Consistently ranked as one of Canada's top 10 gold and precious metals mining analysts, geologist Barry Allan's Research Capital utilizes his 15 years' experience in the Gold Mining sector that brings together geological fieldwork, equity research and finance. Before joining Research Capital in 1997, he was a gold and precious metals mining Analyst with Gordon Capital, BZW and Prudential Bache. Prior to equity research, Barry was a member of the specialist finance group at CIBC, one of Canada's largest financiers of mining projects. Here he speaks to the Gold Report about the historical gold-silver ratio, and why silver tends to overshoot on the upside. He foresees a short-term breather for gold and a strong surge by silver – meaning that we're approaching silver's season to sparkle. The Gold Report: When we interviewed you last March, you were very bullish on gold and silver, partly because demand for gold is being driven by investors rather than jewelry and also by worldwide currency crises, particularly problems with the US Dollar. Gold is now approaching $1,200 an ounce, and central banks have shifted from selling to Buying Gold. What's your impression of where we are in this precious metals bull market now? Barry Allan: It's fair to say that all the ingredients we talked about in March have really come to fruition and quite dramatically so. I recently saw statistics in our financial Globe & Mail about fundamental purchasing of gold by the average person. We are seeing unprecedented hoarding rates, as far as people putting gold in safety deposit boxes is concerned, but also a continuing evolution in the amount of gold going into exchange traded funds, Gold ETFs. And as you pointed out, we have seen this material shift by central bankers. It's now fashionable to actually to own gold as part of their foreign holdings. I am a bit concerned that gold is becoming too fashionable, that it is now not only mainstream thinking that you need some gold, but it's actually approaching a point where gold is occupying the forefront of a lot of people's attention. Short term, that worries me a little. Nevertheless, while we might have some short-term weakness, prospects for the US Dollar and interest rates still suggest that in certainly US Dollar terms, my expectations for gold a year from now are higher than where we are now. TGR: What do you mean by the short-term weakness? Barry Allan: In the near term we are always cautious about the seasonality element, which basically says that gold gets into a tough environment toward the end of January or February. It certainly has been the case for the last number of years; and I have no reason to suspect that will change. We typically go into the doldrums before the beginning of spring. But with that caveat, we continue to be optimistic on both gold and silver. We don't really see the dynamic of the market changing all that much over the long-term. TGR: A lot of people who see this current market rally as a bear market rally are calling for a correction; in fact some are even calling for a crash. If the market does crash, will gold and silver decouple or pull back with the general market? Barry Allan: My expectation is to see a certain amount of correction in gold. I do not expect a decoupling. Gold has become fairly tied to investment opportunities and prospects in the sense that if we get into a tough equity market, you're going to see some profits taken in gold as well. The more you say gold is an investment vehicle, the more it will behave like other investment vehicles. If we're having a general contraction in equity markets, I find it hard to believe that we wouldn't have some correction in gold – certainly gold equities, but also in the price of gold itself. TGR: But aren't the metals often viewed as a hedge against downturns? Barry Allan: Yes, but on a practical basis people will take profits. Gold is certainly a hedge against currencies, but if the market is correcting, why would I sell my equities and go straight to currencies? Wouldn't I go to gold? It's that kind of logic. The practical part of it, though which I have seen over the years, is that any time we've had an equity market correction, we've always had a correction in the commodity price as well. I do not expect that to decouple. It may be less of a phenomenon, but I don't expect a surge in bullion price if equity markets roll over. TGR: Silver prices have done very well this year, along with gold, but they're still a lot of "silver bugs" who expect it to start to increase relative to gold due to the gold-silver ratio. What do you think will happen with silver? Barry Allan: That's a fair comment. Certainly what we've been tracking and saying is that silver has lagged gold. History has shown us that silver often does catch up and tends to overreact, so we fully anticipate that gold and silver will come back into line. We haven't changed our thesis; we've always argued that the best predictor for silver price is the price of gold. We look at gold as our benchmark. The R-squared value of the correlation between gold and silver is the best predictor for silver prices, with the caveat that it tends to lag and then it tends to overshoot. For that reason, particularly now, we'd be more apt to be in silver than gold. TGR: Because you're expecting silver to catch up. Barry Allan: That's correct. Yes. And that's based on a little more concern about gold and a little more correction in the ratio. TGR: Are you looking for silver to have that increase before the seasonality downturn? Or is that more likely to occur throughout 2010? Barry Allan: Probably more in the seasonality period. I would expect the ratio to correct itself with silver holding up a bit better than gold. We'll certainly see silver trying to catch up while we're in this bullish environment for gold, but I really think it's going to be a matter of gold coming more into line with silver, at least for that period. After that, they'll march together again. But again, in a rising Gold Price environment, silver almost always lags. Continued...

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