Last week I wrote about the gold silver ratio as a way of determining which represents better value. Since then the ratio has moved higher, with gold outperforming silver on its move above $1,100. This has brought with it a number of bullish articles and while the move is encouraging and supports the idea that gold may have bottomed, in relative terms gold looks stretched to me at this time if we take a step back and look at the bigger picture.
First, consider gold relative to the other precious metals and oil. In the charts below a higher number indicates relative overvaluation. Only for palladium could you argue that gold is not stretched. By the way, look at the volatility in the oil ratio. You often see people talking about the stable gold:oil ratio but movements from 10 to 30 is an increase of 200% and a fall from 30 to 10 is a 66% reduction – hardly stable.
Next, if we look at agricultural commodities (click here for a bigger version). The left hand side has the breakfast club commodities – OJ, coffee, sugar, corn and bacon – and the right hand side has cotton, coca, soybeans, lumber and cattle. Only two of these ratios are within long term ranges with the rest at elevated levels.
Finally, the charts below compare gold to other metals (in these charts the ratio is inverted, so a low figure indicates gold is relatively more expensive – click here for a bigger version). Again, most of the ratios are at the extreme end of long term high/low trading ranges.
Of course the above charts may be reflecting the relative weakness of commodities but on that logic when commodities recover that will just put the ratios back into their normal ranges, meaning gold will not get a boost from that general money flow into commodities when (if) it happens. No doubt gold is attracting fear money at this time and moving up along with the US dollar – another example of its non-correlated behaviour with asset classes – but it is still too early to call as the chart below puts the move above $1,100 into context.
Gold has been above the 200 day moving average before and failed and it doesn’t take a technical analysis genius to look at the chart above and see that gold has to move to at least $1,150 and hold before shorts will lose their confidence (although recent equity jitters and questions about the strength of economic recovery would be giving them pause for thought).
In terms of Asian demand, Perth Mint is seeing good premiums on kilobars in the fact of this price rise. Normally demand dries up on price surges so this is positive but we wouldn’t classify demand as crazy either, which considering Yuan devaluation and the fact that early February is Chinese New Year could also be read negatively.
All up, I feel that gold is a bit stretched and thus likely to grind sideways in the medium term as it builds a base and other metals and commodities catch up.
