-- Posted 15 May, 2010 | | Discuss This Article - Comments:

Go back to the 1970s and the last precious metals boom. In the late 1970s gold prices rose eight-fold and silver by a factor of 25.

Fast forward to today and you have ArabianMoney editor Peter Cooper publishing a book predicting a rise in gold prices to $5,000 as the world goes through something like a re-run of the mid-70s.

Then as now a massive credit expansion produced a huge bust in property and then stock prices, and governments reflated to counter the downswing.

Inflation not deflation

Inflation resulted after the initial price deflation, although stock and real estate prices stayed low, and bond prices fell. Even gold prices took a nasty tumble in 1976 as they did in late 2008 but then came the spectacular 1979-80 blow-off in precious metal prices with gold at $850 and silver at $50 an ounce. Is that final spike about where we are today, only to far higher price levels?

Note that silver is the only commodity in the world not to have passed its previous all-time high, and that was set three decades ago now. So will history repeat itself again?

If we look at what has happened to house prices and stocks (about due for another dip if 70s volatility is any guide) then things do look very similar. Governments have also been taking desperate measures to counter the financial crash, and signs of inflation are already emerging in places as far flung as China and the UK.

The next shoe to drop will surely be the bond market as it was in the 70s. Interest rates rocketed in the late 1970s and that is bad for bond prices. Today governments around the world need to borrow a lot of money to finance their deficits and the markets are going to exact a higher price for that money.

As real estate, stocks and bonds cease to be attractive investments then that leaves the precious metals as a store of value. The silver market is much smaller than the gold market and in the 1970s became cornered by the Hunt Brothers, forcing the price through the roof until the market rules were changed and the price slumped.

It could be different this time but actually the huge short positions in the silver market are already there and a very similar kind of spike to the upside is built into the market as it begins to achieve traction. That could happen very soon with silver up $2 in the past week or so.

Caveat emptor

However, life is never that easy for investors. Silver is volatile and fell by more than gold in the 2008 sell-off. Will this happen again if industrial commodities fall due to margin calls in a falling stock market? And it was this liquidation of the carry trade that brought precious metals down in 2008.

You cannot be sure. Then again if you do not invest now you might miss the best price levels. For the market cycle has moved on since 2008 and investors are not so highly leveraged and therefore may well not have to dump their gold and silver in a crash.

Indeed, most instability is likely to come in the currency and bond markets next and this is precisely where precious metals have their greatest strength as real money that cannot be devalued by the printing press. Ergo the best is yet to come for gold and especially silver.

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link