29 Jul 2011


In a letter to clients, JP Morgan analyst John Bridges made clear his bullish views for gold and gold mining equities. Bridges predicts gold prices will reach $1,800/oz by years end and that we are presently at a good entry point for buyers of the metal.
“Actually over the last decade there have been few bad times to buy the meta,…. but June and July have often offered the years’ best entry points.”
In justifying the case for gold, even at current levels, Bridges says,“Some people may argue that $1,600/oz is the top of the bubble, but we suggest that unless governments control their debt levels, investors’ fear of paper currencies will drive gold higher.”
The following chart is provided to outline the strong correlation between gold’s performance and US debt levels:
Gold Mining Stocks
So far in this decade long bull market in gold, gold mining equities have largely failed to participate and are lagging significantly behind the metal’s performance. Part of this is because of uncertainty regarding business conditions, including tax and regulatory factors, in most countries and the increased cost of production driven largely by high oil prices. In any case, Bridges says mining equities will play catch up eventually, and their long run prospects are positive.
“We believe the equities should follow the bullion price,” Bridges says. “[Gold equities] can lag gold when prices are high or the market is de-risking but it’s nonsensical for the two to diverge for long periods,… Already the equities have recovered most of the ground lost in Q2.”
Silver has a lot of the same fundamentals going for it, according to Bridges, but he describes silver as the “high beta gold”. ‘Beta’ is a finance term which refers to an assets correlative performance relative to the general market, and the application of the term to silver signifies its cyclical nature. Gold tends to have counter-cyclical benefits, while silver mimics the general market much more so. Furthermore, silver is more than twice as volatile as gold, but in the long run may have more potential and is trading further below its inflation adjusted high of ~$140/oz, using the BLS inflation calculator, than is gold.

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