CHARTS: Gold vs Fed debt shows fair price today is $1,800
On Tuesday the gold price continued to lose ground as money rotates into riskier assets like stocks. In thin volumes on the Comex division of the New York Mercantile Exchange, gold futures for April delivery ended the day at $1,1999.30 an ounce, down slightly from Monday's close after earlier slumping to near its lowest for the year at $1,190.60.
While the gold price struggles equity markets continue to reach new highs. London's FTSE-100 hit an all-time record on Tuesday, while US stock markets did the same after comments from Chair Janet Yellen reassured investors about the timing of rate hikes.
California-based investment site Gold Eagle interviewed noted gold market commentator Nick Barisheff who provided some insights into the disconnect between the economy and capital markets and between paper and hard assets. The president and CEO of Bullion Management Group also showed two fascinating long-term graphs that capture the schizophrenic nature of markets today:
G-E: What asset classes are considered today very inexpensive relative to historical standards and current global economic conditions?
Nick: For the precious metals sector, gold, silver and platinum are very inexpensive today. Right now there is a rare anomaly where platinum is below the price of gold and silver is grossly undervalued with respect to gold. The silver/gold ratio is around 73:1. Based on the US geological survey of how much gold to silver is in the ground, there is sixteen times more silver than gold in the earth’s crust. Under the US Coinage Act when you had the bimetallism standard, it was 16:1. In 1980 the ratio was 16:1. If the ratio reverted to the mean it would be around 56:1. The prices are way out of line for silver and there is a depressed gold price. Platinum is grossly undervalued, silver is grossly undervalued relative to gold and gold is dramatically undervalued. Undervaluation brings us to the $10,000 per ounce gold figure. Until 2012, the US debt and the gold price had a positive correlation of 97%. Then the figures diverge through manipulation, the gold price goes down and the US debt keeps rising. To get back to the correlated relationship that has been there for at least 20 years, the gold price would have to return to around $1,800. Gold is undervalued, silver is more undervalued and platinum is undervalued, so there is a lot of catching up to do. Instead of getting distracted by the manipulation, consider it a gift from the central banks. Right now gold, silver and platinum are all at a discount, so it is an ideal time to buy as much as you can.
G-E: What asset classes are grossly over-valued?
Nick: People are pouring money into the US equity markets instead of looking at traditional calculations like P/E ratios and earnings per share, both of which are manipulated by financial engineering. The Warren Buffet indicator is the telling one where the market cap of the S&P500 is divided by the US GDP. That indicator is rising and is compounded by the vulnerability of record high margin debt for stocks.
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