US Stock market / Gold cycles 1850 - 2013
I. Kondratieff wave problem:
While researching Kondratieff wave back in December 2007, I noted that after year ~1960-1970 something happened, the line go up and up and up.
Russian economist Nikolay Kondratieff researched/found this (Kondratieff wave) cycle in the "western" economy world back in year 1925. The figure shows the "updated" wave until year 2000.
The Kondratieff wave chart actually is chart of US stock market in USD terms. Second cyclical line shows ideal "Kondratieff waves" with "Kondratieff seasons". Until 1970's the USD was backed by gold. If we see long term Gold chart in USD, we can see that the price was mostly flat until 1970's, when Nixon closed the gold window:
After that because of US inflation, the dollar get devaluated at very fast levels. With all this inflation - goods, commodities, the stock prices raised. One way to compensate this inflation stock price raise is to denominate the stock prices in gold, e.g. to construct the Stock / Gold ratio.
II. Stock prices methodology:
For US stock prices we can use Dow Jones Industrial Average index. It is compiled from year 1896. Before 1896 that we can use Axe-Houghton Industrial Stock Price Average index. This index is compiled from 1854. Unfortunately, I had no data feed for it. The data is "scraped" manually from following chart:
Our associates scraped average price for each year between1854 and 1899.
Because now we have 2 different indexes (DJIA and AHISPA), we used the overlapping years to estimate the coefficient of relation between them (similar to flat exchange rate). Finally we had stock prices from year1854 to 2008. The chart looks like this:
III. Dow / Gold ratio:
Finally if we construct last chart we receiving US stock prices but measured by gold:
What we get are 3 peaks - years 1929, 1965 and 2000. We the peaks are between 35-40 years. What is interesting here, the lows are not that precise - ~1896, 1934, 1980. Also each peak is higher than previous one and we can project a trendline.
|Peak #||Inflection||Year||Ratio||DJIA |
|Gold Price |
(average in USD)
|1||TOP||1929||15.04||310||$ 20||The Roaring Twenties, Wall Street crash|
|BOTTOM||1934||2.82||98||$ 34||Depression of 1934, Gold Reserve Act (Gold confiscation)|
|2||TOP||1965||26.07||915||$ 35||Vietnam war|
|BOTTOM||1980||1.46||895||$ 612||US Recession of 1980, Soviet war in Afghanistan, Gold hits $850, Interest rates hit high|
|3||TOP||2000||38.29||10,688||$ 279||The Dot Com Stockmarket Bubble|
|BOTTOM||2010||less 5||$ 2,000+||The Housing Bubble|
IV. Possible predictions:
As FED inflating the USD, Gold will go higher. Many analysts believe the US stock market will go down. My opinion is we will have slow growth there. In all cases, I can not found even one analyst who believe the bull marker will resume.
1. The Dow/Gold ratio must go down to under 5, or even under 3.
Lately I read someone who said Dow will go down to 5000. This means Gold go to 2000 USD (ratio 2.50).
However I see Dow higher because of hyperinflation. If you note peak # 2, Dow doesn't fall at all in USD terms (2%). If we assume this peak #3 we have 2% drop, this means Dow will go down to 9800. This makes gold to be 3920 USD at its next top.
We do not need to forget that between 1965 and 1972, USD was still backed by gold. This means that at that time the dollar was stable and inflation was not that high. I think that's why we see those 2% drop. I believe this time we will see small increase of US stock prices. If we guess 2% increase in Dow, this put gold to 4360 USD at the top.
2. Timeframe is much difficult.
The downtrend in peak # 1 is just 5 years, in peak #2 is 15 years. We are 8 years away from year 2000. For these 8 years ratio drops from 38 to 15. This is 61% drop for 8 years. This gives us 5 more years, e.g. year 2013.