By Lorimer Wilson
“Analyzing the long-term relationships of gold with other assets suggests that, in most instances, physical gold and silver and the shares of the companies that mine those precious metals have major upside potential – truly major – in the years to come.”
So said Ronald-Peter Stöferle in a 71 page report* on gold he recently released. In an e-mail** to me he implored that I “spread the (golden) word” which I have done below, in Part 2 (access Part 1*** below), in a reformatted and edited [...] version for the sake of clarity and brevity and to ensure a fast and easy read. Stöferle went on to say:
1) Dow/Gold Ratio Suggests Possible Future $10,400 Gold!
At 8.5x the Dow/gold ratio is currently slightly above the long-term median of 8x. This means that gold is still relatively inexpensive in comparison with the Dow Jones. Bull markets tend to end in euphoria and excess, however, which is why we expect substantially lower values.
In 1932 the ratio was 2x, and at the end of the last bull market the ratio was 1x. We think that values of 1-2x might be reached again as a result of the secular bull market. Under the assumption of a constant Dow Jones index, gold would therefore have to rise to USD 10,400/ounce.
2) Gold/S&P 500 Ratio Suggests Possible Future $6,000 Gold
Currently the gold/S&P 500 ratio is almost exactly on its long-term median of 1x. Looking at the development in the 1970s, we expect a dynamic increase. Bull markets do not end around the long-term median – they end in extremis. In order to reach 6x, gold would have to increase to more than USD 6,000/ounce given a constant S&P index.
3) Gold/Silver Ratio Suggests Future Price for Silver Somewhere Between $75 and $650
Currently the gold/silver ratio is about 65x and thus above the median of 55x albeit below the long-term average since 1970 of 68x. A low was hit in 1920, when 15 ounces of silver would buy 1 ounce of gold. 1940 saw a row of historical highs, when one ounce of gold bought 100 ounces of silver and we experienced similar values again in 1990.
Looking back over the centuries, we find that gold has been substantially more expensive since the beginning of the 20th century than in the previous three centuries. The long-term median (since 1687) is 15.7x. This also reflected the actual ratio of physical supplies: gold is about 17 times more scarce than silver. According to USGS, the measured and assumed silver resources are about 6 times as high as the ones of gold.
Therefore silver is at the moment clearly undervalued at a ratio of 65x relative to gold.
[Using a gold: silver ratio of 16:1 equates to a price of $75 per ounce for silver based on the current ballpark price of $1200 per ounce for gold and suggests a price of $650 ) if gold were to reach a parabolic top of $10,400!]
Silver is, like gold, a monetary metal, but the relevance for the industrial sector is much higher than that of gold. This is why silver tends to outperform gold in economic upswings, whereas gold usually outperforms silver in periods of stress.
4) World Gold Mining Index/Gold Ratio Suggests Much Higher Prices for Gold and Silver Mining Shares
Currently the World Gold Mining Index/gold ratio is 1.7x and thus above the long term median of 1.4x. A rise indicates that gold shares are outperforming gold. Since the beginning of the bull market shares gold mining shares have performed more or less in line with the gold price.
5) Gold/Oil Ratio Suggests Possible Future Prices for Gold and Oil in Excess of $3,150 and $250 Respectively
Oil and gold have a strong positive correlation with each other. Both commodities are traded in U.S. dollars and tend to increase when the dollar depreciates against the most important currencies. Also, oil is one of the most important indicators for inflation and thus also for the gold market. On top of that, the argument that oil production is about to see its peak (“peak oil”) can also be applied to gold along similar lines. The constant purchasing power of gold can also be measured in terms of this ratio. For example, one ounce of oil today buys the same amount of oil as in 1945, 1982, and 2000.
The current ratio of 15-16x is slightly above the long-term median. The all-time high was set in 1973, when one ounce of gold would have bought 42 barrels of oil. On the other hand, in 2008 the ratio hit its historical low at less than 6 barrels per ounce.
[Looking at the extremes if gold were to reach the $10,400 mentioned above a 42:1 gold:oil ratio would put oil at $250; the long term median ratio of 15-16:1 would put oil at an unbelievable $650-$700 per barrel; the extreme ratio of 6:1 would put oil at an astronomical $1,733.33 per barrel. Conversely, applying the 42:1 ratio to the current price range of oil between $75 and $80 would put gold at between $3,150 and $3,360 while, for what it is worth, a 6:1 ratio would put gold at between $450 and $480.]
Conclusion
The long-term comparison of gold and other asset classes paints a clearly positive picture. While many ratios are close to the median, this goes to show that the current valuation is certainly not excessive. It is therefore also very easy to rebut the heavily cited argument of the “gold bubble”.
Bull markets end in euphoria, and this substantiates our argument in favor of an imminent transition to an accelerated trend phase [- to somewhere between $3,000 and $10,400 per ounce for gold, between $75 and $650 per ounce for silver and in excess of $250 per barrel for crude oil.]
