Gold Breaks from Traditional Trading Versus Oil and USD, Looks Strong

Safe haven demand and a lack of investment alternatives continues to help gold break from its traditional trading relationships, rising despite a strong U.S. dollar and weak crude oil prices. In fact, analysts at Genuity Capital noted that gold is more than $200 per ounce above its normal value relative to the greenback.

Meanwhile, sustained investor interest in gold throughout 2008 helped push dollar demand for bullion to $102-billion, a 29% annual increase, according to World Gold Council’s Gold Demand Trends. The organization also said identifiable investment demand for gold, which incorporates exchange traded funds (ETFs), bars and coins, rose 64% last year. This is equivalent to an additional inflow of $15-billion.

Genuity also pointed out that the opportunity cost of holding bullion has diminished, with treasury yields at record lows and demand fundamentals deteriorating in the broader commodity and equity markets.

Concerns about the stability of the global banking system and credit rating of the U.S. Treasury has been a major driver of physical demand for gold. Until clear evidence of stabilization in the global financial system emerges, analysts at Genuity expect this trend to continue.

“If the U.S. dollar weakening resumes in the medium term, as we believe it shall, and oil prices improve, gold should continue to prosper,” they said in a research note. As a result, Genuity continue to recommend gold over base metals in the near term.

Aram Shishmanian, CEO of World Gold Council, said:

The economic downturn and uncertainty in the global markets, that has affected us all, is unlikely to abate in the short term. Consequently, I anticipate that gold, as a unique asset class, will continue to play a vital role in providing stability to both household and professional investors around the world.

North American gold equities have risen more than twice as much as gold itself in the past month, showing stronger than typical leverage. Silver has also begun to outperform.

Genuity highlighted Silver Wheaton Corp. (SLW) was a name that provides leverage to the metal and has the potential for a re-rating.

The firm’s top gold picks in the intermediate space are Allied Nevada Gold Corp. (ANV), IAMGOLD Corp. (IAG) and Northgate Minerals Corp. (NXG). It also favours seniors Goldcorp Inc. (GG) and Yamana Gold Inc. (AUY). The firm also raised its target prices for gold stocks by an average of 28% to reflect higher price assumptions for the metal.

Genuity said:

While our target multiples are now mainly near the top of the typical valuation range (1.0x to 1.7x), we believe that continuing positive momentum in the gold price should support further outperformance from the gold equities.

With the arrival of fourth quarter and year-end earnings season, one area of reporting that will see additional focus is the updates on gold reserves.

RBC Capital Markets expects gold producers to increase the gold price assumption used to calculate reserves from the previous range of $550-$575 per ounce to $675-$725. This will better match the three-year historical gold price as suggested for use by the SEC.

“With this increase, we expect most producers should be able to more than replace gold reserves mined during 2008, and show net gains from the end of 2007,” RBC analysts told clients.

Comments

[The Spiral ...:]

Very informative, I have both gold exposure (GLD 8%) and Dollar exposure (UUP8%) and have seen perform even as i intedted to trade one at the expense of the other. Great Blog, Thanks

Feb 19 10:40 AM

[ROLEXDAYTONA:]

I call a Gold price irrational exuberance and expect it at 500$ in August-September and back to it's real price of 200$.

Feb 19 10:41 AM

[GMiki1:]

Gold will certainly outperform for the year but many of the technical analysts expect a pullback to the $850 range before it shoots up to $1200. However, you never know what economic news will call gold to simply roll forward as we've seen before. That's why we had such a long period of consolidation this last year, in fact. It doesn't matter though. If you're long gold and don't need the liquidity, hold on.

As for ratio versus oil and the dollar, that is sometimes not the "traditional" ratio for periods of time.

And for silver, it is still way undervalued. It's a small market and quirky. Also dominated by a couple of gangster banks shorting it on the COMEX. Long-term--wow.

A lot of the analysts *are* now saying go for the stocks since they have underperformed and will perform extremely well in order to catch up--the badly beaten juniors included.

Metals and energy, ag and water are still the only investments to make since the market is expected to plummet again. And that's why we hold physical PMs, too.

Feb 19 11:08 AM

[zorkfin:]

Buy a gold coin. In your timeframe it will help you to pay back to the pawn shop for the rolex you pawned to pay for your Daytona mortgage.


