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By Sumit Roy

Ed D'Agostino is the publisher of Mauldin Economics and the general manager of Hard Assets Alliance (HAA). HAA provides self-directed investors with online precious metals trading and storage. HAI's Managing Editor Sumit Roy recently caught up with D'Agostino for his take on the latest developments in the gold and silver markets.

HardAssetsInvestor: We saw reports of a surge of physical buying immediately following the big plunge in gold prices in April. Is that spike continuing in May?

Ed D'Agostino: The surge is continuing. The week after the price drop, we saw our sales volume double over the average of the previous two months. Since then it's tapered off, but we are still up well over 50% of what I would consider our baseline sales level. Some of that is due to increased purchases from existing customers, and some is due to a wave of new customers. That's encouraging. This price correction provided a great entry point for those who have been watching from the sidelines.

HAI: Are buyers favoring gold or silver?

D'Agostino: Gold has been more favored since the price drop, probably due to the higher premiums we've seen for silver, particularly silver coins. Prior to the price drop, we were selling almost equal amounts (by value) of silver and gold in the markets where we offer storage for both metals (New York, Salt Lake City, Melbourne, and Singapore).

HAI: The gold ETFs continue to see big outflows and selling. Who is selling, and what is the reason for the disconnect between ETFs and physical?

D'Agostino: The investors in ETFs are distinctly different than buyers of physical metals. ETFs are great tools for price speculation, and I suspect it's the speculators who are now selling out of their positions. Speculators use leverage, and when prices drops and the margin calls come in, you see massive redemptions. That's what's happening now, as best as we can tell. And I think that's healthy for the precious metals market overall. Leverage and speculation distort prices. A shake-out was needed to rebalance the market.

HAI: Broadly speaking, how significant is the retail investor for the gold and silver markets? Can the retail investor alone keep prices up?

D'Agostino: That's a great question, and the answer is more complicated than it would seem. First, let's define "retail investor." I include retail investors on a worldwide basis when I look at the market. And in many markets, particularly Asia, India and the Middle East, the retail investor base for precious metal is very strong. We saw evidence of this immediately after the price drop. There were lines out the door and around the corner at street-level dealers across Asia. Premiums for gold coins were much higher in Asia than the U.S. In the U.S, the retail base is not nearly as strong, but it is growing. As the average U.S. investor becomes more aware of the need to allocate a portion of their portfolio to precious metals, price support will increase.

Second, let's define "gold and silver markets." It's becoming more and more apparent that there are two markets -- the futures market, and the physical market. Sometimes the price for these two markets is similar, but today they are different. The price for smaller sizes of physical silver is now significantly higher than the silver spot price. Retail investors have a substantial impact on the price of physical precious metals, as we've seen over the past few weeks. And I believe it was the strong demand from retail investors that provided a floor for metals prices recently.

HAI: What is the outlook for gold and silver for the rest of the year?

D'Agostino: I don't really look at gold and silver on a day-to-day or even month-to-month basis. That perspective is more appropriate for a speculator or a trader. But taking a longer view, I believe the outlook for gold and silver is solid, and should continue to see regular price appreciation when measured in terms of years. Nothing has changed relative to the base case for precious metals. If anything, the case grows stronger as more developed nations deploy increasingly aggressive quantitative easing policies.

Look at Japan, doubling its monetary base in an effort to devalue the yen. And they are succeeding. How long will it be before South Korea responds? They aren't going to let Samsung and Kia lose market share to Sony (NYSE:SNE) and Toyota (NYSE:TM) for long. They'll have to answer. And that's just one example of a potential worldwide currency war that is unfolding as we speak. That alone is a compelling reason to own metal.

Precious metals are a hedge against instability, and there's plenty of instability in the global marketplace right now. We may have good news in the U.S. in the short term -- in fact, I hope we do -- but globally, there are so many challenges that will require many years to resolve. High unemployment, massive public and private debt levels, deleveraging, a fragile and intertwined global banking system, the threat of regional armed conflicts -- the list goes on and on. I don't see these challenges being resolved quickly or easily, and precious metals are a good insurance policy for investors.

Source: Gold Physical Sales Still Up 50%, Gold ETFs Shake Out Leveraged Speculators