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Gold and Silver Price Forecasts for 2012 Probably Too Pessimistic

By: Peter Cooper, Arabian Money

If anything gold and silver forecasters are probably too cautious about the outlook for 2012. This is not surprising after the volatility of 2011 which saw record highs for both metals but a collapse later in the year that left gold up 10 per cent and silver down around the same amount for the year.

The worry for precious metal investors is that deflation and recession will overcome the inflationary forces of money printing in 2012 and limit the upside for prices.

Correction done?

But while it is certainly possible to see a 2008-style drop in commodity prices in another global financial crisis, most likely with the eurozone at its epicentre this time, the correction that we have already seen in precious metals probably shields them from a copycat correction. In short the correction is largely behind us, whereas in late 2008 it was well overdue.

Then again in 2009 it took a few months for the bailouts to kick into action while they are ongoing in 2012. We even have the IMF now doubling its funds to $1 trillion by means of borrowing and leveraging debt from its heavily indebted members, or at least proposing such a preposterous move.

QE3 is also there waiting in the wings for a suitable crisis for the Fed to push the button. At the same time the biggest investment bubble in the world, US treasuries continues to inflate.

Investors around the world know that this is unsafe and that the only real protection from a bond market crash is to hold real assets and among currencies that is gold and silver.

‘The Chinese are converting their money to gold and silver’, said the Sharjah trader interviewed by ArabianMoney last week (click here). It is a gross over simplification but not an inaccurate one.

Paper burns

It is pretty dangerous to be holding paper currency when the supply of that currency is being inflated as it is today. Only because that money remains unlent in the banks is inflation being held in check.

So the relatively fixed supply of gold and silver is still faced by increased demand for a currency that cannot be printed in the age of money printing by virtually all the central banks of the world.

This is not a phenomenon that shows any sign of going away any time soon. One way or another money will have to be created to bailout the eurozone crisis, and ultimately that can only push the price of gold and silver in one direction.

The ArabianMoney investment newsletter regularly reviews how to invest in gold and silver for maximum upside with actionable investment advice (subscribe here).

Posted Friday, January 20 2012