Gold and silver: are we there yet?

Every time gold prices take a correction, we hear the chorus that we are in a gold 'bubble" that is about to burst. The chorus continues until the correction is over, abates, then restarts when gold takes its next drop. The chorus is even louder when it comes to silver prices.

The first graphic purports to show a "parabolic" rise in silver, the final proof of a bubble in some eyes. When I get a plot for silver prices, the price rise is steep but not parabolic(second graph down). Even more revealing is the third graph, the gold price. Since, last November, gold has traded in a rising channel. No runaway bubble there. Compare the rise in gold prices to the previous graph: while gold has started the current channel in November, the rise in silver began in August this year. Until then, shorts were keeping silver prices almost even. So, now silver prices are pushing hard. Also, the occurrence of silver to gold is 14 to 1 in the ground, so for many years gold ran 15 times higher than silver. The ratio of gold to silver got as high as 60. Clearly, silver prices were being suppressed.

The biggest reason for the rise in precious metals is the money printing across the world, especially in Europe and the US and Japan. Yes, we have a fear of inflation as well, but it is the Central Banks and our FED that are ruining the fiat currencies.

The FED is starting QEII with a 600 Billion purchase of Treasuries that is supposed to goose the economy and lower interest rates. Instead, we see municipal and Treasury bonds yielding more in interest, forced on the bond issuers, because of the value of the Dollar is dropping. Strange that Helicopter Ben is still 'surprised' every time one of his schemes do not work out.

The last graphics is a description of what happens in a gold bubble. We have yet to see the Public become enthusiastic.

The best guesstimate is that gold will reach $5,000/oz between now and next August. Sometime, between now and then, gold will start moving fast. The current rally is small potatoes.

Update on gold and the debt crisis.

The two graphics I posted should explain the basics of the debt crisis in the world. It's like this: not enough producing, too much spending and too much borrowing. It is the nightmarish end of Social Democracy: endless government subsidies and spending to buy votes.

The first graphic shows the borrowing needs of selected Western countries as percentage of GDP. We can see that these rates are not sustainable. In the case of Japan, the government borrowed the money its citizens saved, so when Japan goes belly up, its citizens will lose all their savings. The US borrows most of the money it spends from all over the world (including China). This year, the FED is going to do "Quantitative Easing #2, or QEII, a nice way of saying printing money. We will 'pay' for it in the coin of inflation and the dollar losing its reserve currency status.

The second graphic is the increasing debt burden of the PIIGS countries. Notice that in spite of the spending "cuts" promised, debt continues to swell.

How do these countries get into the pickle of unsupportable and escalating debt? It began with the promises of the Social Democrats to provide for various government services to the population. At first, they raised taxes, especially on the high earners. These were the people who knew how best to invest money in profitable ventures and increase the GDP. When their earnings went to the government in the form of taxes, the high earners reduced their taxable earnings. Down went the GDP and down went the taxes collected. The Media is Socialist all over Europe and it defends every government program just as fiercely as it does in the United States. Opposition Conservatives became "me too" politicians and after a while it made no difference who got elected; government programs and subsidies continued and so did deficit spending. As the private economies grew anemically, an ever larger amount is being financed from borrowing.

So, where is the problem, a Social Democrat might ask. The problem comes when investors (those who buy the debt) decide that with larger debt, the risk of default grows and demand larger return on the borrowing needed to roll over old debt due for repayment. At some level of interest demanded, the debtor can not pay and default looms.

This creates a problem for all who own debts by the deadbeat. If the deadbeat defaults, all of its loans might be declared unpayable and pyramiding of debts stops. Hidden to the population of Europe is the fact that these countries owe large sums to each other and if one gets caught in a default, it will be come a "contagion," a serial default as one country after another admits that it can not pay its debts. That is why the EU decided to bail out Greece and is now considering bailing out Ireland and Portugal, with Spain looming on the horizon.

With the debt crisis comes another unexpected surprise: a surge in the price of the dollar, as deluded people try to convert their Euros into a "safe" currency, the US Dollar. And that raises the value of the dollar, depresses oil, gold and silver prices. Permanently? Oh NO!! When the Europeans paper over their latest currency "crisis" the dollar will again sink and gold, silver and oil will soar.

More on this correlation later.