Fear of inflation drives up gold and silver prices
Posted on 18 February 2009 with no comments from readers
Precious metal prices have leapt to their highest in almost a year, with gold and silver stocks rising even as the general indices tumble.
Investors are now worried about inflation, a phenomenon that has always accompanied huge government spending programs in the past, although the immediate problem for the global economy is surely deflation and the risk of a downward debt deflation spiral.
Bonds doomed
However, if investors are right then the alternative safe haven asset class of bonds is doomed to destruction. Bonds currently pay incredibly low yields and will shift into negative returns on the smallest whiff of inflation.
This is what worries investors now rushing in to precious metals. They are concerned that paper monies will prove a poor store of value, like in the 1970s. Gold touched $971 an ounce yesterday and silver topped $14.50, with silver now outpacing gold in its rate of price increase.
But are we just going to see a repeat of the gold price performance of 2008 which peaked in March at $1,033 or something more spectacular this year?
Commodities analysts are pretty divided. Certainly fundamental buying from jewelers is drying up due to high prices, but investors seem to be gaining an appetite for precious metals.
Market forces
And when a large amount of cash is poured into a relatively small market – silver is one hundredth the size of gold and easily the rarer metal – then the scope for price advances is obvious.
It is probable therefore that chartists who think they are cleverly going to exit precious metals in March and go away could well be making a big mistake this year. The prospects for still higher prices are excellent, and $1,100 and 1,300 look possible for gold, and up to $30 for silver.
Precious metal stocks could also confound the experience of 2008 when they got trashed along with all other equities. The difference in 2009 is that the metal prices are rising and not falling, and thus the leverage on stocks is upwards and not downwards.
Buying major gold producers and smaller precious metal companies a little later in the upcycle would look one of the few win-win options presently open to investors.
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This is from Rick’s Picks – I have noticed a big increase in interest in gold from Asia on this blog which tends to support these observations:
One observer at Market-Ticker.com noted that there was fierce selling of currencies Monday night originating in Asia. Here’s the post: “Someone, apparently someone in Asia, wants dollars. A LOT of dollars. There is a forced-liquidation event underway that is massive, it is against all asset classes and it is spreading. All of the primary currency crosses got hit at once – euro, pound, yen – all weakened dramatically against the dollar and it is still going on. The Asian stock markets got walloped at the same time in coordinated waves of forced selling. At the same time the US futures markets got nailed as well, down some six handles on the [E-Mini S&P futures] in a near-vertical drop. While this sounds ‘not that big,’ to move these markets in a coordinated fashion like this is a trillion-dollar enterprise. This is not some small company that went bankrupt, or even a large company.”
Although the selling failed to gain momentum as the writer had feared, we would be foolish to ignore the possibility that this flurry of activity is warning of a global run on currencies. The fact that Western Europe’s loans to developing countries, most particularly to Eastern Europe and Latin America, are on the brink of a massive default suggests that even minor disruptions in forex markets should be taken seriously. If, in the next week or so, gold pushes above $1000 with the dollar in a strong rally, we would infer not merely a warning, but the onset of a full-blown global financial crisis.