The Inverse Realtionship of Gold, Silver & Strong Economy

It may seem counter intuitive but when economic forecasts are good and economy solid, precious metals go down or remain flat in value; when forecasts and economy are not so cheery, gold and silver increase in value. Allow me to offer the lay persons explanation as to how these issues relate to one another.

Gold, silver, platinum, palladium, copper and others are metals that are speculated upon and traded and their "spot" values vary according to need for whatever precious metal we're discussing, the amount available in total, the amounts being mined or refined and lastly and most importantly, the future outlook of economy.

When economic times are good and most future indicators point to long term stability and reasonable growth, the spot values of precious metals remain somewhat low and stagnant. Economy is largely based on future expectations and speculation. When economy is shaky or predicted to be poor precious metals will generally increase in value due to the fact they are "real."

When speculation about future economic strength and growth pop up people lose confidence and stocks go down. The inverse relationship of hard tangible assets like silver and gold to economic growth kicks in. Silver and gold have been used as currency and tender all over this planet by virtually every society. They both were not only legal tender for whatever time and society, but they were also the "storehouses" of a society's wealth.

As I have discussed before, so much of society and a nation's economy is built on faith. Our economic system is very complicated, interdependent and runs on confidence. Credit availability, economic outlooks and forecasts drive economies. When citizens lose confidence in the system the system falters. Sometimes the faltering of the system drives the loss of confidence, but the two are inter-related. They seem to feed on each other, each exacerbating the other.

When times grow sketchy people default to the old, tried and true things and silver and gold are those things. There is no doubt that in times of poor economy people can turn to the old standby of precious metals to "protect" them and their assets. One of the real issues within this dichotomy is the inverse nature of this phenomenon. What we used to put faith in as valuable, gold and silver, means little when complicated and credit driven economy is strong, but let confidence wane and credit grow tight to come by and people seek hard assets to protect them and to put their faith in.

It is merely another form of the human tendency to withdraw to a "safe haven" and silver and gold have always been just that. While their value in nation's currencies may fluctuate, the trust in the fundamental soundness of silver and gold has never been in question. I believe people inherently know deep inside their souls that modern economy is built on speculation and faith. A nation's currency is worth what we're told because we have faith in the government that tells us, but when economy falters so does the faith we have in the government.

To tie all this together, let's look at our current situation in the US. Standard & Poors just downgraded the US debt outlook from "stable" to "negative." The result will be a declining value in the US Dollar. Nations are already discussing taking the world off the US Dollar as the world's reserve currency and standard of trade. Despite the assurances coming from the Administration, the world is not buying what they are trying to sell.

Inflation will ensue unless measures are taken by the Administration. When inflation rears its head the actual buying power of one dollar declines, but silver and gold values increase because they are not a representation of a nation's economic strength, but are in fact proven assets that endure the machinations of nations and societies efforts to create value with credit and on paper wealth.

Until this Administration accepts what most nations and non-Keynesian economists know, gold and silver will only continue to climb. As long gold and silver increase as they are - by leaps and bounds - know that the world and the money men of this nation have no confidence in the system. If and until the Administration gets serious about actually addressing the debt, out of control borrowing and printing money and get to reining in deficit spending, what we see now will only become worse

On the reverse slope, if government truly slashes budgets and addresses deficit spending, confidence in the economy will grow. If the Administration actually accepted what the world acknowledges - that US debt is unsustainable and must be curtailed - things would improve. So long as the Administration continues to pay lip service to doing the hard things of real meaningful cuts, the future value of gold and silver will know few limits.

Where is the "top?" No one knows but all the smart money folks who do this for a living are rather uniform in predicting that our total lack of fiscal responsibility will keep us in economic limbo, and that will cause the ancient "hard assets" of gold and silver to go up. People know that silver and gold were used for trade and as tender long before there were governments to tell us what money was worth, and when fear and lack of confidence manifest, people will always fall back on the tried and true things, and in this case, that's gold and silver.