On Monday, the S&P ratings agency downgraded the US debt outlook to negative. The Triple A debt rating was maintained by S&P, but the outlook downgrade by the agency, which hit the U.S. stock market hard and also prompted a sell off in U.S. Treasuries.
In the meantime, the U.S. dollar index backed down from its session high on the negative U.S. debt outlook. The S&P downgrade of the U.S. prompted fresh safe-haven buying interest in the precious metals markets, as both gold and silver futures rallied sharply on the news and are trading at fresh for-their-move highs.
The gold price closed in on major psychological resistance of $1500 per troy ounce, and is therefore set to hit yet another record high. We believe the $1500 mark may prove to be as important as the $1000 level hit a few years ago. Meanwhile, gold is still not overbought and does not look extended by any measure.
Although we do not adhere great importance to rating agencies anymore, as we believe they have lost most of their credibility during the credit crisis for not predicting things the market had seen coming for a while, this downgrade may well prove to be the straw that broke the camel’s back.
US investors and overseas investors who hold a large portion of their liquid wealth in USD should seriously consider shifting part of these assets into bullion, i.e. physical gold. It is the best way to shield their wealth from USD debasement.
Meanwhile, we strongly believe gold and silver mining equities have a lot of catching-up to do. In the past few yew years, mining shares have never been cheaper versus the underlying metal prices than today. Most of this underperformance comes from hedge funds going long bullion and short mining shares. If gold and silver continue to perform well, they might be in for a rude awakening and get burned.
Dan Norcini put some of these issues into perspective, by comparing the HUI index (gold & silver mining shares) versus gold and silver prices.
HUI/Gold Ratio still in the gutter
HUI/Silver ratio at levels not seen since 2001!
Strategically, we continue to advise to accumulate gold and related assets. Tactically, since many of them have risen significantly over the past 12 to 18 months, it may be wise to recover your principal investment in some positions and reinvest in underperforming mid and large caps stocks, which have attractive risk-reward profiles. After all, do not forget the public is not yet invested in these names.
If our scenario pans out, this may be 1999 all over the place again within a few years. The only difference will be that the high-flyers are not named Quallcomm, Cisco or Oracle, but Barrick Gold, Newmont, Goldcorp and the likes!