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Investors should be aware that the physical gold and silver markets differ from paper gold and silver markets.

March 5, 2012 – Though the price of gold and silver dropped last week following a Congressional appearance by Federal Reserve Chairman Ben Bernanke, the drop does not accurately reflect the demand for gold and silver in the actual markets. Investors should be aware that the physical gold and silver markets differ from paper gold and silver markets in that paper contracts for gold and silver sell in multiple of the underlying physical on a fractional reserve basis. This means for every one ounce of silver in holding, there could be 100 contracts on the market for that same ounce. In earnings reports by major investment banks, some analysts have concluded that ratio is much higher.

Clearly, holding your own physical in such a market has its benefits and is the position most strongly advocated. The reason for the paper market reaction is a lack of indication on the part of Mr. Bernanke that the Fed will actively pursue a third round of fiscal stimulus known as Quantitative Easing. While paper markets overreact to something Ben Bernanke failed to say, physical markets more clearly reflect the actual demand for metals in the world.

Asian markets, which make up the majority of the demand for gold on the planet, remain at record-breaking highs in demand. As they are less exposed to what the Federal Reserve Chairman in the United States says, they may more accurately reflect investor sentiment. According to the World Gold Council, India is the top consumer of gold on the planet, but even that market will be overtaken by the current occupant of second place, China, over the course of this year. Asian markets have a strong history of storing wealth in precious metals, particularly in jewelry, and as such they add demand on the metal coming to market.

Whether the Fed engages in a third Quantitative Easing measure now or in six months is relatively ineffectual on the actual world precious metal markets. Of course, any fiscal stimulus will have the effect of pushing the price of gold and silver higher as the markets cope with the flood of liquidity, but prices will move higher without fiscal stimulus as well on such strong demand.

Shannon King

Senior Staff Writer – GoldSilver.org

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