Friday, May 14, 2010

Gold bugs still bullish, but with caution from this bug

Gold bugs are still bullish for all the right reasons, but I would suggest some caution illustrated in the last sentence of this otherwise bullish article:

http://www.gata.org/node/8643


But let the record show that Murphy's Lemetropolecafe does supply one (short-term) cautionary note: India has just stopped importing gold -- not an unusual response to the metal's move, but sometimes a sign that it's due for a breather.

Industrial and investment demand of precious metals tend to be inelastic. For instance, industrial buyers of silver will pay any price to keep their production lines running--even if there is a shortage. Likewise, gold consumers will step up to the gold window in a flight to safety--despite rising prices, as distrust of paper currencies grows.

Retail Indian demand tends to historically be elastic, however. Gold jewelry has been an important part of Indian culture, as they are often wedding gifts. Therefore, with high prices afoot, retail demand has decreased as households cut back on their purchases. With India traditionally the highest consumer of gold, expect reduced demand from the fast-growing country as long as gold prices remain nominally high.

However, that slack has been more than absorbed by soaring investment demand from Europeans fearful of a sinking euro. And demand from China has challenged India's lead recently, due to a rising middle class in the Middle Country.

In the overall scheme, gold and silver represent much smaller markets than other financial markets: equities, bond, real estate, and foreign currencies. A rush to gold and silver can send prices soaring.

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