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Gold Most Expensive to Silver Since ’09 Means More Losses
by Joe Deaux - Bloomberg | Nov 6, 2014 1:21 AM ET

As bad as the rout has been in gold this year, it keeps getting more expensive relative to silver.

The ratio, now at the highest in five years, is of concern to gold investors because it may signal more declines.

“Gold is overvalued to silver,” Yoni Jacobs, the chief investment strategist at Chart Prophet Capital, said yesterday in a telephone interview. “It looks like gold could fall more. People are realizing it is not a good investment when the equity markets go up and as the dollar is getting stronger.”

The metal is also still expensive relative to some other commodities, with its ratio to crude oil last week reaching the highest in 17 months. More than $7 billion has been wiped from the value of precious metals-backed funds in two weeks, data compiled by Bloomberg show. The dollar climbed to a five-year high yesterday against a basket of 10 currencies, and the Federal Reserve is moving closer to raising interest rates, eroding demand for hedges against inflation.

Futures fell 6.8 percent over six sessions, the biggest tumble since June 2013. The four most-traded gold options in New York yesterday were bets on more declines. Prices are heading for the first back-to-back annual losses since 1998 after some investors lost faith in the metal as a store of value. U.S. equities reached all-time highs this week, and American employers in 2014 added more than 2 million jobs through September.

“There’s more pain to come for gold,” Graham Leighton, a trader at Marex Spectron Group in New York, said yesterday in a telephone interview. “It’s not necessarily going to happen in a straight line, but that’s certainly the trend. It’s a function of the dollar being in favor.”

Climbing Ratio

Gold futures for December delivery fell 0.2 percent to $1,143.60 an ounce on the Comex in New York, after yesterday touching $1,137.10, the lowest since April 2010. Silver futures for delivery in December lost 0.5 percent to $15.365 an ounce, after reaching $15.12 yesterday, the lowest since February 2010.

One ounce of the yellow metal is fetching more than 74 ounces of silver, the most since March 2009. Silver’s 30-week correlation coefficient to gold is near 0.8. A reading of 1 signals the two metals are moving in lockstep in the same direction.

The ratio is climbing because silver has more industrial uses, and that demand could suffer from slowing world economies, according to Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. The measure may not be useful as an indicator for gold’s outlook, he said.

Silver’s ‘Attraction’

The International Monetary Fund cut its 2015 global growth forecast to 3.8 percent in October, from a July estimate of 4 percent. In 2008, slowing economies drove a 24 percent decline for silver used in solar panels, car parts, electronics and batteries. Gold climbed 5.5 percent that year.

“One of the attractions of silver in the past has been industrial use,” and that’s fading, Hellwig said. “I don’t think gold is overvalued.”

Silver has outpaced gold’s declines since the end of 2012, falling 49 percent through yesterday, while gold dropped 32 percent.

Holdings in global exchange-traded products backed by gold are near the lowest since August 2009. Money managers cut their bullish bets on the metal in nine of the past 11 weeks, U.S. government data show. The Bloomberg Dollar Spot Index climbed for four straight months as a diverging global growth outlook is increasing demand for the greenback. While the U.S. gains traction, Chinese services and manufacturing are slowing and the European Central Bank is buying bonds to spark expansion.

“The story of gold falling is the strength in the dollar and the strength in the equity market, and that’s the trade.” Jeffrey Sica, chief investment officer of Sica Wealth Management in Morristown, New Jersey, said in a telephone interview. “Short term, it’s going to get ugly.



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