Distributed for Honest Money
Distributed for Honest Money

Precious metals prices won’t fall very far unless governments worldwide stop spending funds they don’t have. (OK, China is spending money it DOES have. Everybody else? No way.) Will governments stop spending? It is doubtful. So with excess spending, we’ll see the accompanying monetary expansion from the central banks. That’ll give us more inflation. And the only effective defense against inflation is gold and silver.

Gold bugs and speculators of the world are on the edges of their seats. With gold stopping $3 short of $1,000 yesterday, will this be the one that sticks? Are the days of three-digit gold prices about to be a thing of the past? Your guess is as good as mine Amelia Island, but scanning through the pages of investment advisories, not one has issued any sell recommendations on the shiny metal — thus it’s safe to say all analysts are holding on for the ride.

Long term, gold and silver prices are going higher, Byron King, one of my favorite advisories, summarizes. Really, where else can they go? Lower? With the current monetary madness that’s infecting the world’s central bankers?

Silver in particular has been very interesting lately. With gold near $1,000 and the precious metals buzz revived.

If you believe silver to be a store of value as legitimate as gold, it looks like there’s more potential short-term upside for poor man’s gold. While gold is just a breath from all-time highs, an ounce of silver goes for $16 today, about 23% below its 2008 high of $21. Sellers will say this is because of silver’s industrial capacity — which has been beaten bloody by the credit crunch. Buyers, like Byron and most of us, say we’re heading into an inflationary period so great that this will be rendered somewhat irrelevant.

The gold/silver ratio is both in a state of decline while still higher than typical, another bullish argument for silver:

The gold-to-silver ratio has spent most of 2009 in a downtrend, meaning the price of silver has been rising faster this year than the price of gold. Just this morning, it hit 59, a 2009 low. During the high inflation of the 70s, the ratio stayed below 50. Back in gold standard days, it was hardly 15. So silver is undervalued compared to gold, and it has some momentum on its side. I’ve heard worse odds.

One last note on precious metals: The dollar is way stronger today than it was in March 2008 when gold and silver hit historic highs. The dollar index goes for 78.5, well above its low around 71 in 2008. The index is actually around break-even for the week; testament to just how bold precious metal buyers are becoming.

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