Gold and Silver: The Only Attractive Investment Option

August 2nd, 2009

By Peter Cooper

With the S&P up 46 percent from its March low, a typical 50 percent retracement is almost complete ready for the next plunge lower in this bear market.

Unless you are a born-again-bull or have shut yourself in a cupboard for the past two years, I do not understand how anybody can see a further upside in markets; at this point, the risk is all to the downside.

At the same time, the outlook for the US dollar is not good, even if a new market crash brings a short rally for the greenback. At the very least then hedging the dollar with a currency of fixed supply looks attractive.

IMF dilemma

That is where gold and silver come into play. You can inflate the money supply but not the gold supply, although with IMF gold sales that is exactly what the central banks are going to do.

They will fail because the IMF does not hold enough gold to cause a serious price change, and might actually stimulate additional demand if this action is perceived as a desperate attempt to keep gold prices down because inflation looks inevitable.

It is the same story for those who say silver is not a currency. Just take note each day that when the gold price goes up silver doubles that increase, and when gold goes down silver drops by double that percentage.

The leverage is obvious, and as gold prices take off those who can not afford gold will buy silver. Also silver stocks are 100th the size of gold stocks so simple supply and demand will leverage the silver price up. Silver is money because of its link to gold, and look at this another way: could silver fall in price when gold is rising? Impossible.

This year I have noted that the flat-earth, tree hugging investors have become a little tired of waiting for gold prices to go up. But the new kids on the block are the hedge funds like Paulson & Co (who tend to get their timing right, that is why they have made billions), and also the more humble retail investor, represented by the enigmatic publisher Rich Dad or the gold ATM machines in Germany.

To my mind this is setting us up for a price spike, and actually it does not matter where the stock market goes this autumn.

Inflation fears

A rising bull market would give rise to fears about inflation from the massive stimulus packages – like that already evident courtesy of China’s $1 trillion sub-sub-prime lending program in the first half. That would send investors into gold and silver.

A nasty little crash in October would send investors scurrying for safe haven assets in a renewed belief that the end of the world is coming. It would also mark a definite top for the bond market and investors would have no other alternative then except precious metals, fearing a surge in inflation from a second bailout package.

So with gold and silver it's heads you win and tails you win. That is why gold and silver look to be the only attractive investments out there now. You might get a chance to buy them a little cheaper before an autumn stock market event, but do not count on it!

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