Citi is bearish on gold and silver shares for two reasons. Firstly, they are bearish on the metals. Secondly, equity valuations contracted sharply after the last big mega market in the seventies and they think that valuations have completed enough of that post-peak phase yet in the current bear market.
Gold peaked in 2011 and that it is still in a bear market. Only the occasional rally will provide some optimism and we believe that the recent bear-market rally is drawing to a close. In February 2013 we downgraded two UK gold/silver shares to Sell.
The thesis is based on the key assumption that we have passed the worst point of the credit crisis and that the global financial system and global economies are in recovery mode.
On the basis of the above thesis, we believe that the 'insurance component ' portion of gold (which may have been anywhere between USD 700 /oz and USD 900/ oz at the recent peak) has now been surrendered for the medium term. This suggests that gold could find a base anywhere between USD 1100/oz and USD1200/oz. At that point, we believe the metal should begin to find support from areas other than its hard asset attraction, such as the jewellery cycle improving with the economic cycle.
Gold is a highly volatile commodity (its 70’s bull market went from $40/oz to $800/oz, its recent bull market went from $275/oz to $1850/oz). The result is that valuations move very swiftly up and down during its bull and bear markets and simply using an average of the last five years is seldom an appropriate approach in our view. It is not appropriate because, if those five years incorporated one of gold’s mega-bull-markets, the average valuation will be very different during those long 10-20 year spells when gold is doing very little by comon.
