Daily Market Update

Gold Investments Market Update


Gold and silver continued to surge yesterday with gold up 1.6% and silver up over 4%. They have continued to rally in Asia and early trade in Europe.

Gold has risen on the continuing oil surge with oil reaching new record highs (above $130) again this morning. There are fears of shortages and possible rationing in the next few years as the markets gradually and belatedly realize the reality that is peak oil. The FT reports that the fear of a global oil shortage within five years propelled oil futures prices to well above $130 a barrel, further stoking inflationary pressures in the global economy. Investors rushed to buy oil futures contracts as far forward as December 2016, pushing prices as high as $139.30 a barrel, up $9 on the day. Veteran traders said they had never seen such a jump. Contracts to be delivered at the end of 2012 have soared almost 60 per cent while near-term prices have risen by 35 per cent since January.

The dollar has again fallen sharply versus the euro and Australian dollar but is flat against sterling and up versus some of the Asian currencies (SGD) and Scandinavian currencies (SEK, DKK).

Today’s Data and Influences

The focus will switch to the U.S. later in the day with the minutes of the last FOMC meeting due for release at 19.00.

Silver Surges and Remains One of the Worst Analysed Commodity Markets

Silver futures for July delivery rose 69.7 cents, or 4.1 percent, to $17.725 an ounce. The price has advanced 19 percent this year, while gold climbed 9.8 percent.

Silver remains one of the worst and most inaccurately analysed of all the commodity markets and this creates a huge opportunity for investors who are willing to do their own research and go against the herd. Incidentally the herd were wrong on the NASDAQ, on property and they will be wrong on assuming that this will be another short benign recession.

The article below is slightly out of date but all the fundamentals remain the same. Most institutions have been bearish on silver since it was above $7 per ounce and continue to be as they fail to look at the big picture reality as looked at in this article: http://www.gold.ie/documents/articles_of_interest/AOI_08-05-07_Why_the_Silver_Price_Is_Set_to_Soar.htm

Many silver experts and analysts said that it was the best analysis of the silver market they had encountered and it was picked up internationally and syndicated and referenced in papers such as the International Herald Tribune.

While gold was up some 2% yesterday, silver was up by more than 4% and we expect this outperformance of silver vis-à-vis gold and all other commodities to continue in the coming months. With regards to the price of gold and silver – after the recent healthy correction, they are both now cheap vis-à-vis other commodities and especially against black gold or oil.

Gold, silver and oil are highly correlated over the medium to long term. But oil can often outperform them in the short term prior to the precious metals catching up when higher oil prices lead to inflation hedging buying of silver and gold. Not to mention safe haven buying when higher oil prices lead to slowing economic growth.

The long term average gold to oil ratio is 15 to 1 or 15 barrels of oil to one ounce of gold (see chart below). Today, the ratio is near record lows at 7.1 ($865/ $127 = 6.8). Oil is at over $125 per barrel and so if we multiply it by 15 we get a gold price of $1,875. At the higher end of the scale gold has traded at over 30 times a barrel of oil which based on today’s oil price would result in a gold price of $3,750.

Thus based on today’s oil price of $125, the gold/oil ratio would suggest that gold is very undervalued at a near historic low of 6.8. The ratio will revert to the mean in the coming weeks and months and will thus see gold reaching its inflation adjusted high of some $2,400 per ounce in the coming years.

Similarly with the silver/oil ratio. The average is 4.4 but at the moment it is at 7.6 or 7.6 ounces of silver required to buy one barrel of oil ($127 / $17.03 = 7.6). Should there be a classic reversion to the mean average of 4.4 that would result in silver prices rising to over $28 per ounce (127/ 4.4).


This happened as recently as 2002 and 2004 and is more than likely to happen again. Indeed the ratio was as low as 2.4 as recently as 1999 when oil traded at $10 a barrel and silver at some $4.50 per ounce. At the higher end of the scale, in the 1970s silver traded at a ratio with oil of between 3:1 and 1:1. At today’s oil prices that would mean silver trading at between $42 and $127 per ounce.


Silver is trading at $17.75/17.80 per ounce at 1200 GMT.


Platinum is trading at $2177/2187 per ounce (1200 GMT).
Palladium is trading at $446/450 per ounce (1200 GMT).

Mark O'Byrne
Executive Director


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