Wednesday, May 28, 2014

Putting A Thermometer on Gold

Gold just got smashed today.



Both gold and silver are down 2% for the day, which is pretty impressive to me. Personally, I'm more of a fan of silver now, seeing how it is usually seen as the high beta cousin of gold, but it seems to be moving in tandem now. That tells me that silver is actually performing better than gold, being more resistant to the downside - at this level.


http://www.macrotrends.net/1441/gold-to-silver-ratio-historical-chart

The Gold/Silver ratio also lends a bit of support here. With the moving average recently trending downwards, it might be entirely possible for silver to outperform gold on a relative basis, while both metals do well.

However, on the flip side, looking at some macro charts and some cycles chart, silver actually has the weaker picture compared to gold. Maybe gold bugs out there believe that the bottom is in for gold, and it is only a matter of time before we see upside.

Personally, I think that the bottom for gold looks set in deep pretty solid. For silver, I'm not too sure. Technically, I could see it going down further. My thesis on the metals now is that they are going to get smashed, but only once the margin calls start coming in. That would be the final washout for the metals, and we're in for a nice pretty rally, especially since it seems no one learnt anything from the Great Financial Crisis.

However, regardless if the metals are dropping, one thing still gives me conviction, and that is the hope of gold stocks.

http://www.macrotrends.net/1440/hui-to-gold-ratio

The chart is from Macrotrends. They have the XAU to Gold ratio as well, but I think that the HUI to Gold ratio is a much better ratio, even though there is less data available for it. The XAU is heavily tilted towards large caps, with 3 companies making up 50% of the index. The HUI is a lot more balanced, with 16 companies equal weighted.

With that said, the HUI to Gold ratio is look particularly stunning. If you're a precious metals bull, you have absolutely got to own gold stocks. Not only do they largely share the same thesis, they are even cheaper than gold, which many people already think is too cheap!

I'm sticking to my guns and long term investment principles. I'm young and wild, I'm a risk taker, and right now, the risks I see in front of me looks particularly rewarding.

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