Saturday, April 02, 2011

New 28 Year Lows for the Gold Silver Ratio

HOUSTON -- With gold still unable to punch through its $1,440s resistance, but with silver simmering just pennies under its $38 lid, the gold/silver ratio (GSR) has fallen to a fresh new bull market low.  Sporting a now 37-handle, meaning that it takes about 37 and change ounces of silver to “buy” an ounce of gold metal, the GSR just put in its lowest weekly close in 28 years as shown in the chart just below.

20110402GSR LT 
(GSR since 1981, weekly. Note the 1983 plunge to a 32-handle as the next technical target with some congestion there at or near 35. If any of the images are too small click on them for a larger version.)

We Vultures believe that the gold/silver ratio is involved in a reversion to its historic relationship to gold of between 15 to 20 ounces silver to one ounce of gold, but it is unlikely to get there in a straight line.  At $1,430 gold a 20:1 ratio implies a silver price of roughly $71 the ounce.  At 15:1 it would be $95 silver.  The ratio has already come in more than 40% (from the middle 60s) since last August, as expected.  We plan to convert some of our physical silver metal into gold in stages as the ratio reaches certain lower benchmarks as we have mentioned in previous postings

More in a moment, but first here is this week’s closing table. 

One glaring item in that table is that silver just keeps on outperforming: Is that because the U.S. government no longer has any physical silver to manhandle the market?  Despite plentiful availability of some silver products on the street, most notably US 90% silver coins and most 100-ounce name brand bars, demand at the commercial level (for the big average 1,000-ounce good delivery bars) remains intense as evidenced by continued (although moderating) backwardation in the silver futures market.  Note also the curious fall in gold open interest late week despite the moderate increase in commercial net short positioning as of Tuesday.  A falling open interest is usually inconsistent with a major rise in commercial net short positioning.

Just below is our table summary of the weekly change in the disaggregated commitments of traders report (DCOT) from the Commodity Futures Trading Commission (CFTC).

20110402DCOT table 
Positioning as of Tuesday, March 29. Source CFTC for DCOT, Cash Market for gold and silver. 

Note please that the Other Reportables in gold have moved back to a long position, albeit a small one, after having gone from record net long in December all the way to slightly net short last week.  We find their exit from the long side interesting, somewhat spooky, but not necessarily predictive.  

“Frank Talk on Gold” 


One of our weekly stops on the GGR Rabbit Trail is to Frank Holmes’ blog at U.S. Global Investors, based in San Antonio.  USGI currently runs something close to a $2.5 billion book for clients.  We found this week’s installment of particular interest.  Just below is a clip, followed by a link to the rest of the excellent work Frank provides to the public free of charge. 


Frank writes:  “The reality is that gold doesn’t possess the traits necessary for a financial bubble to form. Rodney Sullivan, co-editor of the CFA Digest, has done some great research on the history of markets and bubbles going all the way back to the 1600s. He discovered three key patterns in the 47 major financial bubbles that occurred over that time period.

“These three ingredients of asset bubbles are financial innovation, investor exuberance and speculative leverage. The process begins with financial innovation, which initially benefits society as a whole. In the exuberance stage, usage of these innovations broadens; they become mainstream and attract speculation. The third step, the tipping point for a bubble to form, is when these speculators pile on massive leverage hoping to achieve greater success. This excessive leverage adds increased complexity, which mixes with irrational exuberance to create an imbalance in the marketplace. Eventually, the party comes to an end and the bubble bursts.

“This is what happened with the housing bubble in the U.S. as Main Street home buyers leveraged themselves 100-to-1, Fannie Mae leveraged itself 80-to-1 and Wall Street investment firms leveraged themselves over 30-to-1.

“Gold as an asset class is far from being overbought by speculators. Eric Sprott recently did a fascinating presentation explaining how underowned gold is as an asset class. Sprott wrote that despite a 30 percent increase in gold holdings during 2010, gold ownership as a percentage of global financial assets has only risen to 0.7 percent. That’s a big increase from the 0.2 percent level in 2002, but Sprott points out that it’s misleading because the majority of that increase was fueled by gold appreciation, not increased level of investment.