Courtesy: www.FinancialArticleSummariesToday.com
Tuesday, August 31, 2010
Monday, August 30, 2010
BUY GOLD NOW!
By Jeff Clark, Casey's Gold & Resource Report
I get this question a lot: "Should I buy gold now, or wait for a pullback?"
It’s a valid question. For nearly two years, gold hasn't had a serious decline. There have been pullbacks, of course, but nothing assumption-challenging. In fact, since October 2008, gold’s largest price drop is 10.6% (based on London PM fix prices), and yet the average of all declines since 2001 is 13% (of those greater than 5%). The biggest pullback we've seen this summer is 8.2%. Technically the summer's not over, but I'll admit I'm surprised we haven't had a better buying opportunity.
So, is now the time to buy? It depends on your honest answer to another question: “Do you own enough gold?” By “enough” I mean an amount that lends meaningful protection on your assets. By ”meaningful” I mean that no matter what happens next – another financial blow-up, accelerating inflation, crushing deflation, war, a plummeting dollar, more reckless government spending – you won't worry about your investments.
Whether you should buy now is almost irrelevant if you don't already own a meaningful amount of gold. If you earn $50,000 a year, how is one gold Eagle coin going to protect you if the dollar plummets and sends inflation soaring? If your investable assets total $100,000, is your nest egg sufficiently protected owning two gold Maple Leafs? This is all akin to buying a $50,000 insurance policy for a $500,000 home.
Today we face the prospect of prolonged economic stagnation, and most governments are administering grossly abusive monetary policy as a remedy. While some of the consequences are already being felt, the full ramifications have not hit your wallet yet. But they will.
If you don't have at least 10% of your investable assets in physical gold, or at least two months of living expenses, you have your answer: Buy. Don't use leverage, don't borrow money, and don't buy with reckless abandon, but yes, get your asset insurance policy and tuck it away. And then start working toward 20% (we recommend a third of assets be in various forms of gold in Casey's Gold & Resource Report).
Back to the original question: should we buy now, or wait for a pullback?
The answer comes when you look at the big picture. If you pull up a 9-year chart of gold, what sticks out is that the price is near its all-time nominal high. One could be forgiven for thinking it looks toppy or at least ripe for a pullback. But I assert that the highs for gold have yet to be charted.
What will a gold chart look like after adding five years to it?
When projecting gold's potential price peak, there are many ways to measure it. Conservatively, gold reaching its inflation-adjusted 1980 high would have it topping around $2,400 an ounce. More radically, if the U.S. tried to cover its cumulative foreign trade deficit with its current gold holdings, gold would need to hit about $32,000/oz.
Let's take something more middle of the road, and apply the same trough-to-peak percentage advance gold underwent in the 1970s. (I think there's a greater than 50/50 chance it does more than that, given the precarious nature of the U.S. dollar.) Gold rose from $35 in 1970 to $850 in 1980, a factor of 24.28. Our price bottomed in 2001 at $255.95; multiply that by 24.28 and you get a gold price of $6,214 per ounce.
Sound too high? Well, would it feel high if you had to pay $12.50 for a Big Mac? At $3.39 today at my local McDonald's, that's about what it would cost ten years from now if we get the same rate of inflation we had in the late 1970s.
So if gold hits $6,214, what might it look like on a chart if you bought today around $1,200?
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$1,200 doesn't seem so pricey, does it?
I'm not saying there won't be pullbacks or that you shouldn't try to buy at lower prices. Just keep a big-picture perspective. Let's say gold falls to $1,100 and you're kicking yourself for having bought at $1,200… if gold reaches $6,200 an ounce, the profit difference between buying at $1,200 and buying at $1,100 is only 1.6%. If gold gets whacked to $1,000 (at which point I’ll be buying with both hands) the difference is still only 3.2%.
Heck, even if gold peaks at $2,400, you still get a double from current levels. (But unless government monetary policies immediately reverse course, gold isn't stopping at $2,400.)
So there's my answer. Yes, you have to accept my projection of gold's ultimate price plateau. And you have to sell at some point to realize the profit. But if the final chapter of this bull market looks anything like the chart above, I don't think you'll be too upset having bought at $1,200.
Carpe gold.
Friday, August 27, 2010
Gonzalo Lira: Hyperinflation, Part II: What It Will Look Like
Gonzalo Lira: Hyperinflation, Part II: What It Will Look Like: "I usually don’t do follow-up pieces to any of my posts. But my recent longish piece, describing how hyperinflation might happen in the Unite..."
Gonzalo Lira: How Hyperinflation Will Happen
Gonzalo Lira: How Hyperinflation Will Happen: "Right now, we are in the middle of deflation. The Global Depression we are experiencing has squeezed both aggregate demand levels and aggreg..."
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