Precious metal prices have leapt to their highest in almost a year, with gold and silver stocks rising even as the general indices tumble.

Investors are now worried about inflation, a phenomenon that has always accompanied huge government spending programs in the past, although the immediate problem for the global economy is surely deflation and the risk of a downward debt deflation spiral.

Bonds doomed

However, if investors are right then the alternative safe haven asset class of bonds is doomed to destruction. Bonds currently pay incredibly low yields and will shift into negative returns on the smallest whiff of inflation.

This is what worries investors now rushing in to precious metals. They are concerned that paper monies will prove a poor store of value, like in the 1970s. Gold touched $971 an ounce yesterday and silver topped $14.50, with silver now outpacing gold in its rate of price increase.

But are we just going to see a repeat of the gold price performance of 2008 which peaked in March at $1,033 or something more spectacular this year?

Commodities analysts are pretty divided. Certainly fundamental buying from jewelers is drying up due to high prices, but investors seem to be gaining an appetite for precious metals.

Market forces

And when a large amount of cash is poured into a relatively small market - silver is one hundredth the size of gold and easily the rarer metal - then the scope for price advances is obvious.

It is probable therefore that chartists who think they are cleverly going to exit precious metals in March and go away could well be making a big mistake this year. The prospects for still higher prices are excellent, and $1,100 and 1,300 look possible for gold, and up to $30 for silver.

Precious metal stocks could also confound the experience of 2008 when they got trashed along with all other equities. The difference in 2009 is that the metal prices are rising and not falling, and thus the leverage on stocks is upwards and not downwards.

Buying major gold producers and smaller precious metal companies a little later in the upcycle would look one of the few win-win options presently open to investors.

Dow Almost Touches November 20 Bottom

US stock indices tumbled last night and the Dow Jones came within one point of its November 20 bottom at 7,552. Then Warren Buffett called a bottom and began buying.

This blog questioned his bottom-logic then, and will question it again now. The previous bottom before that was 7,286 on October 9, 2002 - the nadir of the dot-com stock market crash.

Stocks going lower

Yet can anybody seriously argue that the worldwide financial crisis is somehow less of a big deal than the dot-com crash? It surely has far wider implications and so that ought to mean stocks are going much lower.

The q-ratio which measures discount to net asset value has also not come close to the level that would mark a real stock market bottom, and to do so stock prices need to fall almost 50 per cent.

There is a whole slew of potential economic disasters lined up that might take us down again: from the Eastern European trillion-dollar debt crisis to the economic slump in Japan, and concern that Obamanomics do not add up.

Viewed from the other direction even the most die-hard optimist is hard pressed to come up with a positive scenario. It is like jumping off a cliff and hoping for a soft landing while on the way down.

Precious metal stocks

As a gold investor my one slug of optimism is that gold and silver stocks have been traveling in the reverse direction to the Dow, and that some of the smaller stocks have rebounded very strongly - admittedly after a tragic performance late last year.

However, the compunction to mortgage the ranch and buy gold stocks is still not that impelling. That might be a fear of getting fingers burnt again and a desire to see previous disasters come right first, but it is a barrier nonetheless.

And you have to concede that if world capital markets crash again, it could be that good and even golden assets fall along with the bad.

On the other hand, the protection of bonds is now called into question with global governments sudden enthusiasm for printing money, and that really only leaves gold and silver as safe havens.

-- Posted Wednesday, 18 February 2009 | Digg This Article | Source: GoldSeek.com Previous Articles by Peter Cooper