Robert Weinberg's job is to promote gold as a solid, sound investment. As managing director of institutional investment for the World Gold Council, Mr. Weinberg is particularly interested in pressing his case with pension funds.
He believes a 5% to 7% allocation to gold is reasonable.
And in touting gold, Mr. Weinberg also, and perhaps not inadvertently, makes a convincing case for a Dow bubble with more air to be let out. This has to do with the historical ratio of the average annual price of gold to the average annual value of the Dow Jones industrial average.
It turns out that since 1900, the average yearly ratio has been 9.7: 1. In other words, it would take 9.7 ounces of gold, historically, to buy one unit of the Dow.
On Oct. 16, the ratio was 25.6: 1, meaning it would take 25.6 ounces of gold to buy one unit of the Dow (calculated by dividing the Dow's value by the spot price of gold).
That ratio is two and a half times higher than the historical mean average, which to Mr. Weinberg's way of thinking means one of two things: Either the Dow's value should be closer to 3,000, or the price of gold should be closer to $800 per ounce. As of Oct. 17, the Dow stood at 8,275.04 and gold cost $311.60 per ounce.
As usual, the reality is probably somewhere in between. But a graph of the historical Dow-to-gold ratio does seem to indicate that some kind of correction is in order. In 1928, the ratio peaked at 14.25: 1. That year, the Dow was at 300 and gold cost $20.67 per ounce. Six years later, the Dow had fallen to 104.04 and gold had risen to $34.70. The ratio went to 3: 1. Then in 1965, the ratio peaked again at 27.59: 1. The Dow stood at 969.26 and gold cost $35.13 per ounce. This time the correction was mostly gold's. Nine years later, the ratio had dropped to 3.88: 1. The Dow was at 616.24, a 36% drop, while gold cost $158.83, a 352% increase.
The most recent peak came in 1999, when the ratio stood at 41.12: 1. So far it's the Dow that's been responsible for the reversion to the mean - its value has fallen 28%, while gold prices have increased 12%.
Mr. Weinberg doesn't expect the ratio to return to 10: 1. "I certainly hope not, anyway, because like most people, I've got more of my money outside gold than in it. But I do know that over 30, 40 or 50 years, asset prices tend to revert back to some kind of trend, and they don't tend to stay away from the trend for long."