Why gold and silver are breaking out

Author: Julian Phillips

Truth and consequences. Rising oil prices due to the Middle Eastern and North African unrest raises the prospect of the double dip again, while Asian buying continues to underpin gold and silver.

We have yet to complete two months of 2011 and so far we have already seen several attempted revolutions in Middle Eastern countries, with, so far, two of them successful.   All of them have been unexpected and have caught the world by surprise.   

We are on the brink of the next successful revolution [Libya] disrupting the oil market and taking prices so high that we are likely to see them negatively impact growth in the developed world.  

The prospect of the dreaded, "double-dip" recession is now back on our screens.   Should food inflation continue to hurt the entire global economy, then words like ‘stagflation' and ‘depression' will reappear in much of the financial world.  

With developed world recoveries still tenuous at best and weakened from nearly four years of financial crises, there is little capacity to absorb this new threat.   If it does come about, then the strength to resist yet another one of the many potential crises maturing in the last few years will not be there.   Our previous articles on the ‘validity of technical analysis in gold and silver markets' have already proved correct and are hopefully prompting investors to reassess their viewpoints on gold and particularly silver.

 REFLECTIONS ON WHAT COULD HAPPEN

We are living in a world of consequences, all of them unforeseen, yet caused by the faulty structure of the financial world laid down decades ago.   The ‘credit crunch' that rippled into the banking crisis, then the sovereign debt crisis was a reflection of greed and the ‘live now, pay later' way of life in the developed world.   Each of the consequences of every stage of these crises was unforeseen.   Yet each was a consequence of the sanctioning of debt leverage in all walks of financial life.  

Energy prices are much higher than pre-credit crunch levels and expected to move higher.   At the time, much was written about ensuring that oil supplies needed to accommodate both the developed world and the rapidly emerging Asian world, which accounted for half the world's population.  

Have oil supplies been expanded to accommodate such Asian growth?   No they haven't!   So there is an oil crisis in the pipeline.  

The governments of the oil producing Middle East have long been secured by the main developed world powers to protect the vital interest of oil supplies.   The fact that they were corrupt and kept their own people in poverty was ignored.   It was a matter of time before that crisis erupted.   Food and energy inflation provided the trigger.  

Will the new governments in these countries continue to support the dollar pricing policies on oil or will they accept all currencies and review their priorities concerning which customers to favor.   Will we see prices like $145 if Libya falls [they supply 2% of global oil supplies]?   If Bahrain falls, will it bring down the eastern area of Saudi Arabia?     If so, the shape of the oil world will have to be re-sculptured.  

In turn, the economic future of the developed and emerging world will change and cause pressures between the different trading blocs that have not even been contemplated.  2011 is already the most dramatic year of this century and it still has ten months to go.

 

CHANGES ARE A' COMING.....

It is in our nature to want our national, political, financial and economic environments not to change, leaving us to get on with our lives in a somewhat myopic way.   Change, when it does come, is surprising every time.    It shouldn't be, but we tend to be so focused it always is.   As with the credit and subsequent crunches, we tend to feel everything will right itself eventually, it's just a case of waiting.   Well it hasn't and here we are suffering the next set of structural crisis consequences.

So what should we do?

-          We have always followed a policy of extrapolation, taking the events and structures of today and playing them forward to the future.   Hope is not part of this exercise, only realities that are present and real now.  

-         We do not wait until statistics from the past confirm our viewpoint.   We need to be able to take the factors unwinding now, knowing that statistics will confirm our conclusions later.   This takes us to the front from the back of the queue.   For instance, we were confirming central banks had turned sellers of gold nearly two years ago.   It is now being confirmed by economic statistics provided now.

-         We need the correct perspective in order to weigh the different market influencing factors in a balanced way.   For instance, we don't see gold in a ‘bull' market, but paper currencies in a ‘bear' market after their ‘bull' market last century from 1971.

-         We need to accept that the gold and silver markets are now global markets.   Asian markets are the most robust in this regard so they are now in the center of the market.   These encompass investors who do not buy for profit.   In the developed world, investors buy for profit, but are having a diminishing effect on the gold price itself.   Yet western investors continue to believe they are the main influence on the gold price.   They will sincerely believe that the level of U.S. interest rates will dictate the future of gold prices.   The average Asian buyer doesn't even know what these are.   Yet, it is the Asian buyer that is having and will have the greatest impact on the gold price.  

-         Our last two articles on technical analysis highlighted the dwindling influence of technical factors on the gold price too.   The fundamentals are the main influence with technical factors clarifying short-term moves.

-         We must accept that the world financial climate has darkened and that the storms of consequences are fundamentally destructive.   Like adjusting to winter from summer our expectation have to be tempered by this reality.   This allows us to protect ourselves from the coming storms.  Where we are optimistic, we have weighed the pertinent realities before reaching that conclusion.   We then act on that.   We may well find that the realities of crises have given us tremendous opportunities both for profit and to protect those profits.

 HOW WILL ALL THIS AFFECT THE GOLD AND SILVER MARKETS?

The fulcrum of the gold and silver markets at the moment remains rapidly growing Asian demand.   Following this is the inability of the supplies of gold and silver to accommodate this growing demand.   A factor that will grow in the days to come will be the change in the developed world to holding gold rather than selling it when prices indicate a correction.   The corrections we have seen in the last few years have shortened and become shallower than the previous one. 

 Just as central banks in the developed world have stopped selling, [but not yet turned to buying] so private investors are holding far longer than has been the case in the past.  

Asian demand is totally different in that investors there buy to hold as financial security, just as we used to buy houses.  

We expect to see this trend start to grow in the west as the developed world declines economically and the East rises.

 Julian Phillips is a long term analyst of the global gold and silver markets and is the founder and principal contributor for Global Watch - Gold Forecaster -www.goldforecaster.com and Silver Forecaster - www.silverforecaster.com