Oil price weakness has had a dramatic impact on the price of gold and silver in the past two weeks, but the pace of the decline in these metals was tempered by a strong start to the physical metals season, according to Precious Metals Quarterly, released on Tuesday by ScotiaMocatta, the precious metals division of Scotiabank.

Throughout India, as well as the Middle and Far East, a retracement in gold prices from above $US660/oz. in July to below US$600/oz. in early September has generated a strong resurgence in demand for the physical metal, coinciding with the beginning of the annual festival and wedding seasons, which run to March 2007.

”In India, much of the increase can be attributed to domestic investment product demand which has recently seen a phenomenal surge at the expense of the more traditional jewelry market,” said Bernard Hunter, director of sales, ScotiaMocatta.

After real estate, gold is fast emerging as a new asset class for retail investors in India and this is evidenced by the fact that since March 2001 gold has appreciated in value by more than 100%, compared with stock market returns of 200% and a 20% growth in bank deposits.

Further evidence of the growth of gold investment products in India is the in-principle approval of a gold exchange-traded fund by the Indian government and the Reserve Bank of India. There are currently three funds that have finalized their offer documents and are waiting for final approval from the authorities.

In China and the Far East, sellers have turned to buyers. There are regular reports of large scale buying of gold below US$600/oz. and in particular, Vietnam and Thailand have seen very robust demand.

Silver is also on the rise with the new iShares silver ETF in New York accumulating over 100 million ounces in holdings, helping to underpin the silver price. A side effect of this rapid position growth has been a large discount in the price of New York silver relative to the London price.

This discount has now largely evaporated, implying a slowdown in the growth of the ETF’s demand and a more balanced demand-supply picture. Offsetting this slowdown in silver investment demand however are signs that India is starting to import metal after a 12-month hiatus.

”In general the physical markets appear more ready to support the market on price declines as market sentiments remain positive and expectations are for the gold price to move higher later in the year,” said Hunter. In addition to the current cheapness in the gold price, recent weakness in the U.S. dollar against Asian currencies means that the metal is even cheaper in local currency terms.”