As I look back at the gold and silver market signals we recently published and our 2013 silver forecast, which predicted a price well above $50 per ounce (the high reached in April 2011), I can’t help but to wonder what fundamental factors will spark this “hyperbolic” move?
Several major fundamental factors are developing that could send precious metal prices soaring.
Free Money, Inflation and the Increasing Cost of Debt
The Federal Reserve sets short term rates and prints “free” money (since it is not backed by gold, silver or any other inherently valuable commodity) and purchases bonds to infuse cash into the economy. Such tactics have been employed for almost a decade in an attempt to jump-start the economy. The economy appears to be slowly recovering, but the market determines longer term rates. After recently reaching historically low rates on the 10-year notes, long-term rates are beginning to move higher, raising fears of inflation and, possibly, hyperinflation, with too much money chasing too few goods.
One area already showing inflationary signs is commodities; prices are rising. Oil hit 147 in 2008, only to rally even higher in 2011. It appears to be only a matter of time before commodities in general are ready for another move higher, especially if inflation takes off. The stock market is also inflating with the Dow Jones closing above 14,000 on February 1, 2013 for the first time since 2007 as more dollars chase fewer opportunities.
Steve Roy, Chief Technical Analyst for the Equity Management Academy, whose mission is to preserve wealth through education, said, “The Fed thinks they can control it (inflation), but they are always behind the curve. By the time they do anything about it, it will be too late.” Over time, the dollar has been devalued by the markets (a certain sign of hidden inflation), with the dollar index slowly declining since a high of about 120 in 2000/2001, and a record high of 165 in 1984. Since 2002, when the dollar index was at about 122, it has fallen now into the 70s. As the dollar index fell, gold really started to take off as a hedge against inflation. If the dollar index moves another leg down, which Mr. Roy expects, it should push gold and silver much higher.
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by Patrick MontesDeOca – ETF Daily News – February 8th, 2013