The price of gold in the targeting, silver ...?

As I write this, I am supposedly on holiday in India - but who can ignore the ever-increasing gold price: the yellow metal moved above $1390 yesterday breaking through new records, although then came off from its high point as the dollar recovered. Silver too is doing even better in percentage terms and moved well over $26.50 at one time - again breaching its 30 year high level. Indeed perhaps the silver price should be considered a realistic new high given that 30 years ago it peaked briefly at around $50 due to an almost successful attempt to corner the market and drive the price up by the Hunt Brothers. At the time the gold:silver ratio hit around 15 - an oft quoted target for the silver bulls - but in this writer's view probably an unrealistic one nowadays.

The current gold:silver ratio is around 52, having come down from 68 over the past few months. Currently momentum is certainly with silver - even more so than gold - which has been having a really good run and a gold:silver ratio of 50 or less certainly looks like it may be on the cards. With gold continuing to rise too this is proving a profitable time for the silver investor - but be warned, silver also tends to fall back far faster on setbacks and there may well be some of these ahead.

The latest gold price surge followed the announcement of another $600 billion of effective money printing by the U.S. Fed and a virtually inevitable dive in the value of the dollar against a basket of currencies - so much for the supposed ‘strong dollar' policy of Timothy Geithner. A strong dollar and quantitative easing do not hang well together. The current dollar index has fallen to below 76 and while there may be some short term recovery, as other countries try to drive their own currencies down to compensate, the overall trend is downwards for the time being. The recent G20 ‘agreement' effectively not to manipulate currencies lower in a competitive manner will inevitably break down - particularly as in some eyes the U.S.'s QE program is, in itself, just another means of doing this.

Meanwhile, major fund manager BlackRock has gone on record as saying gold's fundamentals still look good at current prices. The definition of what gold's ‘fundamentals' are has obviously changed over the past year or so. Not so long ago gold's fundamentals looked at supplies (mine production, central bank gold sales and scrap supplies on the one hand - plus or minus hedging and dehedging by the gold miners - set against industrial and jewellery demand with relatively little investment in the equation. Nowadays investment demand, be it for physical gold or ETFs, is the main demand driver and no-one really knows how fickle this demand will be if and when the inevitable crunch appears. Hence the talk of a gold bubble - even by George Soros although he still appears to be investing on the basis that the bubble is nowhere near bursting yet. Yet burst it will - but whether this is at $1,400, $2,000 or perhaps $10,000 is still in the lap of the Gods - or rather the whim of the investment community and the results of politicians trying to tinker with the global economic system!

What the writer feels, though, is there will be corrections which could see prices moving back $50 or more from time to time, but with the overall trend remaining upwards. Increases in money supply on the scale we have been seeing will ultimately lead to inflation - perhaps heavy inflation as the chickens come home to roost. And, given the Western economies are not out of the woods yet, and won't be until the number of jobless actually falls significantly, rather than the rate of increase declining (which seems to be taken as a sign the recession is ending by the optimists out there). Still more entering the jobless category - which is seen as drastically understated anyway - suggests the ‘recession' is in reality still with us whatever the U.S. government economists may say.

True, there are signs of improvement in some areas of the world - Germany looks to be pulling itself out of the mire, but this may be the only significant European nation so far managing to achieve this. The Far East, of course, and China in particular, still seem to be booming, but any slip here could impose a nasty shock on the global economic system which would again likely be positive for gold, although could be less so for industrial metals.

On balance one feels therefore that gold could well have yet a reasonable further upwards run and, if the current momentum remains intact, silver could do even better. Gold somewhere between $1,400 and $1,500 - or even higher looks on the cards by the end of the year and perhaps silver at close on $30. We await the outcome with interest.

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