Monday, May 14, 2012

Sit Back and Enjoy the Ride

Which way will the gold and silver market trend from here? Up, down, sideways?

Of course if we all new this, we could all be rich by lunchtime. But we don't know and all we have in front of us are the facts today and the extrapolation of those facts for a tilt at predicting tomorrow.

One commentator's view is that we aren't necessarily in a deflation, but we are in a period of re-pricing of financial assets and commodities. This will entail a period of price decreases in all assets to mark them back to true value. The point being that in the last 40 years or so, money supply has increased rapidly and prices have increased along with it.  The market will find real price value eventually, and this has to be down, across the board in everything. The violent rises and falls since 2008 are testament to this happening.

Of course the other agrument is for higher asset and commodity prices. This based on the sole influence of the sole market maker these days, the Federal Reserve Bank. The fundamentals are screaming QE3 as there is simply no mathematical model that tells us sovereign nations can ever pay back debt based on current growth metrics. Unless there is a restructuring of financial systems their will be defaults in a  big way.

Already the fringes of the EU are fraying further as Greece and Spain take the limelight. If Greece defaults and goes back to the Drachma, then investors will pull money out of Spain, Portugal and Ireland very quickly. This will spell the end of the Eurozone experiment.

But others suggest the Federal Reserve may be out of bullets and in fact may risk losing the confidence of the market if it goes and overtly prints more money in a QE3 scenario.

So will the Federal Reserve allow the market to re-price itself and hopefully maintain confidence in the dollar? Perhaps. But it would be a game of brinkmanship in order to save the reserve status of the US dollar and destroy the euro. One I'm sure they won't play, it is just too dangerous.

Will gold and silver prices likely fall from here? Maybe. Will gold shoot quickly to $3000 per ounce as a QE3 like program is announced? Or will Europe crumble causing people to flee to gold as much as they might flee to the US dollar for safety?

If anything, this will be an interesting ride. But if you own gold and silver, sit back and enjoy it.

Gold in New Zealand dollars: $2019.420 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $36.92 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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