Famed money manager expects the Dow:gold ratio to revert back to 1:1, much like it did in January of 1980. If that happens, we could see gold at $6,000 an ounce.
About a decade ago, famed money manager Michael B. O’Higgins saw a chart in the “Letters to the Editor” section in Forbes that showed the historic ratio of the Dow to gold. He noticed the ratio stood at a remarkable 1:1 in January 1980. At the time Mr. O’Higgins was looking at the Forbes chart, the Dow:gold ratio stood at 44:1.
“It just hit me that Ben Bernanke was going around, he was threatening people that he was going to pull out all the stops to fight deflation and so on, so that’s when I started getting interested, and in January of 2002, I put 25 percent of my money in gold and gold-related stocks at around $280,” O’Higgins told Jim Puplava of Financial Sense in a recent interview.
O’Higgins made the bet when the gold-to-Dow ratio stood at 36:1. Today, the ratio’s around 8:1, but O’Higgins predicts the ratio will fall to 1:1 over the next few years.
“I still think at some point here, gold will trade even with the Dow,” he said on Financial Sense. “Now, today that would be $13,000. When I first bought gold at $280, people would say, ‘Well, where do you think it’s going to go?’ I said, ‘$1,000.’ It’s a chip shot because at that time, the Dow was 10,000, and 10:1 is the long-term average ratio of the Dow to gold. But, I said, ‘It’ll probably go to one-to-one, but at a lower Dow number.’
“(Today) people ask me, if you had to give a number, honestly, I have no idea what it’s going to do, and nobody else does, but I would guess 6,000 for both the Dow and gold at some point over the next few years.”
That could lead one to think that now’s the time to jump into gold, but O’Higgins actually thinks platinum could perform better. If gold hits $6,000 an ounce, O’Higgins says, that would imply $7,500 platinum. That’s why the money manager sold his gold holdings and shifted to platinum in September. It’ll be interesting to see if O’Higgins’ bet pans out.
O’Higgins is the author of two influential investing books: Beating The Dow (1991) and Beating The Dow With Bonds (1999).
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