line for the period August 1934 through December 1935, we notice that the MACD line crossed above the signal line and it continued to move slowly towards the Zero Line. MACD crossed the Zero Line in June 1935 and continued its positive evolution while remaining slightly above the Signal Line.
The Histogram for this period shows also a constantly positive trend – starting with a negative momentum that kept decreasing in strength, and was followed by a positive momentum that kept strengthening.
A couple additional observations about the 1933 moment
As mentioned above, during the analyzed period (October 1931 through December 1935), the Dow-to-Gold Ratio registered three low points: June 1932 (value 2.06), February 1933 (value 1.94) and July 1934 (value 2.52).
The “1933 moment” is of outmost significance when analyzing precious metals. From a Dow-to-G Ratio analysis perspective, February 1933 would have been the best moment to make the swap between gold and stocks. Still, misreading the signals and making the move in June 1932 would not have caused a significant loss, since the difference between the two values is minimal (2.06 in June 1932 and 1.94 in February 1933).
From a historical perspective, 1933 it was the year of the famous “Executive Order 6102 – Forbidding Hoarding of Gold Coins, Gold Bullions, and Gold Certificates”. With this order, signed by President Franklin D. Roosevelt, on April 5, 1933, American private individuals and institutions were forbidden to hold gold coins and bullion, except for collectible coins and jewelry.
This restriction for gold coin and bullion ownership lasted until 1974, when it was repealed under President Gerald Ford. This is also the year when the gold future contracts trade started on the COMEX Exchange in New York, allowing for non-physical trading of precious metals.
The 1980 trough
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The 1999 peak
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The 2007-2008 moment
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The 2011 trough
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