Where next for gold and silver prices, and the US dollar?

Posted on 04 October 2009 with no comments from readers

The summer of 2008 and into the autumn was a bad time for investors in gold and silver with prices falling, and heavily so in the case of silver. This summer has been much better with gold emerging to break the $1,000 an ounce barrier and silver to poke above $17.

What potential investors now want to know is whether precious metals has topped out or whether further upside exists.

Beijing Put

On the second point the future outlook is much clearer than for a longtime. China’s recent statements on precious metals amount to a ‘Beijing put’ and there is nothing better than having a big buyer on any weakness to underpin an asset valuation.

Then we also have the ‘Washington put’ as well as the US will not want a strong dollar in its present economic circumstances, whatever it says about a strong dollar, and that means higher precious metal prices.

So with limited downside, what upside do precious metals enjoy? Looking at the chart of the last decade the gold price appears to move upwards in $200 steps every two years. Gold has been moving sideways, albeit with dips like last autumn, for two years. Another step up is due about now.

However, life is never that simple. Global stock markets presently look well overdue for a correction after a rally of historic proportions despite a recession of historic proportions. When stocks crash this means a flight to the dollar and a higher dollar generally depresses the gold price which would also be impacted by gold sales to meet stock market margin calls.

Sell or buy?

Thus one more dip in the price of gold and silver can be expected, and silver’s leverage to the gold price means it will always come off worst, although the Chinese have been encouraging their masses to buy this poor man’s gold, and the leverage should soon start to work to silver’s advantage again.

Given that higher gold and silver prices have been sustained over the summer and with more buyers now clearly in the marketplace that probably means any downside will be considerably less than last year. Indeed, the chance to buy at cheaper prices may be so widely anticipated that it passes very quickly or does actually not arise.

For looming on the horizon is surely the mother of all currency crises for the US dollar with the government printing money and buying its own bonds. And then you will really want your money in hard assets like gold and silver and not depreciating greenbacks.

Currency of choice

Precious metals will surely become the currency of choice. Governments all over the world are pumping money into their financial systems and boosting liquidity which even the former Fed chairman Alan Greenspan last week said he thought would end in inflation.

Having inflated asset prices around the world with excess liquidity for more than a decade Mr. Greenspan ought to know. But the question is still asked against which currency will the US dollar devalue? There are huge debt piles all over the world and the Japanese economy, for example, seems in a far bigger hole than the United States.

Perhaps then they will all devalue against gold and silver which can not be printed or quantitatively eased. And actually we could well have falling asset prices and an even faster devaluation of currencies, or debt deflation. That is what happened in the 1930s in a similar contraction of global credit and trade, and the gold price soared.

Mr. Greenspan was wrong in the past about inflation why should he be right now? Asset prices are falling almost everywhere, except on stock markets and that can be quickly corrected. Similarly currencies like the pound are competing with the dollar to devalue.

Even the Chinese yuan might take a hit if China has to continue with stimulus packages equivalent to half of GDP. No wonder the Chinese are buying gold and silver with its government creating money like there is no tomorrow. But tomorrow always comes.