Warning signs - could be bad for gold and silver short term but good long term
Gold, silver and other commodities have been falling sharply, along with the stock markets creating warning signs for investors as global uncertainties persist.
Posted: Friday , 11 Mar 2011
Are we headed for a major stock market downturn? If so what could be the effect on gold and silver? The portents are there for problems ahead short term, but probably are positive for gold at least longer term.
The global political situation, with unrest still simmering in the Midde East and the fighting in Libya, will have a continuing impact and even the slight dissent seen so far in Saudi Arabia's oil producing area does raise some serious warning flags. The oil price has a major economic impact on the global economy and sustained oil price rises will lead to a fairly rapid return to recession - or at the very least a substantial slowdown in any economic revival. If it contributes to Chinese inflation and a subsequent reduction in growth there then the immediate outlook for industrial commodities would also be much more obscure.
Today's Japanese earthquake and tsunami have also hit markets and the full impact on the Japanese, and other Pacific nation economies, is still far from certain, but it will have an inevitable adverse economic impact.
As we have often pointed out in these columns in the past, in the 2008 market crash - and a number of economists see parallels developing in the markets now - all commodities including gold and silver fell back with the need to sell the good alongside the bad to maintain liquidity. But gold fell less than virtually anything else and recovered fastest. This could happen again.
Silver, on the other hand, because industrial demand is a major factor here, crashed dramatically in 2008 (possibly worse than any other commodity) and while we feel that this time any fall alongside another market meltdown might not be quite as severe, one should approach silver purchases with a degree of caution in our view. The gold:silver ratio has been at its lowest for over 30 years and even some of the top silver bulls are expressing some nervousness on silver's short term prospects.
Gold, however, tends to thrive on political and economic uncertainty and while it is currently showing some weakness as the dollar has been strengthening, the downside may be more limited than for other commodities. Base metals prices have been falling sharply over the past week or so and this downtrend could well continue.
Figures for the U.S. economy, which is probably key to short term performance in the stock and commodity markets remain mixed and while there are signs that consumer confidence is still picking up, although this could change rapidly, this too will impact precious metals prices in particular. The feeling is that as the economy improves then the safe-haven aspects of precious metals investment falls away. But any indication that the recovery is stalling could bring investors back very quickly.
Europe too is seeing regional economic uncertainty with the some of the weaker economies within the Eurozone seen as being particularly precarious once more.
While it is still too early to say if the global economy is going south again, there are some nasty warning signs out there that this could happen. Caution remains the order of the day and gold most often is the best ‘cautious' option.