Gold and the out-of-whack economy
By The Mogambo Guru
I am always looking for some extra money with which to buy gold, and if I am
ever successful without actually getting a job, I intend to buy some right
away, as Bob Moriarty at 321Gold.com has taken a look at the XAU gold equities
index compared to gold, and finds that a recent ratio of 0.182 means that today
"is the most negative ratio of gold shares to gold in the last five years. This
week the ratio got even more negative with the ratio plunging to 0.176. People
simply hate gold shares."
As a result, he says, "Since most profitable investors use contrarian opinion,
the ratio is a screaming buy signal for both gold and gold shares."
Mark O'Byrne, executive director of Gold and Silver Investments
and writing at MoneyWeek.com prefers his statistics on the fundamental side,
and even so, agrees with this analysis and says so in an essay titled "Why Gold
and Silver are Table-Thumping Buys."
He says that "Gold production is stagnating, and output in the leading gold
producing countries continues to fall year on year, despite higher gold prices
leading geologists to wonder whether we may have or may soon have reached the
point of 'peak gold' production. The world's biggest producer - South Africa -
produced nearly 1,000 tonnes of gold in 1980. This was down to 264 tonnes last
year, the lowest since 1932."
Even China is getting into the gold mining thing, as Chinainfoworld.com reports
that "China Tops the World in Gold Output", which is something that I did not
expect. In fact, "The China Gold Association announced that China's gold output
was expected to reach 300 tons in 2008, surpassing that of South Africa and
making China the world's largest gold producer."
In case you were wondering, China actually kicked our American butt a long time
ago, as China "surpassed the United States as the world's second-largest gold
producer in 2007 with 270.491 tons of output."
As a result, Mr O'Byrne concludes, "Gold and silver are cheap vs many
commodities and oil", especially considering that "the long-term average
gold-to-oil ratio is 15 to 1, or 15 barrels of oil to one ounce of gold".
Today, he notes, the gold-to-oil ratio is down in the low 7's, which is Very,
Very Low (VVL). "At the higher end of the scale," he reminds us, "gold has
traded at over 30 times a barrel of oil."
It is eerily similar, only more striking, with the oil-to-silver ratio! Silver
is a screaming bargain!
With a sly smile, I realize he knows that I cannot calculate these kinds of
things, so he helpfully adds "Should there be a classic reversion to the mean
average of 4.4 in the ratio of ounces of silver per barrel of oil, then silver
prices would rise to $30 per ounce! And silver is selling at less than half
that price right now!"
With a burst of Mogambo Interpretive Thinking (MIT), I conclude that if there
is one thing that you can count on in this crazy world, it is like Bill Bonner
here at The Daily Reckoning once so famously said: "Things that are out of
whack tend to get back into whack", which I extrapolate to mean that things
that sell for half their value end up costing full price.
So if now is not the time to buy gold and silver, when things are so seriously
out of whack, then when is? Hahaha! Exactly!
Richard Daughty is general partner and COO for Smith Consultant Group,
serving the financial and medical communities, and the editor of The Mogambo
Guru economic newsletter - an avocational exercise to heap disrespect on those
who desperately deserve it.
(Republished with permission from
The Daily Reckoning. Copyright 2008, The Daily Reckoning.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
