London, England

If there's an ounce of doubt still apparent in the nine-year bull market for the precious metals it's silver's failure to confirm the primary trend in gold prices. Silver has failed to confirm the rising trend in gold over the last four months because it didn't hit a new high last year whereas gold did.

Silver is more of a short-term concern because if we break $16.50 we could slide to the 200-day moving average price of $15.34 pretty fast (see chart of silver below).

To confirm gold's bull market run, silver must settle above $20.78 an ounce.

Silver hit $20.78 an ounce back in March 2008; while gold also hit a nominal high that month, it surpassed contract highs 12 months later while silver stalled.

The question, therefore, beckoning gold bulls, myself included, remains the following: Does silver have to confirm the primary trend in gold?

Historically, gold and silver have rallied together in all precious metals' bull markets since WW II. I can't find a period when one metal rallied at the same time the other declined. Though gold is a monetary metal – silver is more tied to the economic cycle because of its industrial usage – the latter nevertheless plays a role amid an uncertain monetary environment. Supplies for both metals remain at historically low levels as production continues to decline.

Silver closed above its 50-day moving average yesterday at $17.97 an ounce. It remains comfortably above its longer 200-day moving average and I don't see an immediate threat to the rally. If silver can settle above its March 2008 high of $20.78 while gold continues to rise, then legitimacy will be credited to this historical rally that commenced in 2001.

The major threat to gold and silver remains U.S. monetary policy.

If the Fed aggressively tightens in 2010 then all bets are off for the precious metals. With the exception of 2005 and 2008, the dollar has tumbled sharply over the last decade and remains oversold; compared to most currencies it is also cheap. But let's put things into perspective; the dollar is cheap because it deserves to be as it remains laced by high debt, explosive entitlement obligations and massive funding for its ongoing deficits.

I remain bearish on the dollar in 2010. My view is that the dollar won't sustain this advance for much longer because the market has accorded a series of rate hikes that won't materialize in 2010. The Fed might hike rates later this year but only in small increments, which should be benign for gold and silver. Historically, gold performs best when inflation-adjusted short-term rates are at 2% or less. Currently, the Fed Funds rate stands at 0% to 0.25% compared to 1.8% trailing 12-month inflation, which I expect to rise this year. This is still a very positive environment for gold.

The U.S. economy is still in the process of recovering and the country can't handle high interest rates. Credit intermediation remains fractured, banks aren't lending, real estate is still in a mess and the consumer won't be back to his old ways anytime soon. The Fed has never hiked interest rates amid rising unemployment and it won't now. This scenario is dollar bearish.

The United States desires a weak currency because the nation desperately needs inflation to conquer the massive IOUs it's accumulating. Inflation has returned to financial assets since March 2009. Yet real estate and wages remain in a deflationary trend and will continue to challenge domestic consumption in the absence of tax cuts or another round of stimulus spending. Neither is likely.

Treasury is forecast to borrow about $2 trillion dollars this year and it is possible we will run into some sort of dollar crisis if the government can't fund every auction. In 2009, Treasury raised about $1.8 trillion in funding with relatively no problems. I doubt it will be this easy going forward.

I remind investors that the Europeans have struggled to raise government bond sales since late 2008 – even the Germans – because the market has grown wary about the seemingly never-ending size of debt issuance in the West and Japan.

And if Treasury can't find enough buyers for Treasury bonds then we always have the Fed.

Whatever the markets can't absorb, the Fed will vis-à-vis debt monetization or quantitative easing. This process is massively inflationary over time. It will be interesting to see how successful the Fed will drain an avalanche of excess liquidity it created since the financial crisis; I highly doubt it will stave-off inflation in time. It never has since 1913.

Any bear market rally for the dollar must therefore be viewed as yet another opportunity to sell the dollar in exchange for gold, silver and the mining shares. I would also add to my holdings in Canadian dollars and Norwegian kroner on any intermittent dollar rally.