Long time readers of this site know that we’ve consistently maintained a bullish bias when analyzing precious metals. The Dow/Gold ratio in particular is one of the more intriguing long-term charts that we look at. But today I would like to point to some recent comments made by Citi Technical Analyst Tom Fitzpatrick.
From King World News:
“You can still have corrections and track sideways occasionally, but to us the trend is solid. The pattern is quite clear, and we still believe this $1,791 area is really quite critical in terms of the next leg higher for gold, as well as the $37.48 level on silver.
When we get a weekly close through both of those critical levels, we anticipate that will give us an acceleration which will take us up toward the targets on gold to the $2,055 area (see chart below), and silver back to the old highs near $50. However, on a longer-term basis we believe we have a setup here which suggests that gold could continue to go higher for some time to come.
We’ve always been of the view, and are still of the view that gold is first and foremost a hard currency more so than it is a commodity. So the building blocks are there for gold to continue to go higher, not just against the dollar but against all of the other paper currencies as well.
Given the dynamics that we have in the background, the similarities that we to the 70s, we would argue the combination of the similarities, and the major difference which is the money printing being exercised by all of the developed world’s central banks, we can see gold continue to follow a trend equal in magnitude to what we saw in the 70s.
Ignoring the final move, which was caused by a Russian invasion of Afghanistan, we need to get to $3,400 just to replicate the core move seen in the 70s. We don’t see that, at the end of the day, as a particularly aggressive call.
When it comes to silver, if we see the moves we are looking for in terms of the next leg of the metals, which is $2,050 for gold and $50 for silver, then you are looking at a gold/silver ratio of around 41. This suggests the classic trade for silver to the upside as the ‘poor man’s gold.’
When gold breaks above $1,790, many people will feel they have missed the boat, and they will go to silver instead. So silver should outperform gold. People have to remember that we are only at the midpoint of the gold/silver ratio of the last 45 years. So it is not inconceivable that we could still go lower in terms of that ratio.
If we see gold move to the $3,400 level, it is not inconceivable that we may see silver closer to $100. Investors have to remember that at the end of the 70s the gold price doubled in a mere five or six weeks. If 3 to 5 years down the line we see that the base policy of the developed world is to continue printing money, then the gloves are off in terms of what levels gold and silver could actually go to.”
I can’t really disagree with any of this stuff. Most of what he says has been exactly how I’ve felt for years. The trend here is higher and has been for a long time. I don’t see any reason why we wouldn’t continue to give the bulls the benefit of the doubt in the precious metals space. And this goes for both absolute performance as well as relative to equities. I think it’s important to recognize and be cognizant of both of these ongoing trends.
Tags: $GLD $SLV $GC_F $SI_F