I read it somewhere that, “Rahul Dravid and Gold are the last men standing." And, rightly so, even as the Indian cricket team is reeling under abject batting crisis in England, the resolute batting display by Dravid was a stand-out performance, befitting to his reputation of being the Wall of Team India.
In many ways, our cricket team’s fortunes are no different from that of the global economy. For the past few months, developed economies of the world have tattered into bits and pieces, leading to crisis of confidence, and resultant puncture in the inflated prices of various asset classes, globally. Needless to say, gold has triumphed with its inevitable shine even as other commodity prices soften up.
Some number crunching – the Standard Gold has yielded around 24% returns over the last 6 months, as against 21% in Silver and negative returns by BSE-Sensex at 9%. Now, compare the data over the last 3 years, or since recovery from the 2008-recession, a fact emerges that equity markets have under-performed by a great margin with only 12% gains vis-à-vis surge in gold price by 117% during the period.
Bullion investors are in a tizzy – whether to book profits or hold on to ride the magnanimous bull run in Gold? – I am sure the same question haunts you too, whether or not you’re an investor in the yellow shiny metal. If you’re not obsessed with gold, something that might be worrying you is that the glittering gold is getting out of your reach and capacity; in case you need to buy jewellery for your daughter’s marriage.
Recently, gold tested waters at levels above $1900 per ounce. Simply put, people are as gung-ho on the prospects of gold, as much they are bearish on the outlook of global economy. People started nurturing the belief that the precious metal will be in demand till the engines of the world returns to normalcy – as if they’re recalling the olden days of gold standard, wherein people start hoarding gold to tide over the fears of systemic failures.
Considering the low yields from US equity and bonds, gold has been lapped up by the punters; BUT with the possibility of a third round of quantitative easing (QE3) by Federal Reserve coming into effect by the year end, as the US economy heads towards a double-dip recession led by concerns of bad economic data on housing, jobs and home sales.
This act of pumping money into the US economy, with the hope to boost lending, consumption and lower unemployment; may well spook the secular bull run in gold – as investor sentiment soothes and normalcy returns into the markets. Gold will correct from its current over-bought situation, at least in the short-term duration.
Having said above, one can not turn a blind eye to the fact that gold prices have already witnessed a sharp correction over the last 2-3 days. Gold has lost ground by 8-10% from the highs – raising fear amongst skeptics that the gold bubble is awaiting a prickly burst soon.
The optimist theory that gold is a safe-haven asset class; will now get replaced by the school of thought that gold is a totally useless asset, with no industrial use or practical purposes attached with this soft metal. As in the case of other assets, gold has no clear earnings potential.
Almost all asset bubbles are fuelled by explanation of their superior fundamentals and mismatch in demand-supply scenario. Once, the bubble is burst – the rational approach reigns and sentiment returns back to mean averages, accepting and gulping the bitter reality.
Believe it or not, even gold is in a similar bubble; and is currently supported by the fearsome theory of a likely double-dip recession in the US, sovereign debt crisis in Europe and weakening prospects of developed economies like Japan, France, Germany and the UK.
One last argument in favour of the gold bubble could be that – the world economy will remain in crisis for another 5-10 years, until developed economies regain their growth machinery, and so will the gold bubble sustain. But, forget not, once a bubble gains height which is so high that the altitude of air thins out, the bubble ought to burst, sooner rather than later.
So, what’s your take on gold bubble? Or is it not a gold bubble yet, in your eyes?
Comments
But the basic thing is Gold has always been considered a worldwide currency since the ancient times and it will remain so no matter what happens to USD or INR. I don't think this bubble can burst until the day we are short of very important things like Food etc. So it will come down in range bound manner.
Shailesh,
I understand your sentiment – but where money is employed, emotions make it a point to make presence, sooner rather than later. Once you start losing money, all theories are thrown out of window. Bubbles get burst more easily, it just needs a prick.
In effect, when time has come for a doom, and punters are ready to hit a whip, Gold won't wait for fundamentals to stoop as low as money need be en-cashed from gold to buy food articles. Human beings react irrationally where money is involved & losing its value.
Gold is not in a bubble. You're thinking in terms of currency and not in terms of money. In terms of paper dollars (that are backed by nothing), gold might look like it's in a bubble. But the reality is that paper dollars are losing money so fast that it looks like gold is in a bubble. The more economic stimulus Obama gives (that is, the more dollars he prints), the lesser the value of the dollar and the more the value of gold in terms of dollar.
Value of things like gold and silver stays the same throughout time, but what makes their price change is how devalued your currency is.
But the basic thing is Gold has always been considered a worldwide currency since the ancient times and it will remain so no matter what happens to USD or INR. I don't think this bubble can burst until the day we are short of very important things like Food etc. So it will come down in range bound manner.
Nice article buddy.. very interesting and informative.. thanks for sharing…
I agree. I too feel Gold has entered bubble territory, and have a long term chart (35 years) indicating the same. I would not be surprised to see Gold going in a big correction from the top (wherever it is) for the next 8-10 years and the price can go down to half of current levels.
Gold is the safest place to hide in times of crisis is the common saying, just like land is the safe asset.
This was true till few years back when fast money started entering this asset class. The market dynamics changed ever since. Few years back there were no ETF Gold funds. All that was there was physical demand. Its a simple relation. During daughters marriage, Indians used to buy gold. During the month of deewali bonus, people used to buy gold.
Now look at the market. In additon to physical gold demand there is commodity trading exchanges, gold funds, F&O tradings. These new instruments are not showing true demand for gold. Few years back real estate too saw similar trends and fast money entered and exited as fast as it came in, smashing real estate markets across India. Though few cities recovered, places like Hyderabad never recovered.
