The question I received last week prompted me to do an extensive overview of the potential dangers facing the U.S. economy and the U.S. dollar.  The reader who sent that in also had this to say …

The other forecast is that gold will hit a record $2,500 value within one year.  Other trading sites claim silver is a better investment than gold and yet other sites say gold will fall within a year. 

If one listens to or reads any two financial analysts on any market topic, one fascinating reality is that you can expect two well informed yet diametrically opposed conclusions on that market topic.  Gold and silver are no exception, as the reader points out. 

Earlier this year when gold was treading water around $1300, I said gold would see $1200 before it would see $1500.  I was wrong – dead wrong.  My point then was that gold was forming a bubble, and as we all know, bubbles only have so much elasticity.  At some point, the pressure is too great and they burst.  I still say the gold bubble will burst.  When, though, I don’t know.  It all depends on the U.S. economic recovery, the strength of the U.S. dollar, The Federal Reserve policies, and the willingness of central banks around the globe to keep buying it up.  It is hard for me to imagine that it will reach $2500 within a year, but, hey, what do I know …

Silver, on the other hand, just popped, but it is already forming a new bubble.  Clearly, the industrial/precious metal was dancing out of its league when it approached $50, but it seems to be holding above $35.  Can it stay together at such abnormal heights? 

As commodities, gold and silver are enjoying the upward push from the Fed policies.  Come June, one pressured-packed policy (QE2) will end.  Will both retain their lofty heights as the money that pushed them up potentially moves to other asset classes?  We will see, soon enough.

QE2 aside, gold is traditionally bought as a hedge against inflation and as a safe haven in troubling economic times.  Silver has industrial uses, so it has industrial demand.  Both metals have vanity demand as well. Given this, if one places their value in an economic context, one can see that the rise or fall in their prices depends on the both the perception and reality of the U.S. and global economic recoveries, the appearance (or not) of strong inflation, and, arguably the most important factor, the strength or weakness of the U.S. dollar.  Currently, the Fed’s unofficial “low-dollar” policy is helping keep the prices up (as stated), and it appears that policy will not change soon.

If, however, commodity (oil and food) prices insist on moving higher after June, inflation will become a concern and U.S interest rates will rise.  If that happens, the U.S and global economic recoveries will slow, but the U.S. dollar will strengthen. 

Now, can you understand why such confusion exists “out there” regarding gold and silver?  Can you see why it is important that you not listen to “them,” that you need to come to your own understanding and act on that, not what someone else tells you?        

Trade in the day – Invest in your life …

Trader Ed