By Melissa Pistilli – Exclusive to SilverInvestingNews.com

Crude oil dropped about $14 this week to below $130 a barrel, the largest decline since December 2004, as demand fell and concern over conflicts with Iran eased. An expected sharp decrease in consumer spending is also contributing to the drop in oil prices. According to the U.S. Labor Department, consumer prices rose 1.1% last month, the second fastest rate of increase in 26 years, due in large part to surging energy prices. Investors are worried that rising inflation will cause a slowdown in consumer spending (two-thirds of U.S. economic activity) and in effect lead to a downturn in demands for energy.

Oil has rebounded 2.1 % to $132.04 this morning on speculation that this week’s drop was too much too fast, however its decline still had an effect on gold and silver. As of this morning, gold is setting at $954.50/oz and silver has dropped to $18.10/oz.

Precious metals, primarily gold and silver, are normally seen by investors as a hedge against inflation, “but the steep drop in oil prices has at least temporarily overshadowed that appeal,” says Stevenson Jacobs (AP). But MF Global Research analyst Tom Pawlicki advises that the correction in precious metals prices could “shift course” and set prices rising again.

So not to fear, say many analysts, we haven’t seen the end of silver’s bid to break through March’s record high. “Until we see a bottom in the stock market and things start to rally there, commodities are still the only game in town,” Pawlicki said. “I don’t think you can call a top yet.”

According to financial guru Ira Epstein, “The road up in metals will surely be filled with price corrections, but I believe that prices will be higher by year end than they are now, possibly a lot higher.” In a recent article, Weiss Research analyst Sean Brodrick gives investors five reasons, or “crises”, that support silver’s long-term investment value:

Panic in the Financial Markets
With 37% of America’s bank deposits currently uninsured (FDIC only insures deposits up to $100,000), the potential collapse of large financial institutions such as IndyMac, Fannie Mae, and Freddie Mac and regional banks like Washington Mutual and National City could prove exponentially disastrous.

Rising Inflation
The Fed’s decision to bail out institutions like IndyMac, says Brodrick, has “fanned the fires of inflation.” Another problem created by the credit crisis is the hampering of the Fed’s ability to raise interest rates to curtail inflation. And although today we’ve seen the effects of inflation—a drop in consumer spending resulting in lower energy prices—ease back the price of silver, this effect won’t last long given that higher inflation lowers the dollar, which in turn raises the value of gold and silver.

Massive U.S. Debt
Bailing out Fannie Mae and Freddie Mac, two of the world’s largest financial institutions with liabilities totaling $5.3 trillion, will only add to the already outrageous total of U.S. federal debt ($9.6 trillion). A substantial increase in debt like this will ultimately weaken the dollar even further.

Rising Energy Prices
Although the drop in energy prices has halted silver’s advances, Brodrick believes this is only temporary: “The longer-term forces driving oil higher are still in place and getting stronger.” Energy demand in the U.S. maybe on the decline as recession looms, but given that energy hungry countries like China and India are not experiencing recessions, Brodrick expects world demand to have a greater impact on fuel prices.

Conflict in the Middle East
It seems the fervent fear of war between Israel, the U.S. and Iran that kicked up oil and precious metals prices last week has died down amidst news the U.S. has sent diplomat William Burns to Geneva over the weekend to join in on nuclear talks with Iran. However, it isn’t likely that Iran will budge from its position that it has the right to pursue an alternative means to providing energy to its growing population. Nor are the hawks in Israel or the U.S. going to back down from their position that Iran is secretly trying develop nuclear weapons. Hence, further displays of military prowess like last week’s are bound to occur in the future, stirring up more fear over a possible war in the oil-rich region.

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