Demand for physical gold and silver increasing

2011-OCT-04

The physical gold and silver markets are becoming increasingly dissociated from paper gold and silver markets, where derivatives such as futures and options are traded. According to the latest data from Reuters, in 2010 the demand for silver coins increased by 28% to 101.3 million ounces. In addition, recently the Royal Canadian Mint announced that it expected a sales-rise of 30% – to 25 million ounces per year.

Investor demand for precious metals seems unstoppable. This is of special benefit to gold and silver, which are the best save havens in times of growing crisis and increasing systemic risks. Instead of bidding on the markets for paper gold and silver, many investors are becoming increasingly interested in holding precious metals in physical form. Nobody can predict the future repercussions of the worldwide debt problem. While just a few years ago questioning the future existence of the euro was for many unthinkable, today public discussions have changed significantly. The renowned Boston Consulting Group pointed out in its last internal analysis that industrialised countries needed to make serious efforts at reducing their debts if they were to return to decent growth rates.

Aside from big increases in silver coin demand last year, in 2010 the demand for gold bars and coins grew by 48% to 1,148.4 metric tons in comparison with the previous year. High volatility at the international currency markets and inflationary developments – caused for example by central banks’ continuous debt monetisation – support this trend. By purchasing physical precious metals investors hedge against high volatility at the currency markets and against monetary devaluation caused by inflation. But even during deflationary phases precious metals can be good stores of value, as seen during the Great Depression of the 1930s. Then, metals such as gold and silver functioned as a guarantee against a cascade of defaults, since physical precious metals are immune to default. In fact over the last 5,000 years, gold and silver have survived all economic systems and have even replaced paper currencies during times of severe inflation.

Therefore, the Royal Canadian Mint remains optimistic. Demand for physical silver remains high, and supplies of recycled silver remain low. Recently investors at the global commodity markets confirmed this information, stating that despite the strong price depreciation in the precious metal sector the markets have been short on physical material since May. It seems that investors are not willing to sell large amounts of their physical positions.

Author: Roman Baudzus