Eurozone Hits The Fan: Gold Price Surging; Silver Begins To Make A Move

The Eurozone crisis goes from bad to worse and QE3 looks to be on the horizon in the U.S. again. Gold and silver have moved up sharply and this path could well continue as bad news proliferates.
Author: Lawrence Williams

Wednesday , 13 Jul 2011

LONDON - For some weeks and months now, commentators writing on Mineweb have seen the current Eurozone debt crisis escalating to the point of defaults and despair. To a great extent the general public has let it pass by. Probably 99% of the population has taken the view that this is some temporary phenomenon and won't impact their lives. But this head in the sand attitude is at last beginning to change - in Europe at least - and no doubt the realisation is beginning to dawn across the Atlantic that this is not just a European crisis, but a global one. Many of the problems that are currently besetting the Eurozone are endemic in the U.S. at state level too and slowly, but surely, as poor economic data belies any talk of economic recovery, the realisation that things may get far worse before they even start to get better is beginning to dawn in the world's biggest economy as well.

Today in Europe the mainstream news broadcasts are full of Eurozone debt related stories: Irish debt downgrade to junk status following Portugal; talk of Greece being allowed some form of default; the looming debt crises in the big economies of Italy and Spain - the Eurozone's third and fourth largest - coming to the fore again. We are looking at financial collapse in a string of possible defaults across Europe and if they occur one doesn't see how the global banking system can survive. Those who have been preaching that gold may be the only investment out there which stands much chance of preserving one's wealth - the ultimate safe haven - look like their views may be being vindicated as I write with the gold price jumping up through $1570 and back within a hair's breadth of its intra-day high of a couple of months ago. It is almost certainly going to set a new London Fixing record this morning (indeed will have done so by the time this article sees the light of day) and the breach may extend all the way up to $1600, although last time we saw that coming back at the beginning of May we were quickly disillusioned. But this time it looks to be different!

There is now again official talk in the U.S. of a continuation of some additional financial stimulus from the Fed being necessary to prevent the U.S. economy falling into recession again - QE3 by any other name - and even China, which has been seen as the globe's saviour with its seemingly unending economic growth is facing severe inflationary pressures which are forcing the government there to tighten ever more which ultimately has to dent that economy's advance, although still only back to a level that most Western governments would give their eye teeth to achieve. The QE3 talk dented the dollar, which had been rising against the Euro over the previous few days, giving another boost to the dollar gold price.

Not surprisingly with all the doom and gloom in the financial markets, gold - and at long last silver - are beginning to make a new serious move to the upside after a couple of months languishing in the northern summer doldrums. This summer the dull period may well be ending very early for the precious metals!

The move also seems to be very much towards holding physical gold and silver too. ETF holdings have been static to falling much of this year and perhaps, as the realisation dawns that even the biggest global banks are far from safe from collapse in the current economic environment, physical metal will come to the fore more and more, although the storage problems for significant quantities of gold, and particularly silver, should not be underestimated. The location where one should store precious metals is also something to be considered. Might the U.S. confiscate gold again ahead of a major revaluation? Perhaps unlikely but the possibility will remain in people's minds.

There are signs too that silver may be beginning to move up again on gold's coattails. The gold:silver ratio (GSR) remains at around the 43:1 level and the basic fundamentals whereby silver has a much more prevalent industrial usage percentage than gold could mean this sector of demand may suffer in a continuing recession. However, as Eric Sprott - and many others - continuously point out the volumes of silver traded are enormously in excess of the actual supply and it would not take much to create the impression of big supply shortages should more and more people demand delivery of physical metal which could just be beginning to happen. As an investment metal silver has some major attractions in terms of price with the small investor able and willing to buy relatively large amounts, which with a gold price in the high $1500s they may be unwilling psychologically to do with the yellow metal itself - whatever they see as its investment merits.

Silver has proved to be much more volatile than gold - on the upside and on the downside - and any prolonged rise in the gold price will likely see silver move up even faster - and if this starts to happen momentum could build again as it did in the first few months of this year. Whether silver will ever get back to a GSR of 16:1 as Eric Sprott predicts may be yet be a very long way away, but one could certainly see a return to around 30:1 which could see silver outperforming gold again quite substantially. But then maybe too many fingers got burnt in silver's run up to close to $50 in April/May - and subsequent fallback to around $32 - for a quick recovery to occur, but overall, if gold continues to move up silver will still probably rise faster in percentage terms and if the market starts to see the earlier sharp downturn as overdone this advantage could accelerate.

http://www.mineweb.com/mineweb/view/min ... pid=102055