Almost nine years after hitting a record high in September 2011 gold prices have hit a new record high this morning moving above the psychologically important $2,000 an ounce for the first time ever.

This move higher has now completed a round trip that found a base in November 2015, rebounding from lows of $1,050 an ounce, and completing the set of G10 currencies that are now trading at record highs against this asset which polarises opinion amongst financial market participants.

The usual criticism levelled at fans of gold have been that it has no yield, no cash flow and as such has no intrinsic value. All of these criticisms have validity, however the same charge can also be levelled at a whole range of government bonds, where yields are negative, and whose governments are to all intents and purposes spending more money than they have coming in. The very same charge can also be levelled at a range of US companies that have negative cash flow, no assets to speak of, and have very little chance of making any sort of profit in the near future. 

The reality is that gold, like any other commodity has a value, based on either its fundamentals, as well as its ability to offer any form of return over a period of time, relative to other assets.

One criticism that gold has received is that, on an inflation adjusted basis, it is still well below its 1980 record peaks. That may well be valid but who holds gold over a period of forty years on a constant basis? How many companies that were around in 1980, and were in a portfolio then are still around now? It’s a completely specious comparison.

The whole point of long term investing is rotating capital in and out of various assets as the risk environment dictates, which means holding gold, along with cyclicals and defensives is not always the best risk model, depending on the overall risk environment.

As we look ahead to the next 12 months and the sharp rise in gold, as well as silver prices it would be prudent to see how much more upside we can expect to see in the next 12 months.

For now the line of least resistance is for further gains in the gold price in its current uptrend, with only a break below the $1,900 an ounce level undermining the currently bullish scenario.

Gold/US$ chartSource: CMC Markets

We’ve also seen some big gains in the price of silver over the past few months which has prompted a parabolic surge in the price from $18 only a month ago to levels above $26 now.

This has raised questions as to whether this can be sustained and it is a fair question.

Gold/silver ratio: 30 years

Source: Bloomberg

As we can see from the chart above the gold/silver ratio (green line) has seen gold prices (white line) diverge sharply away from the lows of the ratio seen in 2011, to trade at a record high earlier this year above $110.

This trend was always likely to reverse, however timing the turn of any trend is always problematic, however in this case it does look as if this ratio could well have the potential to come in further towards levels last seen in the middle of the last decade, just below $70.

The price action in silver over the past few weeks does appear to suggest this readjustment is set to continue, the only question being in how it is likely to affect future gold and silver price moves.

The consensus remains that gold prices are likely to continue to move higher, with a new record highs likely to be set on an ongoing basis against the US dollar over the coming weeks. 

If that plays out as expected and the gold/silver ratio continues to narrow then the natural conclusion is that silver prices will have to rise at a faster rate, than gold.

There is certainly scope for them to do so given that silver prices are still well below their record highs of 2011, however a word of warning is needed in that a fall in gold prices relative to silver would also have the same effect in seeing the gold silver ratio continue to fall.

Another way to play the relationship between gold and silver prices is in the form of the CMC Markets Precious Metals index, which has continued to move higher in the wake of the big breakout in silver prices, and has risen another 14% in the last two weeks alone, on top of the rise seen in the wake of the break above the February peaks.

Precious Metals Index

Source: CMC Markets

With a weighting of 41.25%, relative to gold’s 29.1%, any outperformance in silver prices is likely to help drive this index higher. The remaining percentages of the index are made up of platinum and palladium.

It is important to note that while prices have seen a decent move higher, the gains seen since the March lows have been quite significant, begging the question as to whether we need to see a pause, now that prices are over 30% away from its long term 200 day moving average.

As we saw with the move down from the February peaks to the lows in March, a sharp snap back occurred when the price move became over extended.

This suggests that while silver prices might well continue to outperform on their own, the prices of gold, platinum and palladium are likely to have a part to play in the equation as well.

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