Gold and Silver Leap Amid Fears of Inflation

February 17, 2009 | By: Peter Cooper

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.

Disclosure: None

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