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.