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More FEAR needed to move GOLD and SILVER to a new highs!

July 29, 2012

Greed and Fear moves Gold/Silver. New highs may await more ‘fear’ in the markets!

Why is gold still at $1600 and silver at $28? Many would think that these precious metals would be much higher today given the condition of our markets. What really moves gold, however, is ‘fear’ and ‘uncertainty’. If the European situation deteriorates suddenly (say a few large banks collapse) then this event could be the catalyst for moving gold and silver to record highs. I do expect this to occur in the near future. As of today, however, the VIX index has not reflected the ‘fear’ necessary to create these new highs in gold and silver.

 
What has not occurred to date is any type of hyper-inflation…which many pundits have predicted. This is not because new money units are not being created. What has occurred is a lack in the lending of ‘excess reserves’ by our commercial banks and also a lack of ‘velocity’. Credit creation has not increased in the past few years and this means a decrease in the DEMAND for many goods and services. Real estate is the best example. Credit is available but it is not being borrowed by most Americans for new and existing homes. This lack of DEMAND means ‘prices’ are not increasing. The other ‘missing link’ that affects the markets is a lack of ‘affordability’. Wages are not increasing enough to create the DEMAND that is necessary for ‘inflation’ to occur. This means that the ‘deflationary’ forces are greater than those of ‘inflation’. Unemployment and the large group on ‘food stamps’ (now near 47 million) has diminished the DEMAND for goods and services. Check out this website for details:  www.usdebtclock.org.

 
This lack of ‘inflation’ due to a lack of consumer DEMAND has created an environment where Gold and Silver prices have stalled. This trend, however, may not last much longer. If new ‘fear’ develops in the markets as a result of the U.S. ‘fiscal cliff’ and/or the collapse of confidence in the European community, this could be the catalyst for a new ‘run up’ in the prices of GLD and SLV. The ‘dollar index’ is also key to future gold/silver prices. When will the ‘dollar’ index start its next decline? Fear may help this index for the short-term, but eventually the ‘run’ for something physical (gold/silver) will emerge. Watch the markets, the dollar index, the vix index, and the fear index. I expect a ‘run up’ in precious metals in the near future.
 

 
 The coming months in the USA and Europe should create the ‘fear’ and ‘volatility’ to move gold and silver to new highs. My sense is that prices of gold may reach $2000 by year-end and silver may reach $50. China, India, the Middle East and the European/American markets could create the DEMAND for these new highs later in 2012.
 
 
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