Monday, March 12, 2007

Bush's False Market Rally

Here's an interesting point from a comment thread on Barry Ritholz's business and market blog, The Big Picture. The post in question shows a graph of the Dow Jones Industrial Average divided by the price of gold. While the two track pretty closely for more than a decade, they diverge sharply beginning in 2003, when the ratio begins to fall dramatically and steadily (ie. a unit of DJIA buys less and less gold). Barry wondered whether anyone had a reasonable explanation for the divergence, and one commenter proposed the following:

It means that the value of the Dow has gone up when priced in dollars, but down when priced in gold. It's a currency question, implying that the market rally is just US dollar inflation. What the divergence is saying is that the price of gold is going up and the price of dollars is going down. We get lazy and forget that whenever you look at a "regular" chart of the Dow, it compares two variables: Dow and U.S. dollars.

Chart the Dow in dollars and we have a multi-year rally.
Chart the Dow in euros and we're pretty much flat.
Chart the Dow in gold and we've been falling for a while now.

The chart implies then that the US stock market rally is an illusion, we just *think* the markets are going up, but really it's just the currency going down.

I'm not enough of a financial wiz to offer any analysis, but it struck me as something to consider. 

Posted by Judah in:  Markets & Finance   

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