WHY ARE GOLD AND SILVER MARKETS BREAKING OUT?

Truth or consequences. Rising oil prices due to the Middle Eastern and North African unrest raises the prospect of the double dip again, while Asian buying continues to underpin gold and silver.

2011 isn’t two months old, and so far we have already seen several attempted revolutions in Middle Eastern countries, with two of them classified as successful. All of them have been unexpected and have caught the world by surprise.

We are watching the next possible successful revolution [Libya] disrupting the oil market and taking prices so high that $4.00 at pump will look cheap. We are likely to see those elevated prices negatively impact growth in the developed world.

The prospect of the dreaded, "double-dip" recession is now back on our radar screens. Should food inflation continue to hurt the entire global economy, then words like ‘stagflation' and ‘depression' will reappear in much of the financial world. We are looking at the worst all possible scenarios; our Federal Reserve (Bernake) pumping trillions into the world economy which is devaluing your fiat money and investments at the same time demand is driving food and other wholesale commodity prices through the roof. NEVER in economic history has such incompetence played Russian Roulette with the worlds economy.

With developed world recoveries still tenuous at best and weakened from nearly four years of financial crises, there is little capacity to absorb this new threat. If it does come about, then the strength to survive yet another one of the many potential crises maturing in the last few years will not be there. Many previous articles on the ‘validity of technical analysis in gold and silver markets' have already proved correct and are hopefully prompting investors to reassess their viewpoints on gold and particularly silver.

REFLECTIONS ON WHAT COULD HAPPEN

We are living in a frail world of consequences, all of them unforeseen, yet caused by the faulty structure of the financial world laid down decades ago. The ‘credit crunch' that rippled into the banking crisis, then the sovereign debt crisis was a reflection of greed and the ‘live now, pay later' way of life in the developed world. Each of the consequences of every stage of these crises was unforeseen. Yet each was a consequence of the sanctioning of debt leverage at all levels of financial life.

Today, energy prices are much higher than pre-credit crunch levels and expected to move higher. At the time, much was written about ensuring that oil supplies needed to accommodate both the developed world and the rapidly emerging Asian world, which accounted for half the world's population.

Have oil supplies been expanded to accommodate such Asian growth? No they haven't! The vast U.S. domestic on shore and off shore oil reserves are forever removed from possible exploration by the present President. With Geithner (Treasure Sec), Bernake, (Fed Chairman) and Obama (Pres) there either appears to be a concerted effort to cripple the US economy or mindless, gross economic incompetence. Either way, the results are not good. So there is an oil crisis in the pipeline, consequently, the United States is powerless to help herself.

The governments of the oil producing Middle East have long been secured by the main developed world powers protecting their vital interest of oil supplies. The fact that they were corrupt and kept their own people in poverty was ignored. It was just a matter of time before that crisis erupted. Food and energy inflation provided the trigger.

Will the new governments in these countries continue to support the dollar pricing policies on oil or will they accept all currencies and review their priorities concerning which customers to favor. Probably not, if history with past Islamist radical regimes is any indicator. Will we see prices like $145 if Libya falls [they supply 2% of global oil supplies]? If Bahrain falls, will it bring down the eastern area of Saudi Arabia? If so, the entire middle east oil world will have to be re-done.

In turn, the economic future of the developed and emerging world will change and cause pressures between the different trading blocs that have not even been contemplated. 2011 is already the most dramatic year of this century and it still has ten months to go.

GET READY, CHANGES ARE A' COMING.....

It is in our nature to want our national, political, financial and economic environments to remain tranquil, leaving us to get on with our lives in a somewhat myopic way. Change, when it does come, is surprising every time. It shouldn't be, but we tend to be so focused on our own small portion of the world, it always is. Just look back to the past four credit crunches, we tend to feel everything will right itself eventually, it's just a case of waiting. (Ostrich?) Well it hasn't and won’t.

So what should we do?

- Do not engage in the practice of hope. Hope is not part of this exercise, only realities that are present and real now need be considered.

- Do not wait until statistics from the past confirm our viewpoint. We need to be able to take the factors unwinding now, confident the statistics will confirm our conclusions later. This action allows us to move the front from the back of the queue.

- We need to accept that the gold and silver markets are now global markets. Asian markets are the most robust in this regard so they are now in the center of the market. These encompass investors who do not buy for profit. Western investors sincerely believe that the level of U.S. interest rates will dictate the future of gold prices. The average Asian buyer doesn't even know what these are. Yet, it is the Asian buyer that is having and will have the greatest impact on the gold price.

- We must accept that the world financial climate has darkened and that the storm clouds of consequences are fundamentally destructive. Like the farmer adjusting to winter from summer, our expectation have to be tempered by this reality.. We then act on that.

HOW WILL ALL THIS AFFECT THE GOLD AND SILVER MARKETS?

The catalist of the gold and silver markets at the moment remains rapidly growing Asian demand. Following this, is the inability of the supplies of gold and silver to accommodate this growing demand. A factor that will grow in the days to come will be the change in the developed world to holding gold rather than selling it when prices indicate a correction. This translates into a continuously rising trend line. Asian demand is totally different in that investors there buy to hold as financial security, just as we used to buy houses.

We expect to see this trend start to grow in the west as the developed world declines economically and the East rises.

My compliments to Julian Phillips.

Julian Phillips is a long term analyst of the global gold and silver markets and is the founder and principal contributor for Global Watch