Following the weak performance of U.S dollar, the price of gold has been storming ahead since September, as investors rush to hedge against inflation.
In addition to the safe haven theory, investors cite the decline in golds supply as one of the major reasons behind soaring prices. The supply side remained relatively tight during the third quarter of the calendar year 2009, as producers opted to de-hedge themselves and cancelled their pre-production sale contracts. With de-hedging rising to 105 tons in the Jul-Sep period, the supply contracted in the third quarter to 833 tons, 8 percent lower than the previous quarter and 5 percent below the year-ago levels.
And while official sector remained net gold buyer, recycled gold supply fell to 283 tons in the third quarter compared with 569 and 314 tons in the first and second quarter CY09 respectively, according to World Gold Council.
But ignoring this supply side talk, academic circles and the media in the developed economies are wondering if gold has peaked and whether its a true movement supported by strong market indicators or not. Three stages have been identified in this context.
In the first stage, the U.S dollar depreciates that sets off the alarm bells. In the second stage, institutional investors and official reserve managers act on those signals and start buying gold to protect against inflation.
In the third and last stage, the herd joins in, including hedge fund managers, creating a gold obsession and fear that prices would rise further. This too-fast-too soon jump in prices, without the backing of fundamentals, results in price bubble that inevitably bursts to bring price to a new equilibrium position much below the peak level.
The application of this stage theory shows that gold was in its second stage up until late October after being triggered by the weakening greenback earlier on. This was immediately followed by the third stage where the herd investors followed the central banks and joined in the rally - pushing gold prices in a vertical manner and reflecting the formation of a bubble.
Although, daily trading data of gold isn widely available to confirm whether hedge funds are active or not, dealers and analysts in international market argue that a bubble has indeed been formed. "Retail investors have dropped billions into gold of late via Exchange Traded Funds in hopes of a big payday ahead, as a result, gold now has some poorest fundamentals I have seen in the market for a long time", said Jon Nadler an analyst at Kitco, a leading bullion broker in the global investment community. Nadlers sentiments echoed in the latest issue of Dow Jones investment magazine Smart Money. The magazine said that the fundamentals of gold just based on real supply and demand suggest a gold price of somewhere below $880 an ounce - may be much lower.
In short, those who are thinking to join the gold rally at current prices should think again. The reality might just bite anytime soon.
Comments
Comments are closed for this article.