(This is Part 7 of a series. Go back to Part 6.)
But what about precious metals, which have recently taken such price hits? Won't they go down in a recession?
Of course making predictions is a fool's game...but no, I don't believe they will. It seems to me that this recession will be different, because it will be an inflationary recession. That is, as economic activity declines, most prices will keep on rising.
What effect will this have on gold? The recession would normally have a depressive effect on gold, but this won't be a normal time, and it seems to me that gold will rise almost beyond belief in the coming years, for two reasons:
1. Gold is an anxiety metal.
Geopolitically, it appears that the Bush administration has been doing everything in its power to keep things on a low boil in the weeks before the election. But after the election I believe that all bets will be off. A number of situations could heat up over the next couple of years and beyond. Any such list would start with the possibility of the situation in Iraq deteriorating into complete anarchy and spreading to its neighbors.
Continuing, an escalation in the conflict with Iran seems quite possible in the months following the election. The Taiwan-China situation could suddenly flare up. The Caspian Basin, where the U.S. and Russia are already grappling over energy, could easily heat up as well. There's an increasing possibility of a terrorist act involving WMD. Many other examples could be given.
Moreover, it's well established that during large bear markets in stocks —which I believe we're headed for—fear, turmoil and divisiveness increase dramatically. Carried to its logical conclusion, this results in war, and indeed most wars have followed on the heels of deep financial crisis. Examples range from the Napoleonic Wars to the U.S. Civil War to World War II.
As the world heads into a time of increasing divisiveness, people will increasingly turn to gold for a measure of security in an increasingly insecure world. And silver is just the second verse of the same song. Indeed, silver should benefit even more than gold because its price is less manipulated by central banks. Both of these metals, in my opinion, will skyrocket for years to come.
2. The collapse of the dollar.
The second reason that gold should rise strongly even in the face of a recession is the coming collapse of the dollar caused by excess money and credit creation. As the dollar falls the prices of everything priced in dollars will rise. Indeed, the phrases are just two ways of saying the same thing: dollar falling = prices rising.
As the dollar falls and prices rise, people will increasingly turn to gold and silver. For that matter, so will central banks around the world: As time goes on, central banks will increasingly turn to gold and silver as the only sensible reserve alternatives to depreciating currencies.
For both these reasons, in my opinion gold/silver are just beginning the second leg of a massive bull market which will likely take them much higher in the years ahead even as economic activity in the United States and much of the world continues to slide.
(This is the end of Part 7. Go to Part 8.)
—jim sloman, 11.14.06
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