The Federal Reserve’s policies of holding interest rates at 0% and inflating the monetary base have set the stage for high inflation, which will lead to a decline in the ratio. However, if the Federal Reserve has not yet printed enough money to offset the deleveraging associated with the unwinding credit bubble, then the Federal Reserve will be forced to institute even more policies to create the illusion of economic growth. Therefore, the Dow/gold ratio will ultimately decline further because of inflation regardless of the rate of economic growth or contraction. Whether stocks fall as gold rises, gold soars as stocks stagnate, or both stocks and gold go up or down together, the ratio will inevitably bottom much closer to 1:1 just as it did in 1932 and 1980 (Figure 1). With the financial and fiscal imbalances of the US much greater today than they were in 1932 or 1980, and the US Dollar under attack as a reserve currency, a decline in the Dow/gold ratio to that level is logical.
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