In the Long Wave Group Report of a couple of days ago, a comparison is made between stock prices and gold prices by plotting the ratio of the two over the last 125 years. The Long Wave Group have several web sites, at http://www.longwavegroup.com/ and http://www.thelongwaveanalyst.ca/ and this report is accessible at http://www.gata.org/files/LongwaveGroupReport-07-19-2010.pdf and there are two main comments that I want to make about it.
Firstly, the criticism is that this long wave is called a Kondratieff cycle. The cycle has a peaks at 1929 and 1999 with another peak about halfway between. That makes the period about 70 / 2 = 35 years. Generally the Kondratieff cycle is considered to be a cycle in prices (of commodities) rather than in stocks and has a period averaging around 54 years. In a recent post https://cyclesresearchinstitute.wordpress.com/2010/07/24/is-the-kondratiev-wave-still-relevant/ I stated the same thing about another investment adviser.
Dewey reported a cycle of about 35.5 years and the Cycles Classic Library Collection lists cycles near this period as occurring in weather, aurora, earthquakes, lake levels, tree rings, plant and tree growth, manufacturing production and a variety of other things. As I noted earlier it can also be found in the stock market, and these reports confirm that.
Secondly, the graphing of the ratio of stock prices to gold is a good way of making very clear the huge swings that occur in their relative value – with ratios of well over 10 to 1. The three peaks are spaced quite evenly, averaging 35 years apart. If we look at troughs the story is not so clear. The later trough about 1940 which is not as deep as the 1932 one is perhaps a more logical trough to use because the first trough is so close in time to the peak.
The next trough can be expected to happen around 2015, or perhaps a little sooner. However we must treat all of this cycles analysis with some suspicion as there are less than 3 full cycles seen, and the first one didn’t do a peak where it should have.