Britain Downgraded: Why Gold and Silver Will Go Higher

I understand that there are vastly differing views on the outlook of precious metals in this forum, so I thought I'd summarize why I believe the outlook for gold and silver is positive despite the recent correction and claims that either an economic recovery is in place or deflation looms (two contradictory claims).

http://www.telegraph.co.uk/finance/...credit-rating-downgraded-from-AAA-to-Aa1.html

The link above points to the UK's recent credit downgrade. In response, Chancellor Osborne reportedly said:

“We will go on delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbers of jobs."

Basically, what he is saying is that he will continue his plan of austerity for the British population, though he will counter the force of deflation (brought by reduced spending) through money-printing in the form of quantitative easing, which artificially lowers interest rates. Now, some have argued that deflation is bearish for the metals -- and I suppose one could make that argument, though one could also argue that deflation is good for the metals because the metals might drop proportionally less than general deflation -- but it's clear Mr. Osborne is following the monetary policy in vogue throughout the over-leveraged developed nations: to fight deflation at all costs by debasing the currency and artificially lowering interest rates.

This means, over the long term, food and fuel prices will continue to rise at near-double digit growth annually. It also means commodities as a group will continue to rise year over year, even if not at the rate of previous years. Moreover, this policy of money-printing may potentially bring about a global bond market collapse. While some talk of gold and silver as being in a bubble, you rarely hear of the potentially far worse bond bubble. The implied assumption is that, despite historic highs in the face of credit downgrades, bonds will continue to be a safe haven.

If food and fuel prices continue to rise, I fail to see how gold and silver will plunge, since they are also finite commodities. This view strikes me as contradictory.

If anyone disagrees with my analysis, please share your thoughts.

 

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I don't disagree with your analysis, but there are a lot of derivatives still out there, and until they are cleared there are a lot of people selling their metal to cover their gambling debts. Of course that makes it a good time to buy if you believe that eventually PM's are going up.

 

All commodities are basically valued in the world exchange in USD. If commodities are rising in GB due to the weakening of their currency, the Price of PM ( in GB currency) will rise as does fuel or beans, but the price of commodities on the other side of the trades, could go up, down, or stay the same , depending on the strength of the USD at the time. Derivatives or other paper issued for commodities ( options, contracts, etc. [ Except for contracts based specifically on deliver of the commodity which have to be paid in full before the last expiration month] all cancel out at expiration ) so paper will have no effects. IMO.

 

Deflation occurs because inflation already occurred beyond equilibrium. This is simply nature. Using inflation to combat deflation is a short term bandaid to cover up the symptoms without addressing the disease which was leveraged inflation to begin with.

I don't believe that commodities will necessarily rise in price, although they should. I believe they will rise in value, but price is determined by proxies so as to reign in public confidence, and doesn't represent what it's supposed to. Money printing only causes price inflation if that money hits the market. If it sits behind closed doors there is no velocity behind it.

Once the disease is either cured (gold and silver as the only true extinguishers of debt according to Austrian economics) or runs its course killing the patient (great reset) then the price should reflect value accordingly.

 

In the final anyasis all paper currency, eventualy returns to the value of the paper it is written on.

 

I have to admit that for a while I started doubting my investment in silver, given the negative outlook for the metals in this forum, but I'm starting to see that coin collectors are not necessarily very knowledgeable about economics nor have any special insights into monetary policy that put people like Peter Schiff, James Turk and Ron Paul to shame. I think bullion investors and numismatists generally have different perspectives, with bullion investors somewhat more skeptical about the strength of the current monetary regime than the hard-core numismatists.

I think we are all complex computers that have the ability to organize and filter massive amounts of data, and given our limitations do not have very good predictive powers generally -- though some may excel more or less relative to others. So, while I take what people say in numismatic forums seriously, I also have to take into account the sentiment about the economy at my work as well as headlines such as the one I posted above. Right now, coworkers of mine are talking about how prices are going up for food and gas. These are guys who make a decent income compared to many Americans -- not exceptional, but they are flush with cash. So, they are experiencing first-hand the debasement of the U.S. dollar. This is interesting to me because Peter Schiff recently debated a stock market analyst on CNBC and asserted that the talk at the break room at work will be gas prices and not the Dow hitting 14,000. I must say that at my workplace Peter Schiff is on the mark. This may not be true of all workplaces, but it's what working-class Americans are discussing.

I personally do not see gas and food prices going lower long term. I believe there is a strategy of debasing the currency to make it easier to pay off the national debt. This is not the perfect solution, but it will prevent the deflation that some believe is coming. I see gold and silver as in the same general category as agricultural products and oil. So long as debasement is occurring, gold and silver will continue to make annual gains. Let me emphasize, as well, that these gains will not be, nor can be, linear. This is the fallacy oft-repeated in this forum: there is the assumption that if the short-term prices of metals deviate from the money supply there is no correlation between them, when in fact such near-term deviation is precisely why some believe the metals are currently undervalued. In addition, the monetary policy is not likely to change for the rest of this decade.

I mean, silver has dropped barely below $30 per ounce and some are cracking the beer open and declaring the bull market over. Yet a little more than a decade ago the price of silver was one-seventh of what it is today, despite the correction. The commodities bull run is not over.

I'm going to agree with Max Keiser that the real bubble right now is bonds. And I will wager that some numismatists have their money in bonds right now.