The Spark That Ignites A Hyperbolic Rise In Silver And Gold

As I look back at the gold and silver market signals we recently published and our 2013 silver forecast, which predicted a price well above $50 per ounce (the high reached in April 2011), I can’t help but to wonder what fundamental factors will spark this “hyperbolic” move?

Several major fundamental factors are developing that could send precious metal prices soaring.

Free Money, Inflation and the Increasing Cost of Debt
The Federal Reserve sets short term rates and prints “free” money (since it is not backed by gold, silver or any other inherently valuable commodity) and purchases bonds to infuse cash into the economy. Such tactics have been employed for almost a decade in an attempt to jump-start the economy. The economy appears to be slowly recovering, but the market determines longer term rates. After recently reaching historically low rates on the 10-year notes, long-term rates are beginning to move higher, raising fears of inflation and, possibly, hyperinflation, with too much money chasing too few goods.

One area already showing inflationary signs is commodities; prices are rising. Oil hit 147 in 2008, only to rally even higher in 2011. It appears to be only a matter of time before commodities in general are ready for another move higher, especially if inflation takes off. The stock market is also inflating with the Dow Jones closing above 14,000 on February 1, 2013 for the first time since 2007 as more dollars chase fewer opportunities.

Steve Roy, Chief Technical Analyst for the Equity Management Academy, whose mission is to preserve wealth through education, said, “The Fed thinks they can control it (inflation), but they are always behind the curve. By the time they do anything about it, it will be too late.” Over time, the dollar has been devalued by the markets (a certain sign of hidden inflation), with the dollar index slowly declining since a high of about 120 in 2000/2001, and a record high of 165 in 1984. Since 2002, when the dollar index was at about 122, it has fallen now into the 70s. As the dollar index fell, gold really started to take off as a hedge against inflation. If the dollar index moves another leg down, which Mr. Roy expects, it should push gold and silver much higher.

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As sovereign debts based on paper currencies appear more and more risky, some are turning to gold as a less risky investment. Governments classify sovereign debt as riskless but, Mr. Roy argued, “We all know now that sovereign debt isn’t worth the paper it’s printed on. They print money based on thin air, and as long as people buy the story, that money will have value, but once people start questioning whether the governments behind that money have the ability to pay, then it becomes valueless.” He mentioned the Euro crisis as a possible first sign of lack of faith in paper or fiat money.

Various groups around the world are talking about alternatives to the U.S. dollar as a global currency, and gold is likely to play a role in such a change in the international financial system. The Bank of International Settlements recently started using gold as a tier one asset; meaning it is seen as risk free. With more and more people becoming skeptical of sovereign debt as a risk free investment, gold is becoming part of more investor’s and country’s investments.

How Long Can it Continue?
Chart 8 click HERE to see

You can see that they intersect above the 1.618 expansion line during the week of August 16th. So based on this analysis, my forecast for gold prices in 2013 is that we will see AT LEAST $2692.00, on its way up to much higher prices in 2014 and beyond.