Retail buying has slackened slightly in the gold and silver market, a recent HSBC precious metals research piece noted. Even professional trader demand is off slightly. But don’t lose sight of what matters. There could be minor ups and downs in the market but underlying the supply and demand picture is positive economic picture painted with increasingly unorthodox monetary policy, geopolitical risks and uncertainty – all pointing to higher demand with the potential for a supply disruption.

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Higher prices have scared away buyers to a degree

On the retail level, gold and silver demand is waning – or pausing – depending on the outlook.  Unlike a momentum-based pricing pattern, higher prices are not begetting higher prices.

With higher physical coinage, the US Mint reported a 48% drop in gold coin sales for July and a 52% drop in silver month over month coin sales. “This shows that retail buyers are beginning to react negatively to higher prices,” HSBC’s Chief Precious Metals Analyst James Steel stated.

The minor hiccup in retail demand is not expected to have a lasting impact. “This does not mean the end of the bull market in gold and silver by any means, but reduced retail investment demand may constrain further rallies.”

While hedge fund exposure to precious metals remains near records, data compiled by the Commodity Futures Trading Commission noted a differential in demand structure. The Commitments of Traders data revealed on a weekly basis a slight pullback in gold net long positions from record buying. Silver longs, however, built further to extend exposure on the week.

Gold fundamentals based on monetary stimulus, geopolitical risk and uncertainty likely to keep demand high

After starting July near 2016 highs in the wake of the Brexit scare, the price of Gold took a pause most of July, only recently finding a bottom on July 25 and trending higher. Traders might be watching the early July highs to monitor trend extension, with the likelihood of trend extension to test this level in early August.

On a fundamental level, HSBC is positive on the underlying environment. Driving demand should be geopolitical risk in Europe, Russia, the Middle East amid other flashpoints, monetary policy pointing to debasing currencies and a race to the bottom regarding quantitative stimulus and negative interest rates and overall uncertainty.

But this bullish back drop might not move in a straight line higher. “We caution that the market may be subject to periodic long liquidations due to heavy recent investor demand and high net long positions,” Steel wrote, pointing to the potential for profit taking among speculators. “That said, the fundamentals for both gold and silver seem positive as monetary policy remains accommodative, and geopolitical risks and investor uncertainty persist.”