Precious metal prices appear to have entered a new stage. With increasing frequency, and regularity, the price of gold and silver has been swinging in volatile fashion. These volatile price swings have likely caused many individual investors to become reluctant, even fearful, of taking on fresh positions. After substantial runs to fresh highs, prices over the last week have whipped back and forth in a violent manner, making trouble for trend followers. How long might it be before these troubling times are over and a clear trend is re-established? Or better still, how far and in which direction must gold prices move before the market settles down and volatility softens?

Precious metals have always been considered to be welcome stores of value during uncertain times. That investors are facing uncertain times is demonstrable; just look at the price moves of almost any investment. Few are steady in the current environment. The customary pre and post Thanksgiving rally in stocks did not materialize, but the day after it sure did! America continues to react to happenings in Europe, and while the US dollar has recently strengthened in a flight to quality versus other currencies, it looks to be correcting amid an uptrend. What's next?

The national debt is now over 15 trillion dollars while the annual Gross Domestic Product is only $14 trillion. In other words the value of all the goods and services that generate income in America is now exceeded by the nation’s debts. While the US dollar strengthens, it is because for now it is deemed the lesser of two evils. A stronger dollar weighs on commodity prices, especially gold.

Market participants might be surprised by gold’s continuing weakness and some are likely questioning gold’s safe haven status. However, the fundamentals of broad-based global physical demand remain very sound as evidenced by recent central bank gold buying data. Russia bought 19.5 metric tons of gold in October bringing their total gold reserves to 871.1 tons according to IMF data. Belarus increased its holdings by 1 ton; Colombia by 1.2 tons; Kazakhstan by 3.2 tons; and Mexico by 0.9 ton. Data also shows that Germany reduced reserves by 4.7 tons and Tajikistan cut reserves by 0.4 ton. If central banks are buying, what message does that convey?

Additionally SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, reported a rise of 3.631 tons to 1,293.088 tons in its holdings. Commerzbank said recently that they expect to see gold trading at $1,800/oz by the end of the year. Barclays says it is sticking with a fairly bullish call for gold and says it sees the price at $1,875/oz in Q4, and according to Reuters. Deutsche Bank says they expect periods of risk aversion to remain through 2012 and their strongest conviction trade remains long precious metals and specifically gold.

Gold prices have corrected from record highs yet there is evidence of inflation clouds gathering. Food prices are up a full 13 percent this year. Inflation statistics however do not seem to verify this in CPI as a whole. It feels as though the foundations of future inflation have already been laid. There is still a piper to be paid for all of the money that was created as part of the stimulus efforts since 2008.

As for what is happening in Europe, two main potential outcomes exist: Either the euro zone splits apart or it binds closer together. The euro may change its make up or face the emergence of a deeper political union in which a federal Europe takes control of national budgets — something that would lead to serious political, legal and financial consequences. With financial panic now threatening to move beyond Italy and Spain and into Belgium, France and Germany, the euro zone’s paymaster, the pressure to arrive at a solution is at a new level of intensity.

The financial contagion in Europe is pushing already fragile global economies towards recessions, and increasing the risk of the world slipping into global recession is rising significantly. Indeed, as analysts have warned for many months, there is a real risk of a global Depression given the scale of the debt levels in most western countries and the massive imbalances globally.

Although most of the focus has been on Europe in recent weeks, markets should cast an eye on the not-so-inconsequential matter of the appalling US fiscal position which could deliver further market volatility and see the US dollar come under pressure again. Washington's latest “Super committee” effort to come to grips with the mounting debt seems to have ended in failure when negotiators announced they could not reach a deal. This failure with cutting the US government's crushing $15 trillion debt looks set to support gold.


Summary

Gold and silver prices reflect market forces and what investors are experiencing right now are uncertain and unprecedented times. Precious metal prices have gone up substantially and the violent correction to prices is a result of that move. The longer term likely bodes well for another round of higher prices, but it will takes time for markets settle down and get accustomed to their new phase. It is easy for some talking heads to banter in the way they have always done - a really active market with fresh price highs is just a bubble waiting to burst or a story to take an alarmist view on. These sound bites might be good for the quick pace of daily news, but precious metals are unlikely to fade as fast as runway fashions or starlets. Remember to keep the macro view in mind - there is still a long road ahead for the global economy.

Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.