Share By Melissa Pistilli-Exclusive to Silver Investing News

Precious metals prices suffered a slight setback Friday on news that two Dubai state-owned firms have had to delay billions of dollars in debt payments, which sent equities and commodities markets reeling. Investors sold off silver and gold to cover their losses.

Silver hit a two-week low of $17.66 an ounce and gold fell to $1,136.80 Friday. But, both managed to bounce back Monday to close at $18.47 and $1,178.90 an ounce.

Gold is Still Silver’s Best Friend

Gold’s 5 per cent dip was little more than a “knee-jerk response” say some analysts, while others note that the yellow metal was due for a correction anyway.

“Dubai was a trigger for a correction in gold, but … it was a correction that might have come anyway given how much gold has risen,” said Societe Generale senior commodity strategist Jesper Dannesboe.

Despite the gold market’s vulnerability to unsettling news like that out of Dubai, “the market held extremely well,” said Afshin Nabavi, head of trading at MKS Finance. Gold hit a record high of $1,194.90 an ounce last week and is expected to test the $1,200 level once again.

Gold’s long-term fundamentals remain strong. Increasing demand from central banks, an ailing dollar and inflation worries are still very much in play.

“The central bank story is definitely bullish for gold. Also, the physical market still remains strong. We see buying from current price levels, particularly from Asia,” said Walter de Wet, senior commodities analyst at Standard Bank.

And where gold goes, silver is sure to follow. Before the Dubai Dip on Friday, the price of silver was flirting with the $19.00 level and many predict it won’t be long before its testing $20.

CPM Group has reported that investment demand is the main driver behind silver prices, as a cheaper safe-haven alternative to gold no doubt. “This, plus speculative buying, has investors and others adding to already large long positions on expectations of even higher prices yet this week, and over the next few months,” according to a weekly market review from the commodities research firm.

A clear indication of investment demand for silver is in the record number of ETF silver holdings as of November 25: up 1.9 per cent from the previous week to 453 million ounces. However, silver is also benefitting from rising industrial demand, notes CPM. Fabricators are purchasing silver “even as such high prices” because they anticipate industrial demand to rise “sharply” in 2010.

Dubai: A Warning?

The playland of the über-rich may be the next house of cards to come tumbling down as the global credit crisis continues to take on more victims. Dubai, often trumpeted as “the Paris of the Desert,” has managed to build $80 billion dollar in debt.

The investment and banking communities are hoping the potential financial catastrophe that could erupt if the two Dubai firms default on their debts will not have too much of a global reach.

The United Arab Emirates’ central bank has said it would help bailout the firms, if necessary. But, the UAE can’t solve all the world’s financial problems. The situation in Dubai is not an isolated problem. It’s one that’s taking shape all over the globe as fallout from the latest crisis begins to create a second-wave of financial problems.

Since June of 2007, the global financial meltdown has created credit losses and writedowns of over $1.7 trillion worldwide. And that number could increase dramatically if more developing countries fail to prepay their own debts.

“If Dubai were to default, it would be the first nation to default on its debt since Argentina in 2001,” said Wall Street Pit writer Larry Doyle. “The fact is, this overwhelming debt burden is not localized but truly global in nature.”

Dubai is a wake-up call to the rest of the world that the global recession is not over.

Over this past year, the wild-eyed speculation in equities and commodities has returned with an almost reckless abandon, according to some. It’s as if we have learned nothing.

And Dubai isn’t some isolated event. Other nations are also dealing with toxic debt troubles threatening depression. Greece, Ukraine and Ireland are examples offered up in a recent article from The Guardian. Iceland, Hungary and Pakistan have already had to accept help from the IMF.

Even scarier is the thought of major economies like the US and Japan falling back into an even darker recession once quantitative easing measures are curtailed next year and interest rates rise. The fear is that the recovery in the US economy is flimsy at best and not based on real growth.

The threat Dubai poses to its western lenders should be a stern warning to all in the financial community that a preoccupation with luxuriant overindulgence and an overgrown appetite for risk can have hugely dangerous and far-reaching consequences.

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