Talk of gold bubble isn’t affecting investment in the safe haven asset

Written by Ray Clancy

Wednesday, 03 November 2010 10:14

Gold has prospered as investors have seen it as a safe haven asset and now analysts are beginning to talk of it being a bubble waiting to burst.

Gold has risen in price by around 70% in three years and almost 25% since the beginning of the year and the China is regarded as being poised to be a big buyer as it moves to invest more in the commodity.

Analysts at Goldman Sachs recently predicting that the spot price will be at US$1,650 in a year’s time and the spectre of a foreign exchange war is adding to gold’s appeal.

Some investors believe that the very fact that gold is trading at an all time high is indicative of a bubble and is grounds for selling the commodity. But Andrew Thompson, head of Advisory Portfolio Management at Kleinwort Benson, believes that while gold may well become a bubble in due course he is encouraging his Trend Following clients to stick with their gold positions and to protect the downside via Trailing Stops.

Thompson points out that when gold finally broke through US$1,000 in September 2009, there were plenty of analysts decrying the commodity as a bubble. Since then gold has gained a further 36%.

Thompson also points out that gold is very difficult to value from a fundamental perspective because it has no yield, thus its price has the potential to be driven much, much higher by the dual forces of fear and greed.
Indeed financial commentators are forecasting price targets of US$1,500, US$2,000 and some even suggesting the price could go as high as US$6,000.

In a poll taken amongst bankers, producers and analysts attending the London Bullion Market Association conference in Berlin recently, one of the biggest gatherings of the precious metal’s industry, the consensus view was that gold will rise to US$1,450 a troy ounce in the next year.

The latest available figures show that investors bought 28 tonnes of gold through ETFs (Exchange Traded Funds) in the third quarter of 2010. The emergence of ETFs as a distribution channel for gold investors allows investors to get into the asset on smaller amounts, which means more retail gold investing.

And there just isn’t enough new gold coming out of the ground with the World Gold Council warning that gold production is declining. It says that the purchasing of gold by emerging market central banks is adding to demand as is the growing middle classes in China and India.

In India, the world’s biggest gold consumer, Hindus are buying gold in preparation for the coming year during Diwali. The fact that gold outlets are stockpiling Laxmi coins, which weigh less than one gram, is an indication that they expect even the less well off to be buying gold this holiday season.

Jewellers fear the demand for these smaller coins will cause a shortage. Demand is expected to be very high as the price for gold bullion hovers at the historic high levels. Vendors still anticipate high demand for gold and diamond ornaments.