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Gold hit $1600 in London this morning and silver $40, although both fell back thereafter. But the barrier has been breached which would seem to be paving the way for further rises ahead.

Lawrence Williams
July 18, 2011
www.mineweb.com

LONDON
Gold cracked the $1600 barrier, albeit briefly initially, this morning in London, while silver moved back up through the $40 mark as the safe haven aspects of the precious metals began to take hold once more on perhaps the increased understanding by the whole investment community of the global economic perils ahead. Whether this $1600 level can be returned to, and increased, through the day - and in the U.S. - obviously remains to be seen, but the fact remains that a psychological barrier has been overcome. Past patterns suggest that the metals may trade at close to this level and either make a substantial breakthrough, or consolidate at just below.
Silver back through $40, and the further small fall in the gold:silver ratio (GSR) to a fraction below 40:1 does seem to be a further indication that investor interest in this metal is again coming to the fore with the April fall-off quickly being forgotten. But silver's reputation as the ‘devil's metal' as far as investment is concerned should act as a cautionary warning, but as long as gold stays strong silver downside is small. But if gold should see even a temporary fallback then the corresponding drop in silver could be sharp.
Silver's proponents point to the increasing uses of the metal in such spheres as biocides and water purification as being a major positive factor, but it is both speculative and safe haven investment that is the driving force here - industrial usage is currently only a minor part of the silver equation. As Rhona O'Connell points out in today's article on Mineweb - see Comex silver longs bound higher - but much of it is short covering extraneous technical commodity market factors may well be distorting the picture here as well.
The European debt crisis is definitely not going to go away and if one of the more vulnerable European economies is actually allowed to default (and one does not see how some kind of default can be avoided for Greece) then the knock-on effects on the other crisis hit countries and the banking system as a whole, could be dire. The emergency funding for Greece that was recently agreed appears only to be sufficient to postpone the inevitable and we could be looking to an autumn of ever escalating financial meltdown. If Greece defaults then one finds it difficult to conceive that Ireland and Portugal would not follow suit almost immediately, and then the pressures on the much more significant economies of Italy and Spain would be close to overwhelming. European banks would crash like ninepins and with the interconnections within the global banking system many non-European banks would collapse as well.
There is a sideshow in the U.S. at the moment too which is helping gold as Democrats and Republicans are playing a game of brinkmanship over the U.S. debt ceiling. If agreement can not be reached on raising the ceiling, and failing a Presidential bending of the rules, the U.S. itself could go into technical default in two weeks' time and the psychological financial repercussions of this could also be enormous. One suspects that a compromise will be reached at the 11th hour, but if intransigence on the part of the parties involved means that this drags on beyond the deadline then the effects on the financial system could be worse than the Lehman Brothers collapse.
Governments and central bankers are aware of the perils ahead and one suspects that they will somehow manufacture a solution that will ward off the seemingly inevitable, although whether they can do so to the satisfaction of the credit ratings agencies remains to be seen. Ratings downgrades lead to higher interest rates being applied and at current debt levels the amounts involved in resultant increased payments just make the likelihood of pulling out of the downward spiral almost impossible.
These are difficult - indeed exceedingly dangerous - times for the global economy and whether or not the politicians and central bankers can bring us back from the brink has to be questionable. In such times of uncertainty gold is likely to maintain its historical pattern of being the investment choice to preserve wealth, however anomalous this may seem in this day and age, and silver will likely follow suit on gold's back.