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Silver is breaking
out for another run to
new highs. The metal is moving higher
along with gold in the safe-haven trade. The precious metals are likely to get another push up from US economic policy-makers.
Gold and silver are benefitting from the flight to safety trade driven in part by the continuing
European debt crisis and high volatility in the equity markets. Higher inflation, the
US credit downgrade and slowing economic growth are also impacting equities; money is flowing out of equities and into hard assets.
We can see this dynamic playing out in the price of
gold, which is testing new highs at the $1900/oz level. Gold’s rise this month has accelerated on a parabolic trajectory, while the
S&P 500 has sold-off
steeply.
Money is also moving from
stocks into US Treasurys,
despite the US credit downgrade. Yields on the
10-year Treasury are at historic lows, dipping below 2% for the first
time since the 2008
financial meltdown. But real rates for Treasurys have been negative at the published inflation
rate. And the tax man takes
his pound of flesh not matter what. So many investors choose gold and silver.
While gold has been move steadily compared to stocks this year, silver has been more
volatile than gold. Silver
declined a bit more than
gold back in May, and has been trading in a range since. That is until it broke
to the upside in the last two
trading days. We cans see
price action for COMEX silver
has produced a bullish ascending triangle pattern over the last several weeks. Ascending triangle patterns are reliable
bullish indicators. We saw an ascending
triangle pattern in silver back in September 2010 when we called a buy
at $20.78/oz and a target
of $60/oz.
We can see that the pattern formed on declining volume, and that
volume ticked up on the Friday’s
breakout. This volume behavior
confirms the chart
pattern. The point count for the ascending triangle
pattern above creates a near-term price objective of 47
for COMEX silver. We would consider the breakout indicator to have failed if silver closes below 42 on any near-term pullback.
The longer term outlook for gold and silver is bullish as well. For gold, we can see rising
money stocks as the major catalyst for further price gains. Another bullish factor is extended economic
turmoil in the Eurozone.
The gold/silver ratio dynamic
will help pull silver up along with gold. Any move by the Fed to implement
additional quantitative easing
will accelerate the rise of gold and silver prices from here.
The quantity of
money in the economy is increasing. As we know from Milton Freidman and Henry
Hazlitt, “Inflation is always
and everywhere a monetary
phenomenon in the sense that it is
and can be produced only by a more rapid increase in the quantity of money than in
output.”
Fearing deflation would
set in as a result of the financial
meltdown in 2008, the Fed
and central bankers around
the world have flooded the place with liquidity. But, the Fed was wrong in
2008. Deflation was not
the problem. The housing bubble burst, but prices in general were not falling into the abyss. The credit freeze was not a general phenomenon. Only a few Wall
Street investment banks were locked out of the repo market on no confidence votes from
counterparties. The Fed action to add $1.6 Trillion to the money supply
was a gross over reaction to the tempest in the
Wall Street teapot. The Fed’s
additional $600 Billion QE2 stimulus measure also contributed to growing
inflation for all.
And on the inflation front, it will get
darker before the dawn. The reason is “excess reserves.” That is, Fed member banks have been sitting on $1.6 Trillion in cash and have been reluctant to lend. But some of those reserves are now leaking out to the general economy. We can
see that from M2, the Fed statistic that measures money in
circulation plus demand deposits,
savings account balances
and small time deposits,
has increased by $500 billion in the last two months. So there is more cash available to chase the goods and services, the surefire
path to higher prices.
Excess liquidity is
causing inflation, which is showing up in producer and consumer prices. The US Producer Price Index has jumped to 7% year-over-year, which is
squeezing corporate margins and flowing into higher consumer
prices. The US is also importing inflation from China. Inflation in China ticked
up despite several
efforts by its central bank
to raise reserve requirements and tighten
rates.
Gold is the premiere hedge against inflation, so we are seeing the price of gold move steadily higher. We can
expect gold to reach
$2000/oz and beyond in the next
few months.
The gold/silver ratio is
telling us that silver could outperform gold this year on a percentage basis.
The question for you
is, “How can I protect myself and my assets from
inflation and market volatility?”
Investors from around
the world benefit from timely market analysis on gold and silver and
portfolio recommendations contained
in The Gold Speculator
investment newsletter, which
is based on the principles of free markets, private property, sound money and Austrian School economics.
Scott Silva
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