Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Ratio Analyses Suggest Gold and Silver Will Go MUCH Higher!

Commodities / Gold and Silver 2010 Aug 30, 2010 - 01:12 AM GMT

By: Lorimer_Wilson

Commodities Best Financial Markets Analysis Article“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.]

*http://www.gata.org/files/ErsteGroupGoldReport-06-2010.pdf
**Dear Mr. Wilson, I have just released by new benchmark report on gold which I think is a really high quality read! Feel free to share this report with the public. We’ve got to spread the (golden) word .
Best regards from Vienna. Your regular reader, Ronni! Ronald-Peter Stöferle, CMT, Erste Group Bank AG, Vienna, Austria
*** http://www.munknee.com/2010/07/12335/

Lorimer Wilson is Editor of www.FinancialArticleSummariesToday.com (F.A.S.T.) and www.MunKnee.com (Money, Monnee, Munknee!) and an economic analyst and financial writer. He is also a frequent contributor to this site and can be reached at editor@munknee.com."

© 2010 Copyright Lorimer Wilson- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Lorimer Wilson Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in