Why I Still Like Gold and Silver
Recently, I have read many articles that are calling a "top" in gold and silver. The charts at right might lead one to believe that the speculation has run its course and that these metals are headed lower. Indeed, one particularly bearish article suggested that gold will drop to $500 - $700 an ounce within a year. Certainly, the investment performance of gold and silver so far this year has been uninspiring. I can also understand how gold and silver can experience near term weakness in the face of panic selling (similar to what we saw in 2007/2008 at the peak of the financial crisis), when all investors were seeking liquidity at any cost and were buying short term US treasuries and selling everything else. We could certainly see more of that type of selling as Europe's issues continue to unfold.
English: Various Euro bills. (Photo credit: Wikipedia)As it relates to Europe's troubles, there is really only one politically expedient way for Europe to bail out their banks (make no mistake, Greece and Spain are only the beginning - see the table below that shows bank leverage) and to try to pull the Euro zone out of recession - massive liquidity injections by Central Banks including interest rate cuts and bond buying.
Indeed, the Federal Reserve will undoubtedly need to stay the same course in the coming months as inflation appears to be tame and the US economy continues to teeter on the brink of recession. The US will have it's own sovereign debt crisis to deal with in the not too distant future, as the public debt already surpasses $15 trillion and unfunded liabilities (social security, medicare, etc.) exceed $119 trillion! There is no other option but to inflate away the value of these liabilities by devaluing paper currencies! As such, the medium and long term prospects for real money such as gold and silver have never looked better. Also, investors who use leverage at low fixed rates to acquire assets that generate dependable cash flow streams (i.e., real estate) will also benefit greatly from the coming inflation.
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