-- Posted Tuesday, 16 September 2008 | Digg This Article
| Source: GoldSeek.com
By: Peter J. Cooper
There has been some disappointment among followers of the yellow metal about its response to the meltdown on Wall Street this week. Gold picked up but gained little on one of the blackest days in recent financial history. What is the answer to the conundrum of a gold positive situation and only modest performance? And what comes next?
Sat in the United Arab Emirates it is much easier for me to see the answer than somebody pressed against a computer screen in Europe or the United States. I can go down to the gold souk and talk to the jewelers about how much gold and silver they are buying, and how see how their business is going.
Gold souk booms
Believe me there has not been physical buying on this scale in many years. The local jewelers resisted buying at the higher prices of earlier this year, and are now stocking up big time. It is the same story, only more so in India and certainly Vietnam where new regulations were introduced this week to cope with a flood of retail demand for gold.
Silver, I am reliably informed has been snapped up over the past few weeks to the tune of several thousand tons in India, compared with less than 60 tons bought in the rest of the year to date.
So I am absolutely convinced that the answer to the gold and silver price conundrum is that the market this week is seeing liquidation of commodities by funds that urgently need cash for other reasons, such as margin calls, which is being balanced by physical buying of gold and silver in the emerging markets.
Let us not forget why emerging market buyers want gold and silver: these countries are experiencing double digit inflation now, and they do not want to wait for the rest of the world to catch the same disease to buy the only asset that they believe will beat inflation.
Is there any logic in this behavior by retail buyers? They used to buy houses because they thought prices were going up, and they did! But this is more than a self-fulfilling prophesy.
Money supply, inflation
For aside from the stock market crashes of this week, what else was the most important thing to happen in financial markets? Cash injections by the billions from central banks, and an interest rate cut from China and almost certainly one to come from the Fed.
Creating this liquidity is absolutely essential to stabilize capital markets but when you increase the money supply you also increase inflation, and that inflation has to be manifested in some asset class.
Retail investors are leading the way in gold and silver, and I would confidently predict that it will not take the speculators with access to this new money very long to realize where the next asset class bubble is likely to form.
Try finding gold and silver coins in Abu Dhabi today, you might be lucky but ‘collectors’ have been snapping them up over the past couple of weeks. Arabs sense that precious metals are the next hot buy, and I should think oil prices will also now gain from monetary inflation giving this region even more money to invest.
Peter J. Cooper
http://arabianmoney.net/
-- Posted Tuesday, 16 September 2008 | Digg This Article | Source: GoldSeek.com
