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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold in Uncharted Territory with Silver Following Along

Commodities / Gold & Silver 2009 Oct 20, 2009 - 02:55 AM GMT

By: David_Urban

Commodities

Many reasons have been given for the rise in Gold and Silver during the month of October but overlooked by the mainstream press is an important point; the beginning of the 2010 United States fiscal year.  Spending is expected to balloon to upwards of $3.55 trillion dollars with a budget deficit of $1.75 trillion dollars. 


It is clear that the next bubble is not in US Treasuries but in the US Government itself.  Under Bush II, government was allowed to expand far in excess of what was necessary.  Discretionary spending exploded and deficits were allowed to run rampant.  Sprinkle in a massive increase in US Treasury issuance along with artificially low interest rates, a touch of monetary supply growth while interest rates were being increased, the collapse of the US real estate market severely weakening the US banking system, and you sow the seeds for the massive increase in government spending we have today. 

Three points are certain at this moment in time.
 
The first is that the United States, with the amount of debt outstanding and coming down the pipeline, is not able to undertake a policy of raising interest rates from these low levels to normalized levels for a number of years. 

The second point is that Asian economies, starting with Australia, are going to lead the rate cycle as their economies and banking sectors have weathered the storm in better shape than the US and Europe.  Expect to see conventional and unconventional (by Western standards) monetary tightening during this cycle. 

The increased focus on Asia will provide investors with very interesting opportunities in a number of sectors.

The third and final point is that Gold and Silver will only go higher from here over the next 6 month period with a spike in price during the March-May time frame after which we trade sideways for at least a year in order to digest the run higher and the increase in gold supply coming on market from new mines coming into production. 

The peak in Gold should coincide with a peak in Silver as well along with a test of the USD lows made last year.

In terms of supply, we should remember that Penasquito, Goldcorp's massive mine in Mexico, is scheduled to come into commercial production in January of 2010.    This supply of gold, silver, and zinc should be enough to keep each market in a sideways range for some time until the supply is properly digested.

Investors who do their homework should find themselves well rewarded by the end of the first quarter next year. 

By David Urban

http://dcurb.wordpress.com/

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