Gold bubble will eventually burst. It is a matter of time. People are just buying gold for the sake of buying due to the inflationary concern. With the gold marketing gimmick, it further exagerates the true value of gold.
Is gold tracked by exchanged-traded funds such as SPDR Gold Shares(GLD) reaching new highs because of the fear of a double dip? Is it because of quantitative easing? Is it because of the fear of euro collapse? Is it because of the first dip? Is it because of expectations for future inflation? Is the current price movement being fueled by investor speculation or has there truly been a fundamental change in society that can explain the spike?
Let's uncover the real story behind the gold bubble.
There have been four groups who have participated in this run-up:
* Group 1 (November 2007 - April 2009): Hedge funds who were worried the global financial system would crumble as a result of the mark-to-market banking regulatory requirements.
* Group 2 (October 2009 - April 2010): Hedge funds who were worried that unprecedented stimulus would result in hyperinflation as global economies recovered.
* Group 3 (May 2010 - July 2010): Hedge funds who were worried that the eurozone would collapse, thereby causing currency chaos.
* Group 4 (August 2010 - ???): Individual investors who are now buying gold for the first time because they want in on the action.
Before the financial crisis, in January 2007, gold was priced at $650/ounce. The average price of gold had fluctuated between $300 and $500 during the 10 years before. Assuming 5% inflation in the past 10 years, the inflation adjusted gold price as at today is only around $800 plus dollar.
As the financial crisis unfolded, gold served as the ultimate investment vehicle to profit from fear because of its unique characteristics. It isn't valued on fundamentals, it generates no earnings, it pays no interest, it is essentially a perpetual zero-coupon bond that is easy to manipulate into a snowball effect.
This ambiguity made the asset a prime profit-generating allocation during times of uncertainty. Unfortunately for current gold investors, fear/panic is diminishing by the day. Without that essential element, the big money will exit the trade. September's strong stock market performance was the beginning of a new stage -- a stage that I refer to as a "sigh of relief."
Investors have endured panic for three years, and gold has rightfully gone up. Now that the cataclysmic panic is subsiding those left carrying gold in their portfolios are trying to come up with reasons to justify the holding. Quantitative easing is a tough sell. Slow growth isn't enough. The time looks ripe for the investment vehicle of fear to break down. Perhaps, we need to have a war to justify a further rally in gold.
Gold at $1,400 an ounce is eerily similar to oil at $140. Remember all the credible firms extrapolating the speculative action into $200 oil forecasts. Those same bubble-builders are now calling for $2,000-an-ounce gold.
Geroge Soros has highlighted the danger of gold bubble recently. We might not be able to tell what his real agenda is. He might be telling the market one thing and doing the reverse in his own book. This is not uncommon for the big boys to do such things in the market. However, Soros Fund Management LLC sold 547,689 SPDR Gold shares as of Sept. 30, according to a filing with the U.S. Securities and Exchange Commission. The disposal represented 10 percent of Soros’s holding in SPDR Gold, according to Bloomberg calculations, and follows sales in the first two quarters. Still, SPDR Gold remains the Soros Fund’s largest single equity holding. This could be a real early warning sign.
Soros said that gold’s rally may continue, Reuters reported in September, citing an interview. “I called gold the ultimate bubble which means it may go higher but it’s certainly not safe and it’s not going to last forever,” Soros was cited as saying.
Fasten your seat belt!
*some of the inputs are taken from "thestreet.com"