(Kitco News) - Gold and silver have seen a solid bounce off their Monday lows; however, one market analyst is warning investors that there is more downside potential, as last week’s record highs could signal a top in the market.
In his latest precious metals note, Mike McGlone, senior market strategist at Bloomberg Intelligence, said that while he doesn’t rule out a run to $6,000 an ounce for gold, it’s more likely that prices will test support at $4,000 an ounce. He also believes silver could fall all the way back to $50 an ounce.
“Gold and silver going parabolic in January have the earmarks of 2026 being a down year as part of a peaking process,” he said in the note. “Momentum could carry the store of value as high as $6,000 an ounce, but normal reversion points back toward $4,000.”
Not only has gold’s rally pushed prices into significantly overbought territory, but McGlone said that it has also significantly outpaced the broader commodity index. He noted that at its peak, the Bloomberg Commodity Index (BCOM)/gold ratio was 68 from a base of 100 in 1960; meanwhile, 50 marked lows in 1980, ’87, and 2020. Currently, the ratio is trading at 32.
“It might take an unlikely paradigm shift for gold to stay so stretched vs. broad commodities -- or is the BCOM too low?” he said. “When prices move this far and fast, fundamental underpinnings can shift quickly, and gold's uptoo-much risks appear to us to be too extreme for a favorable risk/reward outlook.”
At the same time, McGlone noted that gold is also overvalued compared to inflation.
“Not since President Richard Nixon exited the gold standard in 1971 has gold been so stretched with inflation so low. Will inflation follow the ancient store of value that's gone parabolic, or will typical post-inflation deflation prevail?” he said. “We lean to the latter.”
Although gold may be overvalued, McGlone noted that it could still play an important role as a portfolio diversifier. He pointed out that even at elevated levels, the gold/S&P 500 ratio remains elevated.
“When the metal topped about 15 years ago, so did the ounces of gold divided by the S&P 500 (SPX), near 1.7x. At 0.71x on Feb. 3, the gold/SPX ratio is less than half its 2011 high, which may indicate a support factor for the ancient store of value as a diversification hedge against elevated equities,” he said.
Looking ahead, McGlone said that renewed bullish momentum in equity markets could put more downside risk on gold; however, he added that if the broad market index falls, gold, even at lower prices, could outperform on a relative basis.
Looking at silver, McGlone said that it’s unlikely the gold/silver ratio is sustainable below 50 points. Silver’s sharp decline on Friday and Monday has pushed the ratio back to historical norms, currently trading at 56.6 points.
“This year's $121.65 high may be revisited, but reversion toward $50 appears as a normal path for the commodity known as the 'devil's metal,' due to its volatility,” he said.
