Where is Gold headed Next? – Will it go sky high or a Bubble waiting to be burst?
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?