Gold has risen for a fourth day as investors bargain-hunt and safe haven buyers continue to accumulate. The flight to cash trade seen recently, due to margin calls and sharp losses in other markets, appears to be over.
Gold’s resilience Monday and Tuesday, despite sharp falls in equity markets on deepening concerns of banking and sovereign contagion, is impressive. Physical bullion buyers remain focused on gold’s long-term fundamentals and its value as a safe haven asset.
Gold’s short-term correlation with equity markets has been seen on many occasions in recent years. What has happened is that, after an initial correlated sell-off where gold falls alongside risk assets, gold recovers faster than other assets and displays an inverse correlation with riskier paper assets over the long term.
We expect to see that happening again on this occasion, especially due to massive continuing demand being seen from China, India and across all of Asia including in Vietnam. Vietnam has seen robust demand for gold for months now, but that demand appears to be accelerating as Vietnamese demand surges due to the continuing devaluation of the Vietnamese dong.
Vietnamese gold bullion imports are $1.5 billion so far in 2011, but astonishingly Vietnam imported $600 million worth of gold bullion in September alone, according to a report from the Tien Phong newspaper, citing the Ministry of Industry and Trade.
Due to gold’s still strong fundamentals -- bullion banks, mints, refiners and dealers remain bullish despite the recent sell-off, and very few have lowered their price forecasts for Q4 2011 or for 2012, Credit Suisse has raised its 2012 average gold price estimate to $1,850 from $1,540.
Those continuing to be bearish on gold and misdiagnosing a gold bubble (for a variety of simplistic and ill-thought-out reasons) are ignoring the deeply held belief in gold as a store of value of some 3 billion people in Asia.
Gold bears also ignore the small but growing number of buyers in the Western world who are diversifying into gold, leading to an increase in allocations to gold from a minuscule base. These buyers include hedge funds, banks, pension funds and, most importantly, central banks. These buyers continue to rightly focus on gold’s value rather than its price.
Silver has risen another 0.6% Tuesday as buyers continue to buy on this latest sharp dip.
Physical demand for silver remains high and is being reflected in a slight uptick in premiums. GoldCore has seen continuing coin and bar demand, and physical buyers are not being deterred by the latest sell-off on the COMEX market. Those buying silver continue to expect silver to rise to $50/oz, and many expect silver to rise to over $140/o,z which is the real record (CPI inflation-adjusted) high from 1980.
Demand from Western buyers remains minimal, as buyers remain a contrarian few, with the majority of investors and savers having no allocation to silver whatsoever. However, this is not the case in Asia, where both gold and silver are held in far higher esteem and appreciated for their wealth preservation qualities.
Indian demand has been very significant in recent months and has accelerated in recent days after the sell-off and tentative signs of bottoming. Heightened physical demand for silver from the Indian subcontinent is causing "supply issues," according to UBS Tuesday. UBS notes that airline capacity to deliver the precious metal is being “stretched” and premiums are unsurprisingly on the rise.
With gold having risen 17% year-to-date but silver flat so far in 2011, many in Asia are seeing silver as better value at these price levels. Also, many buyers in Asia cannot afford gold at these prices, and thus are buying silver instead, as silver again fulfills its role as “poor man’s gold.”
The physical silver market remains tiny vis-à-vis equity, bond and currency markets, and even a small increase in allocations to silver could lead to sharply higher prices. As always, buyers should focus on value rather than price and use silver as a wealth preservation tool rather than simply for capital gains.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.