The Threat Of The So Called Gold Bubble

The investors’ around the world rush for gold – which led to the establishment of new price records over the year of 2010 – indicates that exchanges worldwide are trapped in a new speculative bubble. Predicted at least in early 2010 by U.S. tycoon George Soros, the “gold bubble” will continue “swelling” next year and a “burst” is inevitable.

There already are tons of gold in the stock market buyers’ portfolio, gold that is enough to fill twice all the safes in Switzerland and the metal price is in the tenth consecutive year of growth, the longest such period since the last one that was over 90 years ago, notes Bloomberg.com. Everybody buys gold and can therefore acknowledge they made “a good deal,” seeing higher prices in gold in just a few months.

Throughout 2010, investors have purchased 278 tons of gold, whose value would be 10.4 billion dollars, the average price of the first eight months of the year. Next year, those who bought in 2010 will be envious of those who would have caught later on how profitable it is to invest in gold.

In December 2009, gold reached a historic high of 1.227 USD/ounce (28.47 grams), which was then surpassed on June 21st, 2010, the absolute new record being of 1.266 USD/ounce of gold. And with the price falling with around 20-25 dollars from June, one has to be aware that is it only temporary and this decrease will not stop price increases over the next period.

From the findings of 29 analysts, investment firms and buyers of gold, the Bloomberg agency concluded that everyone expects a new price record to be set next year. The ounce of gold would be sold with approximately 1.500 USD in 2011, which would mean an increase of 21% over the last days of August 2010 (1.240-1.250 USD/ounce of gold).

At the New York Stock Exchange (Comex) there were recorded options of buying gold at the price of 1.500 USD/ ounce starting with November 2010. An analyst at Deutsche Bank’s London branch estimates that by the end of the year, the ounce of gold will cost around 1.550 USD.

People “fear a new crisis”, which determines them to keep their wealth in gold, believes Thorsten Proettel, another analyst quoted by Bloomberg, from the Landesbank BW in Stuttgart (Germany). However, Proettel doesn’t expect prices to be higher than 1.350 USD in 2011, while at BNP Paribas SA the estimated price for 2011 is 1.370 USD. “Whether a rapid economic recovery, or an extension of poor performance, both will bring new buyers on the gold market, believes Eugene Weinberg, analyst at Commerzbank AG (Frankfurt).

“A stronger economy will create demand for gold jewelry. If the economy remains weak or gets worse, investors will seek refuge” in gold, says Weinberg.

The 1901 tons of gold set aside for “rainy days” by investors in 2009, have exceeded for the first time in three decades, the consumption of 1759 tons of which jewelry is manufactured. The situation is expected to be identical for 2010 as well, while the amount of gold purchased for “investment” will grow. The biggest global gold buyer, India, bought 480-485 tons in 2009 and aims to bring to the treasury another 600-625 tons in May, 2010. To the economic advance of India and China, where the number of rich people is growing, are the hopes of jewelry producers bounced, after 2009 was the 21st consecutive year of decline in demand for such luxury goods.

“The bubble is rational to buy at the beginning,” Soros said in early 2010, which his investment company (Soros Fund Management LLC) made since the end of 2009. In the last quarter, the number of shares owned by his company to SPDR Gold Trust (the largest investment fund in gold) grown by 152%, as recently, to reduce their holdings.

On August 16, Soros Fund Management LLC sold its shares at 341.20 to the fund and remained with 5.24 million shares, equivalent to 16 tons of gold. Soros did not comment on the transaction, so analysts wonder if somehow he feels approaching breaking bubbles. Judging on his previous statements, one can only assume, in his opinion, the bubble will “swell” to up to 2.000 USD/ounce of gold.

Than those extracted gold and had revenue growth (47% for Newmont Mining Corp., the largest U.S. producer), to “break” bubble will be affected everyone who bet on keeping economy in this metal. The “cautious” already came from transactions in gold.

Soros not only but also other U.S. investment firm, Astor Asset Management LLC, gold dropped since the end of 2010, although 10% of its assets were U.S. $ 570 million related to this metal. “Gold is too risky because too many people bet on it,” said company director, Bryan Novak, who fears the day when, in pursuit of cash, countless investors sell gold are becoming cheaper.11