The gold price
Gold-Silver Ratio Out of Whack - 2 May 2009
The ratio of Gold Prices to silver stands well outside its historic norms...
FOUNDER OF Beacon Rock Research LLC, which produces research for investment institutions and focuses on precious, base and industrial metals, Mike Niehuser is also on the faculty of the Pacific Coast Banking School and was nominated to BrainstormNW magazine's list of the region's top financial professionals in 2007.
Now the Silver/Gold Ratio is "out of whack", says Niehuser. In this exclusive interview with The Gold Report, he weighs the historical seasonality of silver and Gold Investment against the forces at work in today's market, and explains why we could see a significant run up in metals by fall.
The Gold Report: Mike, what is your feeling about silver and Gold Prices both in the near and longer term?
Mike Niehuser: Well, gold seasonally runs up late summer to early spring, then up slightly or flat late spring to summer due to seasonal holiday buying for jewelry in Asia. Gold is now about $900 and silver $13 per ounce; both gold and silver are correlated and remain good hedges against inflation.
There are ample concerns of hyperinflation and since the news is out, I am a bit surprised that gold and silver prices appear within bounds of prior years' seasonal price appreciation. Part of this may have to do with the idea that monetary policy takes about 12 to 36 months to influence the economy. As the price of gold today reflects the market's future expectations, it makes one wonder whether more money is truly being poured into the system or we're seeing a reshuffling of spending in the U.S. from the states back up to the federal government.
In addition, you can look up Irving Fisher's “Money Equation” on Wikipedia: MV = PQ. "M", the supply of money, times "V", or velocity, equals "P", the price of money or inflation, times "Q", economic output. So, even if the money supply is increased, without velocity (say bank lending), you are not likely to see increases in inflation or output of goods and services. This is really where I think we are today.
The new administration wants to push for greater control via stimulus, and bankers, whose number-one concern is to protect their careers and not take risks, are not lending. After everyone takes the summer off, lenders may start lending in the fall, increasing velocity. With the addition of seasonal buying of precious metals, we could see metals up significantly in the fall.
Another thing to consider with silver is that silver is a byproduct of base metal mining. With reduced base metal production, the supply of silver is reduced. Also, historically, the silver/gold ratio is currently out of whack, so silver is particularly interesting right now.
TGR: How did your 2008 portfolio perform?
MN: Not so good in 2008, which is no surprise. I was expecting some flight to quality, so I focused on companies making the jump from construction to production. While this was a tough year for explorers, developers and producers, any news (bad or good) in general seemed to take stock prices lower.
It was amazing to watch the courage of management teams that worked for years and succeeded in achieving goals, yet were punished for the slightest slippage in production targets.
TGR: Mike, you mentioned that your track record in 2008 wasn't so great. How's 2009 looking so far?
MN: I like to say I am still learning and, like the professor said, "If you are not confused, you are not informed." I picked six developers at the end of 2008 that were up 53% at the end of the quarter. It's interesting that gold and silver were up only 4.2% and 14.2%, respectively, in the same period. This reconfirmed to me that fundamentals still mattered. Many of these stocks were beat up due to liquidity concerns and tax-loss selling.
TGR: How are you expecting your picks to perform as we move farther into 2009?
MN: I was surprised that the picks did so well in the first quarter. I think the companies that did well in the first quarter had unnecessary pressure because the market was not sure whether the companies were viable. And as good companies attracted capital, this has not proven to be the case, so they had exceptional returns in the first quarter.
I expect all these companies to have good news flow through the end of the year, and should have greater visibility. And if my thesis is correct about gold and silver prices moving up in the fall, these companies should be attractive for acquisition during the summer months, where potentially flat gold and silver prices are creating opportunities for buying good quality companies with exceptional performance potential.
TGR: Mike, thanks so much for your time.
FOUNDER OF Beacon Rock Research LLC, which produces research for investment institutions and focuses on precious, base and industrial metals, Mike Niehuser is also on the faculty of the Pacific Coast Banking School and was nominated to BrainstormNW magazine's list of the region's top financial professionals in 2007.
Now the Silver/Gold Ratio is "out of whack", says Niehuser. In this exclusive interview with The Gold Report, he weighs the historical seasonality of silver and Gold Investment against the forces at work in today's market, and explains why we could see a significant run up in metals by fall.
The Gold Report: Mike, what is your feeling about silver and Gold Prices both in the near and longer term?
Mike Niehuser: Well, gold seasonally runs up late summer to early spring, then up slightly or flat late spring to summer due to seasonal holiday buying for jewelry in Asia. Gold is now about $900 and silver $13 per ounce; both gold and silver are correlated and remain good hedges against inflation.
There are ample concerns of hyperinflation and since the news is out, I am a bit surprised that gold and silver prices appear within bounds of prior years' seasonal price appreciation. Part of this may have to do with the idea that monetary policy takes about 12 to 36 months to influence the economy. As the price of gold today reflects the market's future expectations, it makes one wonder whether more money is truly being poured into the system or we're seeing a reshuffling of spending in the U.S. from the states back up to the federal government.
In addition, you can look up Irving Fisher's “Money Equation” on Wikipedia: MV = PQ. "M", the supply of money, times "V", or velocity, equals "P", the price of money or inflation, times "Q", economic output. So, even if the money supply is increased, without velocity (say bank lending), you are not likely to see increases in inflation or output of goods and services. This is really where I think we are today.
The new administration wants to push for greater control via stimulus, and bankers, whose number-one concern is to protect their careers and not take risks, are not lending. After everyone takes the summer off, lenders may start lending in the fall, increasing velocity. With the addition of seasonal buying of precious metals, we could see metals up significantly in the fall.
Another thing to consider with silver is that silver is a byproduct of base metal mining. With reduced base metal production, the supply of silver is reduced. Also, historically, the silver/gold ratio is currently out of whack, so silver is particularly interesting right now.
TGR: How did your 2008 portfolio perform?
MN: Not so good in 2008, which is no surprise. I was expecting some flight to quality, so I focused on companies making the jump from construction to production. While this was a tough year for explorers, developers and producers, any news (bad or good) in general seemed to take stock prices lower.
It was amazing to watch the courage of management teams that worked for years and succeeded in achieving goals, yet were punished for the slightest slippage in production targets.
TGR: Mike, you mentioned that your track record in 2008 wasn't so great. How's 2009 looking so far?
MN: I like to say I am still learning and, like the professor said, "If you are not confused, you are not informed." I picked six developers at the end of 2008 that were up 53% at the end of the quarter. It's interesting that gold and silver were up only 4.2% and 14.2%, respectively, in the same period. This reconfirmed to me that fundamentals still mattered. Many of these stocks were beat up due to liquidity concerns and tax-loss selling.
TGR: How are you expecting your picks to perform as we move farther into 2009?
MN: I was surprised that the picks did so well in the first quarter. I think the companies that did well in the first quarter had unnecessary pressure because the market was not sure whether the companies were viable. And as good companies attracted capital, this has not proven to be the case, so they had exceptional returns in the first quarter.
I expect all these companies to have good news flow through the end of the year, and should have greater visibility. And if my thesis is correct about gold and silver prices moving up in the fall, these companies should be attractive for acquisition during the summer months, where potentially flat gold and silver prices are creating opportunities for buying good quality companies with exceptional performance potential.
TGR: Mike, thanks so much for your time.
The Gold Report, 02 May '09
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