Precious Metals

Gold and silver have been on a steady uptrend since 2000.

Despite the fact that gold and silver have been two of the best performing assets Since the early 2000s, there have been questions about the future direction of prices since mid 2011. Since September 2011 both metals have been in a period of consolidation and decline, leaving many investors scratching their heads.  The question many ask is ‘are we past the peak for gold and silver? Are we now on the down slope of this trend’?  This is an important question that Fortrus believes should play an important role in your investment portfolio, because we believe that Gold and Silver are due for a major move higher before we start to reach the peak of the market.

 

One type of cycle analysis that Fortrus uses is the Elliot Wave model. This model better helps us understand the trends and movements of broader market cycles. The EW model stats that major up cycles tend to have 5 waves, with the last being an explosive exponential rise.  Looking at the charts above, Wave 1 went from 2001 to 2008; the Wave 2 correction lasted for most of 2008.  The next up cycle, Wave 3, then took hold and it lasted from late 2008 until mid 2011.  We are currently in the midst of Wave 4 correction.  Once it ends, according to the EW model, the major final move for metals will occur which will push them to new all-time highs in both real and nominal terms.  This will be Wave 5.  Many analysts who share similar sentiments regarding gold and silver have predicted upwards of a $5000 target for gold and $150 for silver.  We at Fortrus are in the bullish camp and expect prices to reach new highs beyond the $1900 level that was reached in 2011. Specific price targets are purely speculation, but market conditions lead us to strongly believe in future price increases, but it is always important to know that, Fortrus will always objectively analyse market conditions and let the markets tell us how far they want to travel and manage them accordingly.

 

You may be asking youself “Why has gold and silver performed so well over the last decade?” Actually the metals have done more than just perform well, they have seen price increases 12 years in a row going into 2013.  Here are a few of the reasons behind this upward move.

  • Demand for both metals far outpaces the production and overall inventory in the world.  Silver is also needed for industrial applications and photography – SUPPLY & DEMAND!
  • China and India’s insatiable demand for gold and to a lesser extent silver continues to grow.  Not only are indiviuals in these countries buying up the metals like never before, but Central Banks and governments have also begun increasing their holdings significantly over the years
  • When fiat currencies fail (currency that is only backed by the credit worthiness of the issuing government), money tends to flow to perceived safety and gold has over 5000 years being viewed as a safe store of value and monetary asset.
  • Many billionaires have built up positions in gold including George Soros, Bill Gross and Paulson
  • Gold and silver tend to be a protection from inflation which continues to be a concern worldwide due to all record Central Bank money printing – occurring in the trillions of dollars.
  • Weakness in the US dollar generally pushes up metal prices and commodity prices.   This has been the trend and long term it may continue weaken the fiscal and economic health of the US.
  • Precious metals may be the choice of assets in a downwards spiraling world economy that shuns major currencies and stocks.

The scenarios described above are the reasons that precious metals have outperformed almost all asset classes since 2000.  If you look at the world today, these arguments could be argued even stronger.  The world is on the cusp of an major economic slowdown, and we at Fortrus would not be surprised to see depressionary conditions arise in North America like we have seen in Greece and Spain.  Currencies are at risk of loosing their vaule more than ever, given the unprecedented money printed by world central banks, and despite the obvious need, world debt levels continue to soar through record levels.

One strong argument why gold and silver have not finished their upside moves is comparing their up moves to other bull markets that have occurred:

 

The first chart reflects the current gold market as compared to the DJIA bull market bubble that went from 1980 to 2007.  The appreciation in the Dow was 1744%.  The current move up in gold is about 500%.  This does not appear to be of bubble status as of yet.  Also, look at the orderly move up on gold.  It has been consistent, with no parabolic moves like we saw in the DJIA.  Towards the end of a bubble, you generally see erratic and parabolic moves up.  We expect to see it in gold in the next few years.

The second chart is comparing the current bull market move in gold to the previous one that went from 1970 to 1980 and resulted in a gain of 2276%.  Again this bull market would appear to have a long way to go if it possesses any of the characteristics of previous bull markets.  Notice the parabolic move up at the end of the bull market in gold in 1979-80.    These are typical when bull markets are concluding.

What about gold stocks…do they present great value today?
Let’s have a look

The dashed line shows major support and a good target for this significant correction in gold shares.  Valuations of gold stocks is becoming as cheap as we have seen for a very long time.  Clearly right now they are out of favour but when this correction ends, they may present the best opportunity for capital gains in any asset class.

 

The XAU is a index of all gold and silver stocks.  It is quite evident from the chart that gold stocks are extremely cheap relative and actually the cheapest we have seen them in the last 25 years relative to the price of gold. Valuation looks extremely compelling and if we get the final wave up in gold like we anticipate, gold shares will provide more return potential than the underlying metal.  We view the same scenario for silver and its related companies.

 

History is a great teacher and we at Fortrus will utilize to try to make sense of today’s environment.  Looking at gold, there has been a relationship between the Dow Jones Industrial Average (DJIA) and the price of gold.  One of the assessments is based on the ration DJIA/Price of Gold.  Back in 1979 the ratio moved all the way to 1.  We will not be surprised to see a similar scenario in the future.  This would require a major correction in the DJIA; a significant move up in gold price; or a combination of the two.  The latter scenario is what we anticipate.  The current ratio is around 5.8, therefore a major move up in gold and down in stocks would help us achieve similar results we saw in the last major gold bull market.

 

The other interesting point that should be raised from this chart is how the DJIA/Gold ratio has gone down from more than 40 to its current level of under 6.  This simply means that in the period from 2000 to current, the DJIA and for that matter all world stock markets have severely underperformed gold.  Gold and silver have simply been one of the best places to have put your money.  We at Fortrus believe that this trend will not end soon.

The last major point that we want to address is the number of participants who actually own gold.  Many ‘smart’ money (institutional monies) players are involved but few retail investors have participated.  This is classic for any bull market.  The retail market tends to get involved during the final blow out phase of the bull market.  This will come in Cycle 5.  Having a look at how currently under owned both metals are is a surprise given the moves they have made:

 

The first chart shows how little gold has been owned relative to its historical ownership patterns.  It is severely under owned.  Silver’s ownership patterns is similar. The second chart compares ownership in the main paper proxy to owning silver, SLV, as well as one of the major silver producers, Pan American Silver.  Both are dramatically out of favour compared to other major world corporations.  We think this will change as the bull markets rally in the final phase of its bull market.

In summary, gold and silver have been in a great bull market from 2001 to current.  We are in the midst of a consolidation phase that began mid 2011.  Once this phase ends, the final parabolic move should begin, bringing both metals to all time highs.  Both silver and gold companies should outperform the actual metals in this parabolic phase.  Fortrus analyzes all markets and will advise when the opportunity for ownership in these two metals should occur.  Have a look at our Fortrus Monthly Portfolio Newsletter for these opportunities.