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Gold – Yellow metal Rally embarrassing the Sensex surge?

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Looking at the way the Gold has sustained sky-high and keeps pressing for newer highs; one thing for sure – either the yellow metal is in bubble zone or the world economy is in deep trouble that is supporting such high gold prices. Either of the two has to give-up anytime soon. That’s how my explanation goes for the rising gold prices.

As of now, one thing for sure – the world economy has just started creeping-out of the deep slowdown witnessed a couple of years back. Though, the fears over double-dip recession in the US still remain; such fears usually tend to stretch longer especially after a bout of extreme pessimism undergone more recently.

Improving economic data has already started flowing from the US and China, hinting at growing global economic strength. China’s manufacturing sector gathered momentum in September. The new US jobless claims fell last week and consumer spending was slightly stronger than expected earlier in the year.

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However, amidst such positive news flow, Gold is still ticking higher and is holding near its life time highs at around $1310 an ounce. Interestingly, gold has rallied to record highs, racking up its eighth consecutive quarterly gain as the Federal Reserve stood ready to pump more cash into the US economy at its support.

In another significant development, billionaire financier George Soros has warned investors saying Gold is locked in the “ultimate bubble”. The note says that apart from the cost of actually digging the gold out of the ground it has almost no real fundamentals other than price itself. It is the ultimately reflexive investment.

Mr. Soros goes on to say that gold is certainly not the safe asset during the troubled times. Moreover, this theory could trigger a new school of thought against the belief that gold could be used as a hedge against anything that could go wrong including economic, natural and even man-made disasters like wars.

Traditionally, Gold has been perceived as a safe haven asset class which provides steady returns that just about manage to beat the inflationary pressures of the economy. However, over the last 5 years, Gold has yielded unusually high returns that could envy even the better performing Equity markets of the world. The shining metal has surged a whopping 400% from its lows of $252 in 1999 to over $1300 right now.

So, can this bull-run continue and provide some more extra shine to the metal? Or are we staring into the abyss of yet another bubble that must burst?

  1. Rajesh says

    There are tons and tons of gold held by countries in their national reserves. Towards the end of 2009 we have seen China diversifying into gold. Many other countries might be doing the same. So if there is a bubble in gold prices, all these nations are going to be hit the most when it bursts. In order to avoid gold bubble from building up, these countries can put the gold back in the market when they feel it is getting to hot to manage.

  2. Raj says

    Hello Viral,

    Good to read your articles once again on Trak. IMHO Gold has always commanded sentimental value rather then an investment value. People always feel that in extreme circumstances they can buy basic necessities in lieu of gold, that is for the average human being, but I am sure that this rise of gold is not due to retail participation. We have seen real estate bubble (in US particularly), we have seen stock market bubbles across Countries, we have seen oil price bubble, its been long time since we have seen a Gold bubble, maybe thats just around the corner.

    Thanks,
    Virendra

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