Are we in a gold bubble? Could gold prices fall?
April 4th, 2009 · Greg Atkinson · 26 Comments
During an economic crisis many investors head for the safety of gold and there is no doubt that since the global economic crisis began that gold was one of the best places to have your money. But is gold still the place to have your money and is it as safe as some commentators seem to imply? Perhaps gold is now trading at bubble like prices and like many commodities last year, we will see its price correct downwards.
Back in January I wrote an article about Investing in Gold and I urge people thinking of investing in gold to read this as it attempts to provide a balanced view of the issues related to investing in this commodity. Gold might seem like some super commodity but investors need to take into account that the forces of supply and demand still come into play and can have a dramatic impact on prices.
Also one thing that worries me is that the gold bulls often never mention the fundamentals of supply and demand when it comes to gold…I wonder why? Is is because they think gold is different somehow from other commodities or is it because this undermines their bullish views?
According to the World Gold Council the market for gold in 2008 could be summarised as follows:
“Sustained investor interest in gold over the course of 2008 against a backdrop of the worst year on record for global stock markets and many other asset classes, helped push dollar demand for the safe haven asset to $102bn, a 29% increase on year earlier levels. Identifiable gold demand in tonnage terms rose 4% on previous year levels to 3,659 tonnes. As shares on stock markets around the world lost an estimated $14 trillion in value, identifiable investment demand for gold, which incorporates exchange traded funds (ETFs) and bars and coins, was 64% higher in 2008 than in 2007, equivalent to an additional inflow of $US15bn. Over the year as a whole, the gold price averaged $872, up 25% from $695 in 2007.”
In other words, investors moved into gold because of its safe haven appeal, but what you should also take into account is that demand for gold for use in jewellery and industry fell. This means that basically gold prices at the moment are being supported by investors spooked by the volatility in the stock market and falling asset values in real estate and infrastructure assets etc.
If investors started moving money out of gold back into stocks etc. then the gold price would probably take a significant hit as industrial demand for gold is unlikely to take up the slack in 2009.
If you wish to see the detailed statistics for gold supply and demand in 2008 then please follow this link
So could gold be in a bubble? Well let first look at the 10 year price chart for gold and see if it tells us anything.
Gold 10 year price chart
If the above chart showed property prices or the stock market then many experts would say it was obvious a bubble was building. But curiously enough many of these same people feel that gold prices are not in bubble territory whereas I would suggest they are, and the only way gold prices are going to hold at these high levels is if the worlds financial markets cannot sort themselves out.
My own personal view is that the gold price will fall back just as oil prices did last year, probably not a big fall, but I think the people saying gold will reach USD $2000/ounce soon sound a lot like those calls that oil would reach USD $200 a barrel last year.
It seems pretty clear to me that the price is being propped up mainly by investors and that there is only so much money that can be moved into gold before excitement begins to wane. Yes the global economic situation is not good, but gold has already run up on the back of a lot of bad news and as they say, all good things must come to an end.
But remember my views are influenced by my belief that the world’s markets will recover and we are not heading for a global depression or any financial doomsday. If I am wrong then gold could very well keep heading onwards and upwards and in any case, if you are a long term gold investor then you may not be worried about what happens with the gold price over the next year or so anyway.
Remember as always, I am not suggesting that anyone buy or sell anything. I am just throwing up some views and ideas that I will hope will help investors sort fact from fiction. If you have a different view of where the gold price is heading then please feel free to leave a comment…I am always open to other points of view.Search terms: stock market graph 10 years, gold bubble 2012, gold will fall in 2012, gold price crash 2012, will gold drop further, gold prices australia chart