Friday, January 29, 2010

Gold: Comments on Price and Relationship to Stocks

The accompanying chart is an about 22-year chart showing long channels of first, gold outperformace v. stocks, then the opposite, then back to gold. Gold was price-controlled for much of the 20th century; we saw long periods of a 5:1 ratio in the pre-FDR days, and at the depths of the Depression after gold was raised to about $35 per ounce, we say 2 or 3 to 1 as the ratio, rising at the maximum pre-WW II to 5 to 1.
From a sentiment standpoint, the only free sentiment data I can follow daily comes from the premium of Gold-Trust's NAV to the value of its gold holdings. That premium has been about 2.5% the past 2 days, and is about 2.1% as I write this.
Having followed GTU for the past year or so, I can say this is about as low a premium as it has carried.
At gold's peak price in early December, that premium surged to about 9%.
Similarly, the much larger and much better known Central Fund of Canada (CEF) is down to a 3.9% premium over NAV. This fund, which owns both gold and silver, has often traded at a double-digit premium to NAV. CEF and GTU are run by the same organization;;
(In case you are wondering, there are various reasons to value precious metals held in these ETFs over those held by the much larger GLD and SLV ETFs; at least many people believe so, which accounts for their premia.)
I take the above to be encouraging signs that the hot money is leaving or has left the precious metals market.
Structurally, gold but not silver is in a confirmed bull market. Similarly, platinum (PPLT) is in a moderately bullish long-term configuration but has not taken out its high of prior years as gold did late last year. Palladium (PALL) is nowhere long-term; its recent strength vs. gold has been a source of concern as it is the most speculative of the bunch.
Currently, gold is holding at the same price, roughly, as the S&P 500. For them to perform equally, gold would have to go up 2% to account for dividends from stocks. Based on the above, definitely fallible indicator, and considering various measures of investor optimism re stocks, outperformance in the months and year ahead for gold is my guess.
Copyright (C) Long Lake LLC 2010

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