Gold is slowly winding down from the highs it achieved in 2011 but my research suggests that the metal is still overvalued and future drops will be coming in the future. The Gold/Silver ratio and the Gold/Platinum ratio lay out a bearish case for gold and a bullish case for Platinum. Fibonacci retrenchment suggest the Gold bottom will be somewhere around $900 per ounce.
The Platinum/Gold Ratio:
Historically Platinum has been 25% to 100% more expensive than Gold. This is because in addition to being rarer than Gold, along with its speculative and decorative uses Platinum has major economic value in the automobile industry and technology. Platinum is currently trading at around $956 per ounce. The metal has not been so low since the nadir of the 2007 recession.
Platinum and Gold 16 Year Spot Prices:
This chart shows us that either Gold is overvalued or Platinum is undervalued. In my opinion the culprit is Gold. Speculative demand (this is primarily inflation fears) is propping up the Gold prices while the Platinum price is supported by its fundamental economic demand.
Platinum has resistance at around $850 and it will stay shelved here for the long term unless economic conditions worsen, in which case the price would drop. I predict Gold will fall to meet it because of technical indicators we will explore later. At the $900-$1000 range the two metals will cross over and if economic conditions improve Platinum should begin to increase while Gold stays flat.
It is difficult to say for sure why Platinum is so cheap. Supposedly the economy has recovered and U.S auto sales have already surpassed their 2006 peak. The low Platinum price suggests to me that the weakening European and Asian economies are putting such a drag on demand that the supposedly strong U.S economy cannot keep up prices. This doesn't explain it all though- more research is needed.
Over the long term (5 years plus) I am bullish on Platinum but I see no short term catalyst to revamp its bull market.
I think the Gold/Silver ratio has questionable value as an indicator of future prices. Most of the time this data is used to present a misleading bullish case for silver when in reality it can only show us when either metal is overvalued.
Over the short term this ratio has been pretty good at predicting over-valuations in both metals.
As we can see here, over the last 25 years the Gold/Silver ratio has been pretty predictable. It currently it is at a historic low point because Gold is overvalued. Silver is at a very fair price in my opinion.
Here is a comparison between Gold and Silver returns over the same period:
Silver, like Sold, had a bit of a bubble back in 2011 but it capitulated much further than the yellow metal. This is because the Silver price is more tied to economic demand than the Gold price is. Speculators who are still worried about inflation or government debt monetization have remained in Gold but not in Silver.
The problem for Gold is that speculation is not self-sustainable and unless severe inflation materializes the Gold/Silver ratio will normalize via a correction in Gold. I want to reiterate that this correction will almost certainly not be through a price increase in silver. Silver is not gong anywhere.
The Technicals Suggest The Bottom Is Not Yet In:
Fibonacci retrenchments suggest a bottom at around $900 for Gold. This study was made in January but it is still my projection. The $900 number may seem low but I think its fair and still represents a healthy premium over most miners cost of production. I would be ready to buy Gold at this price.
Bearish on Gold, Silver and the economy in general. Moderately bullish on Platinum but not enough to put money down. Buy target for Gold is $900 per ounce, likewise for Platinum, but fear of economic deflation keeps me away from the industrial precious metals for the time being. Would not buy Silver at this point in time.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.