Gold Ratios
The following is an extract from
commentary that was posted at www.speculative-investor.com on 13th January
2002.
Gold versus Silver
In our November 5th commentary we analysed
the gold/silver ratio and concluded as follows:
"Our thinking is that the first
decade of the new millennium will have more in common with the 1970s than
with either the 1980s or 1990s, so after an initial period (2-3 years)
in which gold out-performs silver we should see these two metals moving
higher at roughly the same pace. The silver market is much smaller than
the gold market and the silver price therefore tends to be more volatile
than the gold price. The large price gyrations that regularly occur in
the silver market will make for some wild oscillations in the gold/silver
ratio, but the big picture (as represented by the long-term chart) should
be kept in mind.
Before leaving this topic we'd like
to reiterate one point. We do not think it is coincidental that the gold/silver
ratio began trending higher at the same time as the great stock bull market
was rolling over. Gold is the ultimate monetary asset - it is desired during
those times when confidence in fiat money and the financial system is falling
and disdained during those times when the confidence level is high. Silver
is also a monetary asset, but it has significant non-monetary uses (gold's
non-monetary uses are trivial in relation to its monetary uses). As such,
when gold starts to regularly out-perform silver it indicates a shift in
confidence. 1999's upward reversal in the gold/silver ratio is more proof
that the major financial market trends have changed."
Below is an updated version of the
long-term gold/silver ratio chart included in our Nov-05 commentary (chart
source: http://www.cairns.net.au/~sharefin/Markets/Charts/AUAG.htm#SI).
Gold has been trending higher versus silver for the past 2.5 years, so
if the markets are going to follow a similar pattern to the 1970s then
we are now close to the point where the gold/silver ratio should flatten
out (gold and silver will begin to move up at roughly the same pace). Due
to its greater monetary quality we think gold's risk/reward balance is
superior to that of silver in the current environment, but if last year's
massive monetary stimulation kicks-in (we think it will) then we could
see periods when silver dramatically out-performs gold.
Gold versus Platinum
Below is a long-term chart of the gold/platinum
ratio (chart source: http://www.cairns.net.au/~sharefin/Markets/Charts/AUAG.htm#PL).
Gold out-performs platinum during those periods when confidence in fiat
money (and the governments that sponsor the fiat money) is low/falling
and/or during periods of prolonged economic weakness. When the level of
confidence in governments, central banks and fiat money is high/rising,
platinum tends to out-perform gold.
If the next decade is going to give
us more of the same (an on-going bull market in central banking and the
money that central banks issue/sponsor), then platinum should continue
to out-perform gold. Needless to say, this is not what we expect
and the gold/platinum ratio might already be showing signs of a trend change.
The Stock Market versus
Gold Stocks
Over the past 18 months we've used
several different ways to explain why we think that 1997 was the year when
the US economy became a 'bubble'. One of those ways was to look at the
performance of gold stocks (represented by the XAU) relative to the performance
of the overall stock market (represented by the S&P500 Index) as illustrated
by a long-term chart of the S&P500/XAU ratio (see below). This chart
shows that the S&P500/XAU ratio trended higher at a steady rate from
the early 1980s until 1997, at which point it exploded upwards out of its
long-term channel (the S&P500 suddenly began to out-perform the XAU
at a much faster rate). During the final quarter of 2000 we noted that
the ratio appeared to be experiencing its final 'blow-off' and that a return
to the long-term trend seemed like a 'no brainer'. We thus have a long-standing
(since early-December of 2000) target of 10:1 for the S&P500/XAU ratio.
The time from the S&P500/XAU ratio's
break above its long-term trend to its final peak was about 3.5 years.
If the bubble deflates at the same rate that it was inflated then the ratio
will move back into its long-term trend channel during the first half of
2004. However, bubbles tend to deflate at a faster rate than they were
inflated (probably because fear is a more urgent emotion than greed), so
the long-term channel should be reached well before 2004. In fact, we expect
the S&P500/XAU ratio to be trading at 10:1 or lower by the final quarter
of this year.
Regular financial market forecasts
and
analyses are provided at our web site:
http://www.speculative-investor.com/new/index.html
One-month free trial available.
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