The demand for gold and silver is moving back away from the sharp movements seen over the past few weeks in equities, well sort of.

Earlier this week the sharp contractions in equities was not matched as closely by precious metals (PM), however the correlation will continue to exist as long as there is need to cover margins within the equity markets.

The Governor of the Bank of England, Mervyn King may have announced an extra £75 billion in quantitative easing on top of the existing £200 billion, however many economists are questioning if £75 billion is enough. And that is what will keep gold in the game even if it is for the wrong reasons and by that I mean QE is NOT money printing it is simply swapping one asset for another with the same value (seeing as debt registers as an asset on banks balance sheets which they can lend against).

It is being reported across the web that at least a further £225 bn is required to do another back-door bailout with some economists quadrupling that figure.

Quantitative easing and money printing have become synonymous with one another and this misunderstanding is what is driving many investors from cash into gold (although the big players are no so easy to fool) , until the next leg down in the stock market but the sharp contractions are moving further apart even if the spot price correlation still seems closer.

Demand for gold and silver remains high with physical silver demand outstripping supply in some parts of the world, like the UAE where 1 kg bars are like gold dust (pun intended) and this reality is what will eventually send PMs to the moon.

But will the gold and silver spot prices crash if it follows equities? After all most investors (rightly or wrongly) look to the spot price for reference and not to physical availability.

Well the answer is yes there is a very real danger that spot price could 'crash' but the definition crash is only relevant to when you bought PMs as an investment/safe haven.

If you bought in August then gold and silver have indeed crashed and if your position was a short term flutter then you have been burned. But if you bought in 2007 then you have just witnessed a blip albeit a big blip.

The question is, will PMs fall further than 2007 levels? The answer to which is almost certainly NO, and if they were to you can bet your bottom dollar PMs will have fallen alongside the rest of the stock-market and currencies in an Armageddon event and would soon become the only preserver of wealth left on planet earth.

Other than a global financial meltdown taking everything including the kitchen sink with it or complete stability in the financial markets and currencies, I see no reason for PMs to fall below $1,200 per troy ounce….and that is a worst case scenario for gold with silver performing proportionately.

If the meltdown takes place everything including PMs will be sold off but the physical aspect of PMs will be the resistance point as money flows from capitulating banks deposits in the sell of back into physical PMs.

With Moody's downgrading numerous banks in the UK (as well as a few in Portugal) and QE 2 heading our way, it only remains to be seen if this was done in anticipation of a storm heading towards the global financial system, after all both moves hardly inspire confidence in the UK economy….regardless of what the Chancellor says.

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