Precious Metals: Emotions Still Stronger Than Fundamentals

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...worldwide, physical supply is extremely tight. And the strong annual gold season has only started. We think this is very bullish for the gold, but the market so far has failed to recognize that strong physical demand. With the upcoming hiccups due to the credit crisis, financial turmoil and all other bullish reasons for gold, we can expect the market to realize that sooner or later even though we might continue to see a bumpy road for the price of gold and other metals for a few more weeks...

...As mentioned in earlier updates, we never believed that we have seen the end of the credit crisis yet and as everybody realizes now this was the right assumption...

Still, we decided to publish another special update, as we would like to point out some rather strange developments, which we have not yet observed since the beginning of this bull market:

While almost all articles and analyses point out that the metal markets will see even lower prices due to the recession most western countries are facing, we hear and get the facts that physical demand for gold is just exploding.

What must be encouraging for the gold investor though, particularly for those coming in at the current price level, is that a surge of buying from India, the world's largest gold consumer, seemed to be underpinning prices when they were below $800 an ounce. We saw reports over the past few days/weeks that there had already been a strong turn around in buying interest as the festival and wedding season in India just started. As gold plunged through the $800 mark, the buying accelerated and, according to the Times of India, the sales volume has almost doubled in the past week alone. Interesting enough that the Economic Times of India reported that the recent drop in gold price has led to a flurry of demand, which bullion banks were unprepared for. This has caused a shortage in supply and the market suddenly created an astonishing fact: The demand for paper gold has risen again and ETFs are trading at a premium of between 35% and 5% to the spot price of gold during the last weeks...

It seems to be a worldwide fact that physical supply is extremely tight. And the strong annual gold demand season has only started.

We think this is very bullish for the gold, but the market so far has failed to recognize that strong physical demand. With the upcoming hiccups due to the credit crisis, financial turmoil and all other bullish reasons for gold, we can expect the market to realize that sooner or later even though we might continue to see a bumpy road for the price of gold and other metals for a few more weeks...

As mentioned, the bumpy ride is not over yet. Gold could be in favor again as we expect the financial crisis to intensify again. The technical indicators show an incredibly oversold valuation, which in itself lets us expect a bigger recovery...

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