Insights into a Major Stock Market Illusion

By Elliott Wave International

Not everything is what it seems. That includes the stock market. Elliott Wave International's October Financial Forecast takes you behind the curtain:

The chart below shows the DJIA in terms of real money, i.e. ounces of gold:

The left side of the chart shows the Dow’s rally from the meltdown low in March 2020, where the Dow was valued at 11.97 ounces of gold, to the January 5, 2022 high, where it was valued at 20.11 ounces of gold. In terms of U.S. dollars, the Dow declined 22% from January to October 2022. The index also declined 22% in terms of gold to an initial low on March 8, 2022. As the Dow in dollars then rallied to new highs, the index in terms of gold moved sideways in wide swings. While the Dow in U.S. dollars made a new all-time high on Sept. 25, so did gold. As the chart shows, the Dow relative to gold is still down 22% from the January 5, 2022 high, being currently valued at 15.82 ounces of gold. Last month, we showed world stock prices in terms of gold; the ratio this week closed at its lowest level in over four years. The Dow/gold ratio is now on the verge of breaking a two-and-a-half-year support shelf. Stocks are not gaining value in terms of real money; it’s an illusion caused by monetary inflation. The coming bear market will pop the illusion of wealth as stocks decline not only in terms of gold but also in terms of U.S. dollars.

On Oct. 11, 2007, the Dow hit an intraday all-time high -- and then dropped more than 50% in the next 2½ years. Could it happen now?

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This article was syndicated by Elliott Wave International and was originally published under the headline Insights into a Major Stock Market Illusion. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.