“Sprott estimates that the actual amount of new investment into gold since 2000 is about $250 billion. Compare that to the roughly $98 trillion of new capital that flowed into other financial assets over the same time period.

“Gold equities have seen even lower levels of investment. From 2000 to 2010, $2.5 trillion flowed into U.S. mutual funds, but only $12 billion of that went into precious metal equity funds. Of course, those figures were significantly impacted by the advent of gold ETFs during the decade. Despite the growth of the SPDR Gold Trust (GLD), which held more 1,200 tons of gold as of March 31, gold remains largely underowned as a portion of global financial assets.

“The bar chart from CPM Group shows gold as a percentage of global financial assets over time. In 1968, gold represented nearly 5 percent of financial assets. In 1980, the level had fallen below 3 percent. That figure had shrunk to less than 1 percent by 1990 and has remained there since. Sprott wrote that “it is surprising to note how trivial gold ownership is when compared to the size of global financial assets.”


“That point is magnified by the pie chart from Casey Research. Dr. Marc Faber included it in his April newsletter to show just how small a portion gold and gold stocks are for large institutional investors like pension funds.


“Investors who don’t think gold is a bubble but fear they’ve missed the boat need to look at the short- and long-term factors supporting gold at these historically high price levels. In the near-term, gold prices are being buoyed by continued weakness in the U.S. dollar.”

End of clip.

To read the entire Weekly Investor Alert from USGI click here.  Or copy and paste the full link below into your browser.

Excellent research like that is essential for Vultures to keep in mind as we are constantly bombarded by very smart sounding, but relatively clueless “experts” in the financial media opining that gold or silver is in a bubble or that just because they “seem high” they feel they are ripe for a collapse.  Just remember that the percentage of capital invested in gold is still quite small by historical standards.  That is in the context of a world that is printing oceans of new currency while mankind struggles to find meaningful new sources of precious metals. The increase in the currency quotient vastly outstrips the amount of new supply that can be brought in to answer massively increasing demand.  (The bullish case is too easy to make these days.) 

Mostly in the Waiting Room Short Term   

We Vultures continue to catch up on research for the various junior miners and explorers we have an appetite for, if the Trading Gods are so benevolent as to send them into our entry targets.  We have to note that while both gold and silver are within spitting distance of their respective highs, lately the “Little Guys” (our name for the junior miners and explorers) have been generally underperforming their larger cousins, but more or less tracking with gold. 

We are bargain hunters here at Got Gold Report.  Having built up our Bargain War Chest in the past few months by taking delicious profits on our high-flying fun winners, getting to our beloved Free Shares on quite a few issues, selling down to Trophy Shares on still others (a portion of the Free Shares get to stay in the port till doomsday that way) and kicking out laggards on their backsides, we are willing to calmly and patiently bide our time, waiting for the kind of opportunity that makes gaming the Little Guys a lot more fun.  Vultures (Got Gold Report Subscribers) know that we think that bargains continue to be mostly scarce, but they also know we are finding a few issues to nibble on here and there.


How do they know?  Because of the Vulture Bargain Candidates of Interest (VBCI) charts now showing on the subscriber pages.  We just posted an exciting new VBCI this past week and are considering adding another one in the days or weeks ahead.  

We mentioned that the Little Guys have been underperforming of late and to show it graphically, consider the chart just below. 


(CDNX, daily. Note declining volume in March.)

Clearly the Little Guys are no longer outpacing the metals to the upside, but just as clearly they are not (yet) exhibiting the kind of investor exodus we have seen in years past ahead of major trouble.  We mean it when we say this represents a “modest” non-confirmation – so far. 

Bargains are as scarce as honest politicians, but we Vultures are as patient as we need to be, while nibbling here and there on a few special situations from time to time. 

Vultures please note:  There is currently an issue with affecting the placement of annotations making changes to the charts difficult in some cases.  We may not be able to make all the changes to the linked charts we would like by our usual time target of 18:00 ET on Sunday, but we will certainly do what we can by then and save the changes we cannot make on Sunday for when we can make them. 

That is all for now, but there is more to come.


The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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