Dundee Securities: Fundamentally Bullish, But Equities May Lag Metals

Dundee Securities – As the rainy days of April keep us indoors, we’ve elected to revisit our commodity price forecasts. Not surprisingly, our forecasts have increased in tandem with rising gold and silver commodity prices. With the sunny days of spring just around the corner, we anticipate gold (and perhaps to a slightly lesser extent silver) will continue to shine in the near-term given the ongoing perfect storm for commodity prices. While the recent increase in  the price of bullion is no doubt in part a function of the depreciation in the greenback, there are many other drivers for gold going forward, including:

·       Concerns regarding European banks who continue to wrestle with the Greek and other PIIGS debt (cue the currency printers) have led global investors to continue to seek a store of value outside paper currencies and the banking system with gold and other precious metals standing to benefit.

·       Global political tensions continue to run high (Libya, Syria, Yemen, Afghanistan – need we say more?) and are weighing on the minds of investors. While we’d prefer everyone to just get along, global unease continues to cultivate an environment conducive to potent precious metal prices.

·       China continues to represent a key source of demand for bullion. With government-imposed regulations restricting the purchase of multiple real estate properties and inflation taking a toll on most other investments, Chinese investors continue to seek a safe-haven for their savings with gold being a logical destination for the time being.

Silver has strongly outperformed gold in 2011, and the gold:silver ratio is near multi-year lows (Figures 1 and 2).  While the relationship between gold and silver has been volatile, over- and under-shooting the long-term trend line by considerable margins, the ratio has tended to center around 60:1 over the past ten years or so.  Given the current imbalance, we would not be surprised to see gold outperform silver, but only after investors push silver past its all-time record of US$54/oz.

We have been asked many times what could signal the end of the current bull run in precious metals.  While we could point to possible future indicators such as rising real interest rates and/or an appreciating US dollar, in simple terms it will likely be the end of concerns, or fear, surrounding the world’s economy, a scenario that appears unlikely for some time to come.

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