Bad Economic News Supporting Silver and Gold Prices

Center of gravity shifting to the East...

IT MAY be the case that Gold and Silver Prices get hit by stringent margin increases on some exchanges, yet still they bounce back. It seems that whatever ammunition the gold bears throw at them the 'monetary' precious metals regroup and bounce back after a perhaps initial sharp retreat, writes MineWeb's Lawrence Williams. 

It may well be that the bears are running out of ammunition! Gold and silver may lose the odd battle but they are certainly winning the war.

The center of gravity for gold demand is moving ever further eastwards, which means that whatever Western institutions (and I use this term in its widest sense) may do to curb its enthusiastic breakout they are ultimately doomed to failure. The Chinese, Indians and other Eastern investors who are psychologically hard-wired into gold as the ultimate survival currency when times are bad – a factor which equally affects their government attitudes to the yellow metal – will call the tune and any splurge of Western sales quickly provokes an even stronger purchase response from the East.

Silver continues to be dragged up on gold's coattails, and given the far smaller market here we are likely to see more volatility – although it has been interesting to note silver's recent relative resilience to the occasional sharp Gold Price downward moves each time some obstacle is driven into its advancing path. 

Another boost to silver is also an indirect consequence of gold's strength. Increasingly the small investor who wants some precious metal insurance against hard times ahead is being priced out of Buying Gold – and then silver becomes a real alternative. Do not be surprised to see silver demand continuing to increase strongly, particularly in the emerging nations as at least some growth here sees more and more people becoming part of the middle classes – and middle class aspirations in many of these nations will include holding some precious metals against a rainy day.

It is also becoming increasingly apparent – in part through the demand patterns noted above – that any truly speculative element in gold (and silver) purchasing is probably relatively minor in its impact and the demand for the key precious metals is coming from holders who will only sell as a last resort – not to make a quick buck. 

The radical difference in psyche between the Western speculator and the Eastern accumulator is paramount in the price advances we are seeing now. But now there is also an increasing element of Western accumulation as a wealth protector too. With other safe havens like the Swiss Franc, and perhaps the Japanese Yen, even more prone to government intervention to balance domestic competitiveness in world markets, the role of gold as an insurance policy is getting stronger by the day. And this insurance is likely to remain in strong hands until the world is seen as coming out of recession – which looks to be years ahead still.

Add to the above the almost daily news items that various central banks are increasing their gold holdings – many by buying their own country's outputs (Bolivia is the latest of these) – and it would seem that the amount of gold becoming available to prospective purchasers may be diminishing by the day. Indeed there is wide belief that other Central Banks from gold producing nations – China being by far the largest of these – are also purchasing all their domestic outputs, but placing this in accounts which are not reported as part of their official holdings until such time as it becomes politically expedient to do so. 

Meanwhile higher prices have not yet been able to stimulate any significant increase in mined output due to declining grades and end of mine lives counterbalancing any new output that may be coming on stream, which is further restricting supplies. With growing demand, which looks unlikely to diminish in the near future, the squeeze on precious metals prices looks like it could drive the Gold Price onwards and upwards.

Gold Mining firms, on the other hand, do not appear to have been reaping the benefits of the advancing Gold Price – at least as far as their stock prices are concerned. But, with gold's price rise so far this year of over 30% in Dollar terms, many miners will be showing massive Q3 profit increases when they come to report which may well really begin to stimulate precious metals mining investment interest at a time when the general stock market is appearing increasingly shaky.

While continuing lack of global growth may not bode well for the short to medium term price patterns for industrial commodities it could well see gold and silver rise to ever increasing heights.

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