Gold futures rose in electronic trade on Tuesday. Gold for June delivery advanced $3.50 so far, or 0.24%, to trade around $1,471 an ounce in European trading hours.
The yellow metal suffered a $200-plus decline that began on Friday 13 April and accelerated into the next Monday when it dropped to multi-year lows of $1,326 an ounce.
Gold’s recent push higher breached important technical levels and the 50% recovery of recent losses may be considered as a bullish signal for the gold market.
On Monday, the market gained roughly 1%, and is now sitting above the $1450 level again, from where the $1,550 level will eventually be targeted, although $1,500 will certainly have a psychological impact on the buyers. A pullback also may occur in the short term. Long-term investors could still hope for profits.
Elsewhere, latest analyses of the gold/silver ratio support traders’ expectations of higher price in the coming months.
Before the steep correction, some of the big money managers made prescient calls ahead of the precious metals prices crash. Goldman Sachs urged clients to start shorting the yellow metal a few days before the slump, while Société Générale called “The End of the Gold Era” in the beginning of April.
However, all of the investment banks’ revised forecasts show predictions for average gold prices this year are above today’s price. HSBC is the most optimistic for 2013, with a target of $1,700. Bank of America/Merrill Lynch is not far behind, forecasting gold will average $1,670 this year. CITI is more inline with the current levels, because it projected the sunset for gold nearly a year ago.
Elsewhere, the Dutch state-owned banking giant ABN Amro, just recently revised its global macro and gold outlook, forecasting a $1,300 gold price by the end of this year. Moreover, the bank forecasts $1,000 gold by December 2014, and $800 gold in 2015. This may be a little grim perspective, but a gold price around $1,300 an ounce this summer seems realistic to us.
Over the past few weeks, gold and silver have proven to be extraordinarily volatile. The both metals endured selloffs of historic proportions. Such events cannot be written off and easily forgotten.
Given the fact that gold and silver have become now slightly cheaper in terms of their nominal prices, it is important to review the gold/silver ratio in order to examine how the two metals are valued presently relative to each other. Perhaps this will provide some clues as to where the metals’ respective prices are headed in the near term.
In order to analyse the gold/silver ratio, one should consider the daily closing prices of gold and silver and graphed the relative strength of gold versus silver during the past few years.
Since 2006, silver has traded in a very wide range of prices in comparison to gold, with the ratio bottoming when gold was at just over three times the price of silver in the Spring of 2011 and topping out at about 8.5 during the depths of the financial crisis in 2008 when panic gold buying occured.
During the first two years of silver’s existence, prior to the financial crisis, gold was worth five to six times silver pretty reliably. After the financial crisis ended, the ratio plummeted all the way down to just above three, indicating massive outperformance of gold by silver in that period. After the overreaction to the ratio’s low, a steep uptrend ended in early 2012.
A second uptrend is in place for about a year now, with the ratio slightly trending up from five to six, indicating gold is once again outperforming silver. The ratio break out from the uptrend and once confirmed another period of gold outperformance is likely on its way. As gold experienced a sharp correction a couple of weeks ago, many investors and traders took fresh positions in gold at lower prices than it was possible during the past few years.
In terms of a target, 2008 to 2010 saw the ratio bounce between six and seven and if this range holds once more, the up move in gold relative to silver is just getting started. This observations aim at initiating a pairs trade, taking advantage of the outperformance of one asset over the other. In addition, the ratio could increase from gold moving up, silver moving down or a combination of the two. It will be helpful to investors to know which precious metal will outperform.
Given that gold is simply used as a form of currency and as a hedge against inflation, any number of events could set off a strong bull run or a selloff in gold versus silver. So far, investors have shown a very clear preference for gold over silver in the past year. However, given silver’s very low price and dual usage, this fact may change.
