Physical gold demand surges

After the white-knuckle ride of the last week and a bit, the gold market appears to have calmed somewhat in recent days. The price is no longer falling by triple-digit amounts in single sessions, or gaining significant amounts either. Bulls will have been given some encouragement though by the strong bounce off of the $1,350 level reached during the frantic selling eight days ago. That it’s sticking above $1,400 is also constructive, though the short-term price chart still looks horrible.

But just as the cure for high prices is high prices, the cure for low prices is low prices. The last week has seen a surge in demand for physical gold (coins and bars). The FT quotes experienced Hong Kong dealers citing the biggest demand surge for 30-50 years, while The Wall Street Journal reports that Indians are paying $10 premiums above spot – “four or five times the premium usually seen in periods of peak demand” according to traders in the country. In America meanwhile, US Mint gold coin sales stand at 167,500 this month, compared with 20,000 during the same month last year.

So where do we go from here? It will probably take some time for gold (and silver) to bounce back from last week’s serious set back. That said the fundamental reasons behind gold’s ascent in recent years have not changed. Developed world countries are continuing to live beyond their means – something reflected in stubbornly high trade and government deficits. Asian central banks and private savers remain determined gold buyers. Confidence in major financial institutions remains ephemeral and eggshell thin.

Which suggests the selling was overdone. Gold and silver will recover.