On Feb 19 10:41 AM ROLEXDAYTONA wrote:

> I call a Gold price irrational exuberance and expect it at 500$ in
> August-September and back to it's real price of 200$.

Feb 19 12:27 PM

[CLH:]

I have heard $1200 gold almost as often as $200 oil last summer. The end result will be the same.

Feb 19 12:48 PM

[bits:]

Have a little patience CLH. You will see both $1200 gold and $200 oil over next few years.

Feb 19 01:21 PM

[scottzzz:]

If I were an Arab, I would price my oil at 1 barrel for 1 oz of silver.....

Feb 19 02:42 PM

[moe2009:]

then the dollar will be worthless


On Feb 19 02:42 PM User 360301 wrote:

> If I were an Arab, I would price my oil at 1 barrel for 1 oz of silver.....

Feb 19 08:57 PM

[5142152-337:]

User 360301: Thank you for your pithy comment. Its refreshing to see there are thinkers out there willing to contribute.

I have been calling for the decoupling of gold and silver from the USD and oil. Its now occurring.

Buy physical gold and silver now!

Feb 20 08:54 AM

[Mad Hedge F...:]

GOLD! GOLD! GOLD! This is the cry being heard worldwide by investors in the Great Gold rush of 2009, looking for a generic “short America” trade. Where in the past gold seekers used sluices, shovels, and jackhammers to extract the glittery stuff in California’s Sierras, Alaska’s Klondike, and South Africa’s Rand, today the instrument of choice is the mouse. Online traders are unleashing clicks by the millions to buy ETF’s, American Eagles, mining shares, and futures contracts. With stock traders sitting on their haunches, wondering if the Dow will hold 7,000, this is the only thing that is working right now. Gold is no longer just catastrophe insurance. Traders are buying gold more for what it isn’t, than what it is. It isn’t made of paper, made in the US, or held in custody by Bernie Madoff or Stanford Financial. The yellow metal hit a new high for the year of $999 overnight, and the risk of a “melt up” is increasing. The Street Tracks Gold Trust ETF (GLD) is now the seventh largest holder of the barbaric relic in the world. For the newly aggressive, look at the DB Gold Double Long ETF (DGP), which gives you a 200% long exposure to gold, and is up 54% in a month. Who says there is nothing to buy out there?

Feb 20 10:52 AM

[Mad Hedge F...:]

The longer crude stays below $40, the more production is being taken off the market. At this stage all 35 million barrels of storage at the Cushing, Oklahoma delivery point for west Texas intermediate are brimming with crude. The 709 million barrel Strategic Petroleum Reserve (SPR) is nearly full. And there is another 50 million barrels stored in supertankers at sea which is building by the day. Demand has collapsed so fast, that oil companies can’t shut down production fast enough. The scary thing about this is that when the next crude spike upward in crude comes, it will be worse than the last one. Take advantage of the current distress prices to accumulate oil infrastructure stocks. Kinder Morgan Energy Partners (KMP) has a PE multiple of 25 and a dividend yield of 8.3%. Enterprise Products Partners (EPD) has a $10 billion portfolio of fractionation facilities, storage, offshore drilling platforms, and 32,478 miles of product, natural gas, and crude pipelines, and carries a modest PE multiple of 12 X and a dividend yield of 9.2%. More expensive Kinder Morgan Energy Partners (KMP) with a PE multiple of 25 X and a dividend yield of 8.3% is also worth a look see.

Feb 20 10:56 AM

[Alphabet Super:]

If you are a believer in playing divergence from historical ratios even in this historically "crazy" market, have a look at Platinum. Similar to silver, platinum to gold ratios have come way down, and are now correcting to the upside along with gold. In the six months leading up the November lows gold dipped about 20%, while silver dropped 45%. If you feel that this is enough to tell you that silver is undervalued consider platinum which plummeted a whopping 60% in the same period. I know the knock on platinum is that it is not the same as gold in the "ultimate flight to safety" sense. Yes, the main consumers of platinum are the auto industry, yikes. But worldwide auto sales have increased the past two months. If you believe in historic ratios look for platinum to fight its way back the 1.5-2.5 times gold level. See PTM or PGM.

Feb 20 03:19 PM

[Conan the B...:]

Alphabet: So you are saying that Platinum has a chance to go to $5,000 if gold gets to its Inflation adjusted projections of $2,000+.

But I am more curious about "worldwide auto sales".

Where did you get this data?

Feb 22 02:45 AM