Low gold coverage ratio at the Fed points to $12,000-an-ounce gold to come

Posted on 13 October 2012 with 3 comments from readers

Guggenheim Partners has come up with yet another reason to invest in the king of precious metals. Analysts looked at the gold coverage ratio which measures the amount of gold on deposit at the Fed against the total money supply. It is currently at an all-time low of 17 per cent.

Now the average gold coverage ratio over time is about 40 per cent, so that would take gold prices to double their current level. Then again twice during the 20th century the gold coverage ratio maxed out at above 100 per cent. That would leave gold north of $12,000 an ounce.

Currencies in crisis

Who is to say that the extremes of the monetary crisis now unfolding in front of us will not take us to that level?

In his latest shareholder letter, Tocqueville Gold Fund veteran analyst John Hathaway writes: ‘Some suggest that a Republican victory in November would be a game changer for gold. It could bring about the dismissal of Bernanke, the taming of fiscal deficits, the painless elimination of excess liquidity from bloated central bank balance sheets and the restoration of robust economic growth.

‘All of this would need to occur within the four years allotted to a new administration while voters patiently awaited the magic to take effect. While this rosy scenario is possible, we believe it would be a long shot. Therefore, we regard any possible pre-election weakness in gold and mining stocks based on such a possibility as a buying opportunity.’

Pre-election correction?

Gold and silver prices fell back slightly last week. This could be the start of pre-election weakness with equity markets also coming off in their worst week for four months. Is this a quesiton of short stocks and wait to buy gold and silver in a dip as the ArabianMoney investment newsletter advised its subscribers last month?

We doubt any downside will be as dramatic as in the 2008-9 sell-off as precious metals just seem to have too many friends for that to happen. However, we will have our own ideas on the best buys in this correction and share those with our paying subscribers first (sign-up here).

The secular bull market in gold and silver is far from over. The $12,000 price target for the gold coverage ratio at the Fed to reach its previous highs is just another indicator confirming the undervaluation of precious metals.