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Gold In A Bubble?

Monday, May 07, 2012

Gold surged to a high of Rs 29770, quite close to its life time high of Rs 29900.  

Internationally gold reached an all time high of 1920 dollars in September 2011, but by last Wednesday afternoon gold reached 1662 dollars in the international market. Though gold is almost 150 dollars down from its high, the current rates in rupee terms have almost reached its life time high.

The main reason behind this is the weakening of the rupee as against the dollar. The 15% depreciation in the value of the rupee against the dollar since September 2011 is aiding the upswing in gold prices.

Assuming that if gold would have crossed its life time high of 1920 dollars, then gold would be selling at Rs.32000 in the Indian market.

Though retailers have sold gold at Rs 30,000 (a life-time high), but the rates in the wholesale market have not crossed Rs 29770. Jewellers and traders are not happy with this increase, as the demand has weakened despite of the festive and marriage season.

This Akshaya Tritiya, gold sales saw an increase of only 25%, which would have been much more otherwise. With gold prices shooting up day-by-day, marriage buying of gold seems to have taken a severe beating. Most jewellers are fully stocked after lower-than-expected sales during this season.

Internationally, Chinese markets remains closed and most European centres were shut for May-Day holidays. Hence, financial market sentiment proved muted with volumes light and players for the most part lacking conviction.

The US Federal Reserve’s decision to keep interest rate unchanged, indication of a third round of quantitative easing measures, and renewed concerns over the financial health of the euro zone sparked by a downgrade of Spain’s sovereign debt have put the spotlight on bullion in the past few days.

The trading sentiment further bolstered as the mental in overseas markets climb for a fifth day for the best run since January as concern of deepening euro-zone debt crisis boosted demand for alternate investment.

Analysts say the precious metal is likely to continue its rising streak at least for some more time.

Many even believe that gold is in a bubble stage.

 I doubt we are in a bubble stage. When you went to an investment conference in 1989, everybody owned Japanese stocks. And in 2000, everybody owned tech stocks. That is the bubble, when the majority of market participants own an asset. I think there are more people that own a tech company’s stock than gold.

In the long run, central banks all over the world are going to print money because they know nothing else. The purchasing power of currencies will continue to go down. In other words, the price of gold and silver will move up in the long run.

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