It's been a stomach-churning period for the U.S. economy. During the first
six months of 2008, the macroeconomic reasons that sent the stock market
plunging into bear market territory pushed precious metals to new highs. But
since then, gold, silver and platinum have experienced corrections ranging from
10% to 23%.
The question now: Have precious metals peaked or do they have room to rise?
Gold
The Bear Stearns bailout sent gold to an all-time intraday high of $1,033 an
ounce in March. Since then, it's bounced in a trading range between $850 and
$990. Trading as a commodity, gold underperformed oil and platinum for the first
half. Two-thirds of gold's demand as a commodity comes from jewelry fabrication.
That demand fell 55% during the first half.
"Demand was way down, but prices rose 15% for the first half of the year.
That suggests the primary demand is investment demand," says Tom Winmill,
portfolio manager at the Midas Fund (MIDSX). "Gold is acting as an alternative
currency."
As the first half ended and the second began, the mortgage crisis killed one
bank, IndyMac Bancorp, and nearly collapsed the foundations of the U.S. mortgage
market, Fannie Mae and Freddie Mac. Stocks plunged. The government, however,
quickly stepped in to guarantee unlimited credit to the two mortgage lenders.
Simultaneously, food and energy costs have risen sharply.
This has put the Federal Reserve Bank in a precarious position. Central banks
battle inflation by raising interest rates to tighten the money supply. However,
to prevent any collapse in the financial system, the Fed needs interest rates
low to keep markets liquid. This easy money fuels inflation, leaving the U.S.
economy in a vicious circle and the Fed walking a tightrope.
Jeffrey Christian of the CPM Group, a precious metals research and consulting
company in New York, says gold could take another dip to between $880 and $900
in August, but he expects the yellow metal to top its earlier high in the last
quarter.
The Midas Fund's Winmill is even more optimistic. Jewelry demand typically
picks up in the second half of the year as manufacturers prepare for the holiday
season. If interest rates remain low and the dollar weak, he says gold could top
$1,200 by year end.
Silver
In March, silver hit a 28-year intraday high of $21.35. It's since backed off
to $17.57 as of Thursday's close. While silver trades relative to gold, it has
different market issues. Silver has many more industrial uses than gold. For the
first six months, silver faced strong demand from manufacturers of flat screen
TVs, cell phones and computers. However, second-half demand is expected to
weaken.
