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-- Posted Thursday, 3 September 2009 | Digg This Article | | Source: GoldSeek.com

With gold apparently making another attempt to reach $1,000 an ounce this might seem an odd moment to reflect on the broader outlook for financial markets and what that means for gold and silver.

But if you accept that financial markets are at the start of a correction after their historic rally – and September and October are the traditional down months – then things do not look too bright for the precious metals.

For in a stock market sell off there is a move to cash and the dollar and bonds strengthen, while gold and silver are sold down by investors with margin calls to meet. It could well be that fears about inflation and devaluation to come help to put a floor under the gold price but this is unlikely to save it from some distress in a major sell off.

$850 price floor

Indeed, Dr Marc Faber and some chartists have $850 as a floor for gold. Silver is more volatile and also an industrial commodity so will fall harder. Precious metal equities are particularly vulnerable to a collapse in share prices and their leverage to the metal price also works against them.

However, if financial markets head higher on some new burst of optimism about recovery prospects or loose monetary policy then gold would be a big beneficiary. Furthermore, after another financial crisis gold and silver might well be the first assets to recover because the Fed would not standstill and a second stimulus package would benefit precious metals.

Risk avoidance

It is therefore arguable that staying out of precious metals entirely is a bit risky and that the downside is relatively small and should not last long. It is also a question of what to do as an alternative investment strategy.

If you stay long in the US dollar then that strategy also carries downside risk – and we can see the expansion of the supply of dollars far more clearly than any movement in the supply of gold. So the bigger risk might be being caught too long in dollars as the market rallies again, and missing out on a really big up shift in the gold price.

Personally I think Jim Sinclair has it right, and that the dollar will rally (and gold fall a bit) into November and then we will see the precious metals suddenly become the asset class of choice (and the dollar collapse) as the only investment play in town.

-- Posted Thursday, 3 September 2009 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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