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Gold, Silver & Libya's Stagflation Threat

Stagflation from Libya's $100 oil shock is driving a new stage in silver and Gold Investing...

WE HAVEN'T YET got through two months of 2011, and already we've seen several attempted revolutions in Middle Eastern countries, with so far two of them successful, writes Julian Phillips at the

All of these revolts have been unexpected and each has caught the world by surprise. We look to be on the brink of the next successful revolution, with Libya's infighting disrupting the oil market and taking prices so high that we are likely to see them negatively impact economic 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. And with developed-world recoveries still tenuous at best, weakened by nearly four years of financial crises, there is little capacity to absorb this new threat.

If stagflation 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. So how should we look at gold and silver now?

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 are now 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 (Africa's third largest producer supplies 2% of global oil supplies)? If Bahrain falls, will it bring down the eastern area of Saudi Arabia? If so, the future of the developed and emerging economies worldwide will change too, putting untold pressures on the different trading blocs.

2011 is already the most dramatic year of this century and it still has ten months to go. 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? Here at Gold Forecaster, 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. They are investors who do not Buy Gold or silver for profit. In the developed world, investors buy for profit, but are having a diminishing effect on the 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, in contrast, 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. 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.

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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