The same game is now being played in gold. Fast money is moving in and out at such fast pace that normal people can not determine when to buy.
The last of the asset classes that is considered safe heaven is now being infected with fast money creating doubts of bubble burst.
As the author said rightly, people dont know what to do. Whether to cash in the bull run and get out and laugh their way to the bank or to burn their hands by liquidating gold and sitting in money/stocks. We dont know how these fast money instruments react.
However when you see the physical facts, the output of gold is coming down gradually all over the world except China. Even China can not sustain this growth in output for more than 5 more years when all its mines run dry. With less output and growing demand, prices have only one way to go, UP.
People today fondly remember the days when gold used to be in hundreds of rupees per tola. Similarly I guess our children will fondly remember gold when it used to be 25,000 per 10 grams.
Just my two paisa :)
Shailesh,
I understand your sentiment – but where money is employed, emotions make it a point to make presence, sooner rather than later. Once you start losing money, all theories are thrown out of window. Bubbles get burst more easily, it just needs a prick.
In effect, when time has come for a doom, and punters are ready to hit a whip, Gold won't wait for fundamentals to stoop as low as money need be en-cashed from gold to buy food articles. Human beings react irrationally where money is involved & losing its value.
Shailesh,
I understand your sentiment – but where money is employed, emotions make it a point to make presence, sooner rather than later. Once you start losing money, all theories are thrown out of window. Bubbles get burst more easily, it just needs a prick.
In effect, when time has come for a doom, and punters are ready to hit a whip, Gold won't wait for fundamentals to stoop as low as money need be en-cashed from gold to buy food articles. Human beings react irrationally where money is involved & losing its value.
Shailesh,
I understand your sentiment – but where money is employed, emotions make it a point to make presence, sooner rather than later. Once you start losing money, all theories are thrown out of window. Bubbles get burst more easily, it just needs a prick.
In effect, when time has come for a doom, and punters are ready to hit a whip, Gold won't wait for fundamentals to stoop as low as money need be en-cashed from gold to buy food articles. Human beings react irrationally where money is involved & losing its value.
Shailesh,
I understand your sentiment – but where money is employed, emotions make it a point to make presence, sooner rather than later. Once you start losing money, all theories are thrown out of window. Bubbles get burst more easily, it just needs a prick.
In effect, when time has come for a doom, and punters are ready to hit a whip, Gold won't wait for fundamentals to stoop as low as money need be en-cashed from gold to buy food articles. Human beings react irrationally where money is involved & losing its value.
Shailesh,
I understand your sentiment – but where money is employed, emotions make it a point to make presence, sooner rather than later. Once you start losing money, all theories are thrown out of window. Bubbles get burst more easily, it just needs a prick.
In effect, when time has come for a doom, and punters are ready to hit a whip, Gold won't wait for fundamentals to stoop as low as money need be en-cashed from gold to buy food articles. Human beings react irrationally where money is involved & losing its value.
Shailesh,
I understand your sentiment – but where money is employed, emotions make it a point to make presence, sooner rather than later. Once you start losing money, all theories are thrown out of window. Bubbles get burst more easily, it just needs a prick.
In effect, when time has come for a doom, and punters are ready to hit a whip, Gold won't wait for fundamentals to stoop as low as money need be en-cashed from gold to buy food articles. Human beings react irrationally where money is involved & losing its value.
Shailesh,
I understand your sentiment – but where money is employed, emotions make it a point to make presence, sooner rather than later. Once you start losing money, all theories are thrown out of window. Bubbles get burst more easily, it just needs a prick.
In effect, when time has come for a doom, and punters are ready to hit a whip, Gold won't wait for fundamentals to stoop as low as money need be en-cashed from gold to buy food articles. Human beings react irrationally where money is involved & losing its value.
Shailesh,
I understand your sentiment – but where money is employed, emotions make it a point to make presence, sooner rather than later. Once you start losing money, all theories are thrown out of window. Bubbles get burst more easily, it just needs a prick.
In effect, when time has come for a doom, and punters are ready to hit a whip, Gold won't wait for fundamentals to stoop as low as money need be en-cashed from gold to buy food articles. Human beings react irrationally where money is involved & losing its value.
Gold is not in a bubble. You're thinking in terms of currency and not in terms of money. In terms of paper dollars (that are backed by nothing), gold might look like it's in a bubble. But the reality is that paper dollars are losing money so fast that it looks like gold is in a bubble. The more economic stimulus Obama gives (that is, the more dollars he prints), the lesser the value of the dollar and the more the value of gold in terms of dollar.
Value of things like gold and silver stays the same throughout time, but what makes their price change is how devalued your currency is.
Gold is not in a bubble. You're thinking in terms of currency and not in terms of money. In terms of paper dollars (that are backed by nothing), gold might look like it's in a bubble. But the reality is that paper dollars are losing money so fast that it looks like gold is in a bubble. The more economic stimulus Obama gives (that is, the more dollars he prints), the lesser the value of the dollar and the more the value of gold in terms of dollar.
Value of things like gold and silver stays the same throughout time, but what makes their price change is how devalued your currency is.
Good point. I believe that this is the start of an altogether different rally for Gold for pure fundamental reasons. I have detailed most of my reasons behind my statement here http://insight.banyanfa.com/?p=363. What would be your views on this?
Good point. I believe that this is the start of an altogether different rally for Gold for pure fundamental reasons. I have detailed most of my reasons behind my statement here http://insight.banyanfa.com/?p=363. What would be your views on this?
Comments