Market Harmony wrote:Lemon Thrower wrote:Spikeanator6982 wrote:how long will we go?
Looks like Market Harmony's timing was pretty good even though he was perhaps a month early. The ratio got as high as 125!
I'm now old enough to have seen a few of these cycles. What usually happens is gold is dormant for what seems like foreever, and then makes a move. Its usually a decade long move.
The move starts with the highest quality - gold. From a stocks perspective, first you see the majors move, then the juniors.
Silver is effectively a derivative of gold. Its viewed as a substitute. Its not the first choice. So it moves only when the ratio gets so out of whack.
There is no real logic to this, its emotion. You notice that silver didn't really start to move until folks noticed the ridiculous GSR of 125.
So now silver has some attention. You probably have shorts covering, expecially headed into a summer weekend. Expect the shorts to be laid on again Monday, and the price in the short term to retrace a bit.
Long term, there are a lot of good reasons why the GSR should be 15-16 but a realistic target at the end of this cycle is 55-60. Someone above threw out a target of 56 and it makes a lot of sense based on technical analysis. The reason it makes sense is that its been 4 decades since the GSR spent any time below 50:
https://www.macrotrends.net/1441/gold-to-silver-ratioIf you look at the longer term GSR, before 1984, what you have to realize is that internationally gold, but not silver, is considered a risk-free asset like cash by banking regulators. So they can lever the hell out of it. Silver, in contrast, they have to hold reserves against. So there is unlimited demand for gold, but very modest demand for silver, in the banking system.
If you assume Gold of $2000 and a GSR of 55, then that is $36/oz for Ag. $3000 gold at @ 55 GSR imples $55 silver. $4000 gold at @ 55 GSR imples $73 silver.
THIS THIS THIS
Thank you sir for an excellent contribution to understanding the dynamics of the relationship between the metals.
One point I'd like for you to elaborate upon would be the "first choice" notion of gold. I don't think that many people are aware that they themselves subconsciously agree with the preferred status of gold. Especially when they begin to confuse industry with banking.
I'll try to explain in terms of what happens, or what I've seen happen, and what I expect to happen, but I won't say it makes sense to me and when I first got into this space it was not what I expected.
When you see big money printing, like with TARP in 2008 or the stuff going on now with COVID, what it means is there are more dollars and the same number of assets. Imagine you are playing monopoly, and someone cheat and goes into the next room and takes all of the money from a second monopoly game, comes back to the first game and spends that money. The prices of all assets in the first game should go up.
During TARP, the Fed's balance sheet went from $1 trillion to $4 trillion. I have heard that during COVID is already gone from $4 or $5 trillion to $7 trillion.
Think of the Fed's balance sheet as a mutual fund or stock, and dollars are shares of that mutual fund. So now there are a lot more shares but basically the same amount of stuff (perhaps not true depending on what the Fed did) so the original dollars are worth less, just like in my monopoply example the original money now buys less.
So we are starting to see a move into precious metals and bitcoin out of the dollar.
The mistake I made when I first got to this space is to buy silver first, because it was an even better value. I wasn't wrong, just early, which is a polite way of saying I was wrong.
What happens is that the first instinct of the market is to move towards the largest volume assets like gold. Silver follows. We just saw a big move over several days in silver, but that was probably short covering. I won't be surprised to see it evaporate. But silver will be back.
What you need is a sustained (over time) move in gold to create momentum. Once the sector has new eyeballs, people will move from gold to silver. But right now, that is called a "risk-on" trade and it won't happen until the trend in gold has been confirmed. People are moving to gold as a risk off trade, so it takes some time for the risk on trades to work out.
So you see the gold miners move first, then once the trend is confirmed the juniors and silver producers follow. (Odd ball players like royalty streamers and non-producers like NAK (which are basically just an out of the money long option on gold and copper) are exceptions to this because of the embedded leverage and low operating costs.)
Anyway, that's how its played out in the past and how I expect it will play out this time, over the next 1-3 years. This is the top of the first inning.
A similar asset is Bitcoin. Think of that like gold, because it is the deepest market. The altcoins are a fraction of it. So if I were buying crypto now, I'd buy Bitcoin. Once it got to where I thought the trend was established, maybe $20+K, then I might diversify into altcoins. But right now you are probably early, which is another way to say you are wrong.
One caveat on crypto - for a big portion of Bitcoin's lifespan, futures were not available. If you follow the work of GATA, then you understand how futures allow the big players to manipulate a commodity like gold, silver or bitcoin. So Bitcoin's price history may not necessary be relevant to its future in a world where big players can cap the price with futures.
Posted: Sat Jul 25, 2020 8:06 pm