Gold and silver rose marginally in US trading yesterday and have largely traded sideways in Asian and European trading. Gold appears to be consolidating in the $865/oz to $900/oz region and needs a higher weekly close (above $883/oz) and then a close above $900/oz to look good from a technical perspective. This looks quite possible but there are very determined sellers at the $900/oz level who have so far impeded gold’s advance.

Physical demand remains robust and data from India shows that the important Indian sub continent is again buying gold for the festival season after the recent hiatus.

The world is seeing government deficits and debt levels spiraling and this is a recipe for markedly higher inflation and higher gold prices in the medium term (maybe as soon as early 2010).

In 2005 and 2006, the smart money prepared itself for the property crash and asset deflation of recent months by diversifying out of equities, commodities and property and into bonds, cash and gold. Now the smart money is preparing for the medium term threat posed by the onslaught of inflation (as warned of by Buffet and Soros in recent days) and owning assets that will perform well in such circumstances – certain equities, some inflation linked bonds and gold and silver.

Gold outperforms most assets in periods of high inflation, stagflation and especially in the worst case scenario of hyperinflation when the value of paper currency becomes worthless vis-à-vis tangibles and particularly gold.