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« Washington Capitulates: Peak Oil Is Real | Main | IAMGOLD Corporation Options Trade Update »

Precious Metals Stocks: The Next Quarter

Gold Silver Ratio 26 August 2009.JPG
Chart courtesy of Stockcharts

As the sunny month of August draws to a close we take a look at the next few months from September to the year end. There are a myriad of factors to be considered but we will try and keep it brief.

The inflation/deflation debate continues at some pace with analysts and researchers coming down hard on both sides on the line. Our humble opinion for what it is worth is that inflation will take hold sooner or later due to the amount of financial stimulus that has been injected into the global system. The US has been particularly aggressive in this area with their low interest rates, quantitative easing et al, which now weighs heavily on the dollar. Other nations have followed in this direction though in many cases to a lesser extent.

Gold itself still appears to be inversely linked to the dollar as it eyes the $1000/oz hurdle, and the dollar looks for support at the '78' level on the dollar index, hoping to keep the lid on gold prices. As they say nothing goes down in a straight line and that holds true for the dollar, however, the dollar has been debased and we see the next stop being '76' followed by a test of support at the '72' level. During this process of the dollar weakening, gold will challenge and pass the $1000/oz hurdle. We all know that it is only a move up of fifty dollars or so but the psychological barrier will have been breached. This should become headline news and generate plenty of air play for gold and its related mining stocks. Having achieved its immediate goal a rally should ensue taking gold to much higher levels in short order. If it dithers and falls then we will need to re-evaluate the whole story for gold. By News Years Eve we will either be relieved that we were in the right place at the right time or it will be a case of back to the drawing board.

However if we may quote Jim Sinclair of JSMineset recently:

“The price of gold is all in the US dollar, nowhere else.”

The next biggest influence we see is the broader markets as equities have rallied extremely well since hitting the bottom in April when the DOW hit 6,469 before recovering to 9,535 on the 25th August 2009. If this rally keeps going and the dollar declines then one would expect the gold producing stocks to deliver very good returns. However if the broader markets sail into a bout of profit taking which is severe then gold stocks could be sold off as investors flee to the sidelines. If this happens then gold prices will need to hold up thus facilitating a rapid return to favour for the gold producers.

Assuming that gold is about to have its finest hour where should we be positioning ourselves you ask? Well to answer that we can only tell you what we do and you can it add this tiny piece of data to the pot of research that you have gathered to date to help you formulate your investment plan. We hold both physical gold and silver along with the associated mining stocks and some cash for possible opportunistic trades.

We have long held the view that silver will outperform gold and and see no reason to change this stance. Indeed there exists an aberration in the relationship between gold and silver where historically the ratio has been around the 50:1 mark. With gold at say $944.90/oz and silver at $14.25/oz the ratio is at '66' now if gold hits a $1000/oz and this aberration returns to the norm then silver should trade at $20.00/oz. This in turn would see the quality silver producers trade at more than double the prices that you can buy them for today. So our attention will now be concentrated mainly on the silver space.

Make no mistake we are talking about quality silver producers and not speculative juniors with a good story.

Have a sparkling day.

Your thoughts are of course most welcome.

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Reader Comments (5)

Who are some of the examples that you consider "quality silver producers"? I am thinking perhaps names like SLW and EXK.

August 27, 2009 | Unregistered CommenterBC

I believe that gold surpasses 1000 area in the last quarter of 2009 or first quarter of 2010. I am thinking of buying first installment gold around 915, if the price falls further then I will buy at 870 support area. Price shouldn't go below 865 area. I appreciate any comments on my thoughts.

August 27, 2009 | Unregistered CommenterRaghu B

i have my target around 100-108 on gold/silver ratio according to my indicators, 1-2 years from here. right now intermediate trend is up (since june).

August 27, 2009 | Unregistered CommenterDi

The worlds biggest silver producer based in Mexico is Fresnillo. FRES on the LSE

August 27, 2009 | Unregistered Commenterdave

When looking at Fibonnaci numbers (roughly 23%, 38%, 50%, 61%). These numbers usually "play out" when looking at the markets. Using the Dow numbers of the April low and August 25th, we are at a 47% retracement. Will we get to 50%? Highly likely.
Will the Dow go the next level of 61%? Who knows.
But, with governments pouring money out, it has to find places to go - ASSETS.
Historically, when interst rates are held low for long periods of time the stock market does well - look no further than after 2000-2002.
Over here in Canada, the BOC governor said last week that the BOC is looking to "change" it's mandate - which, to me means, letting interst rates rise - which were projected to stay at 0%-0.25% until mid 2010.
Keeping a little powder dry and I wouldn't doubt that the markets will continue to rise after a brief pause here.

August 27, 2009 | Unregistered CommenterMark

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