Why the debt crises remain supportive for gold and silver prices
Posted on 13 July 2011 with 7 comments from readers
Another day, another crisis with Ireland being downgraded to junk status for its debt, following Portugal and of course Greece. Italy looks worrying too. And the gold price touches a new all-time high, topping $1,575.
Indeed, precious metals have been officially pronounced the best performing asset class for the first half of the year. So far ArabianMoney’s tip of the year is looking bright (click here).
Debt crises
The logic is really so simple: as currencies get into trouble and central banks print money to inflate away their debt problems – and that is what they are doing whatever they say about sound money – then investors discover the benefits of a money that cannot be printed.
As more and more investors discover gold and silver then ironically enough the value of this money starts to increase more than inflation: the counter-inflation bet is actually inflating.
Eventually this will become a bubble. All inflations burst in the end. But where the naysayers are wrong is assuming that this will happen, suddenly and maybe tomorrow.
Bubbles of this type can form over many years. It could be two to three years, and possibly longer, before gold and silver prices reach their limit.
There will also be plenty of warning signs that things are getting out of control, although by then nobody will be listening, they will be too busy boasting about how much they have made holding gold and silver.
However, gold and silver bugs have more delights to come. Central banks dare not squeeze economies too tight with higher interest rates right now or they will collapse the financial system.
Soft spot
So they have to keep rates down below inflation. That is why gold and silver are in such a soft spot. Only when rates begin to seriously tighten to beat inflation should this party be over.
Of course, central banks may try to play a few nasty tricks on precious metal investors but this is also risky. For example, the US could sell some of its gold to pay the deficit but that would surely cause a major crisis of confidence in the US economy.
Selling the family silver is always the last refuge of the bankrupt. In the meantime gold and silver prices will continue to surprise to the upside and we should see silver back at $50 and gold over $2,000 an ounce rather more quickly than any major pundit is arguing now.
7 Comments posted by readers:
I presume, Ed., that the party, which will be over when interest rates tighten to beat inflation, is the period of time when gold and silver values increase more than inflation. That makes sense to me on the basis of supply & demand.
However, the price, if not the value, of gold and silver will go on increasing even when central banks increase interest rates to combat inflation, on the basis that bullion is also a currency.
It seems, then, to me that once the supply & demand party is over, bullion bugs will still be able to benefit from inflation because that will be the reason why interest rates are being raised.
Of course, your point about a bubble being inevitable is right but, as you say, there will be signs and commentators like yourself to warn the likes of me that it is time to sell.
Great commentary, Peter!
The Evil that is Central Banks
The Ed. stated “…central banks may try to play a few nasty tricks on precious metal investors” … certainly an understatement here!
The last thing that Central Banks want to see is investors leaving the stock and bond markets in droves, and pouring their savings into physical gold and silver. That is a Central Banker’s nightmare.
So surely, they will enlist the support of their corrupt agents, JPM, GS, HSBC, CME, etc. etc. to drive the gold and silver prices back down, even if temporarily.
@ Ed – Excellent article.
I found your statement ‘..the US could sell some of its gold to pay the deficit but that would surely cause a major crisis of confidence in the US economy’, to be interesting. Many people are now of the opinion that the US ’secretly’ sold a massive portion of its Gold reserves when it went off the Gold Standard (The Nixon Shock) in the 1970’s to help pay for the Vietnam war. In the 1980’s the US openly sold all of their Silver reserves. There have been various calls over many years to have the actual US Gold reserves audited (not done in properly in almost half a century!) but to no avail. We now have some heavy hitters entering the fray, including Ron Paul. If the US actually had the Gold it says they do then why provent an audit?
Secondly, confidence in the US Dollar has been steadily evaporating for years, and is accellerating, due in no small part to the Chinese moving to replace their paper dollar investments with tangible assets, and oil produces such as Iran and Libya asking to be paid in Gold instead of US Dollars.
Interesting times ahead.
@ Comment by John Mark – 13 July 2011
I agree with your analysis. I would like to add to it that I know of many people who are buying Gold and Silver not as ‘investments’ but as long term ‘generational’ stores of wealth. Rather than buying into a property/real estate bubble or buying some form of annuity for thier pensions, or otherwise putting money away for thier children or geandchildren, they are putting away thier savings as Gold and Silver bullion (physical not paper – so no counterparty risk). If this becomes a trend, then hold on tight………….
@ The Old Man:
I am one of many in the camp that says the US has very little gold at Ft. Knox. There is ample evidence that most of the Ft. Knox gold was leased out on a permanent basis to the big banks around the world, who then freely sold it into the market in order to keep the gold prices depressed.
One of many questions, of course, has to do with the fraudulent “audits” that the Dept. of Treasury conducts annually. I believe there is a very high likelihood that most of the 400oz gold bars were replaced by “other” 400oz bars that are basically tungsten, with a thin coating of gold. Most folks don’t realize that the specific gravity of tungsten and gold are practically identical (hence, a 400oz. gold bar weighs the same as a 400 oz. tungsten bar).
There are tungsten bars that have surfaced at Hong Kong banks (about 30 of them), banks in India, and other locations around the world over the past few years. Obviously the US government (with JPM support) quickly paid back those foreign banks for their losses, and then launched a “dis-information” campaign to deny any claims that these bars actually existed.
Google “fake gold bars” for more info, including claims by the US government that there are no “fake gold bars.”
http://www.chrismartenson.com/forum/tungsten-salted-gold-investment-scam-century/31370
My recollection is that, a number of years ago, there were over several tons of 400 oz tungsten bars that were manufactured in Arkansas, then shipped to some place in California to be coated.
Silver in Bull mode again. Great link below.
http://finance.yahoo.com/blogs/breakout/physical-silver-demand-heating-175100522.html
@Andy Silver in Bull mode again
Still in the 30’s (just). Will it ever be this cheap again?
philcu “Still in the 30’s (just). Will it ever be this cheap again?”
I was 39 once (several times actually) but sadly I will never see that age again. The same thing could be true for the silver price at $39.