This has been an interesting week with a lot of new lows unseen in quite some time. We saw silver today testing new recent lows below the $28 mark. Gold has tested the $1550 mark a couples of times. Oil even took a massive hit, dropping roughly 10% this month down to $90 a barrel. The common theme? USD strength. Yup, believe it or not.
Investors around the world have been fleeing the Euro pushing the Euro/USD pair to 2 year lows. This translates to a lower euro price and a subsequent higher dollar price. The most recent catalyst for further Euro selling pressure is that ratings agency Egan Jones has downgraded Spain’s credit rating. This has been the single largest catalyst for the ‘May Commodity Selloff’ that we have seen in North America. The credit downgrade has renewed fears of a European economic recession, sending the Euro down. Gold and silver have not declined nearly as much in Euro terms as they have in dollar terms. This surge in USD cannot, and will not last. The spotlight is on Europe now, and in due time will be shining brightly on the US once again. Investing in precious metals for the past ten years has been quite the success and education for some and a missed opportunity for others. This pull back in precious metals we are witnessing is an excellent opportunity for those already invested to add to their positions, as well as for new precious metals investors to get involved for their first time at what are relatively low price levels. This discounted price, just like anything on sale, does not last forever. Looking back in 3-5 years anyone who is able to get their hands the physical precious metal at today’s prices will be happy they did so. The Gold/Dow ratio explained below reinforces the opportunity people still have to invest in physical precious metals.
A lot of people like to determine things in ratio’s; or things relative to something else. A P/E ratio for stocks, or the Gold/Silver ratio for precious metals. A ratio we follow closely, and believe anyone who has ever thought of investing in anything should be aware of the gold/dow ratio, simply, how many ounces of gold it takes to equal the Dow. The ratio currently sits at just under 8 with gold at $1550 and the Dow at 12500 (approximations). We can see clearly two things on the bottom chart with trend lines. One, is that volatility has picked up immensely since the establishment of the Federal Reserve and the ultimate elimination of the Gold Standard (more on that next week). Two, is that after a peak ratio of about 50/1 in 2000 at the height of the dotcom bubble, the ratio has come racing down towards the low of about 1/1. This ratio has been seen at two other points in history before and I believe it is likely we are headed towards this 1/1 ratio once again before we see the ratio begin work in the other direction.
The long term trend, measured by any metric, is up for gold and silver. The short term on the other hand has been lower. It is times like these, short term divergences in the long term trend, that allow us at Canadian Bullion Services the opportunity to follow the first part of one of the cardinal rules of investing: buy low, sell high.
I’d like to end of this week’s blog post by encouraging you to watch and listen to a link of famed French President Charles DeGaulle calling for the only lasting standard of money the world has ever seen.
BUY THE PHYSICAL!