Gold and silver continue to defy expectations and climb higher by the day.

In 2011, gold has surged 6 percent to an all-time high of $1,505 per ounce. Silver, meanwhile, has soared almost 50 percent to $46 per ounce.

A few years ago, gold and silver rallied because Western hedge funds and other investors bought them as a hedge to the loose monetary policy of the Federal Reserve.

This story is still playing out as Western individual investors, real money managers (e.g. pension funds), and more hedge funds continue to buy into gold and silver.

More recently, however, gold and silver’s rise has been driven by Asia’s gold and silver mania.

Many Asian countries have negative real interest rates, so bank deposits fail to store the value of money. Moreover, consumer inflation is raging. 

Some of these countries have underdeveloped capital markets, so there are limited financial options for consumers to hedge against inflation. Physical gold and silver, therefore, have emerged has the vehicle of choice. 

The sharp appreciation of these precious metals in the past few years certainly adds to their appeal. 

The combined market size of the gold and silver is tiny so it doesn’t take much to drive up prices.

Moreover, because gold and silver fever hasn’t gone mainstream in the West yet, there are still potential buyers out there with untapped capital to pour into them. If the precious metals fever just receives a fraction of the US public participation as the tech bubble did in the 1990s, prices can easily climb to $2,000 per ounce or much more.

Gold and silver are indeed speculative bubbles. They don’t yield an income and their prices are way above what industrial demand can justify. The whole purpose of buying them is to sell them to another investor at a higher price.

But as long prices keep on climbing, gold and silver will continue to pay off for speculators and inflation hedgers.