Gold (SPDR Gold Shares (GLD)) is breaking into new 52-week highs and silver (iShares Silver Trust (SLV)) is at its highest point in more than 30 years as Libya, one of the largest oil producers, faces a civil war and as earthquakes and tsunamis rattle Japan. Libya is not following Tunisia and Egypt with a somewhat moderate transition; this revolt has been extremely violent and bloody. A lot of the fear at the moment is due to concern that protests could spread to Saudi Arabia. Investors are fearing the rapid rise in oil (iPath S&P GSCI Crude Oil TR Index ETN (OIL)) prices may be the spark that hurts a questionable global economic recovery as equities (SPDR S&P 500 (SPY)) sell off, bringing down some miners to extremely cheap levels considering the high price of gold and silver bullion.
Countries that have created easy monetary policies and that are still struggling with high unemployment are finding it extremely difficult to face soaring gas prices and rising fuel costs. Now eurozone debt fears are resurfacing as Spain (iShares MSCI Spain Index (EWP)), Portugal, Greece, Italy, and Ireland face soaring deficits. Within the United States you have troubled states with government workers demanding their benefits as states face empty treasuries.
The US dollar (PowerShares DB US Dollar Index Bullish (UUP)) has a hit a new low and is in danger of significantly selling off as precious metals gain safe haven appeal. The one thing that has saved the US dollar this week is eurozone debt fears. However, next week we may hear more talk of quantitative easing III (QE3) as jobless claims remain high and as eurozone fears resurface.
Investors have moved back into precious metals, however the gold miners (SPDR Gold Shares (GDX)) have not yet confirmed this move due to the weak equity market. All eyes are on the S&P 500 and maintaining the 50-day moving average. If equity markets can hold up and reverse here then some of the miners should follow bullion into new highs. There may be pullbacks and occasional sell-off days, however the precious metals market remains one of the strongest multi-year trends and one must be careful of being shaken off a secular bull trend and of misinterpreting profit-taking from institutional selling.
Gold has a lot of cash on the sidelines from investors who got shaken out in January. This should lead to a measured move to at least the $1550-$1600 area on gold and the $38-40 area for silver. I believe that gold and silver will follow a similar path of their upward moves in August of 2010, March of 2010, and July of 2009. We must ride this wave and uptrend in precious metals and not forget that there may be occasional sell-offs and profit-taking. After five consecutive weeks higher, it is only natural and healthy to have some profit-taking, but it shouldn’t make you lose sight of the big picture: the uptrend in precious metals and the danger of currencies backed by governments with soaring deficits.