Is the gold bubble about to burst?

End-users’ total demand of gold is at its lowest level in 10 years

Gold seems to be heading towards another all-time high. Last week, on Wednesday, the yellow metal touched $1392.81, its highest in almost two weeks, on fresh worries over Europe’s debt, especially Portugal.

But if you’re worried whether a bubble is building around the precious metal, you’re not alone.

Barclays Wealth in its Q4 Compass report for November-December, the last one for 2010, also notes that gold exhibits ‘potentially bubble-like characteristics’.

“There's clearly a link between some of the fiscal imbalances that we're seeing in the developed world and the price that gold trades at. However, the way gold has moved up recently is a bit puzzling, especially if you look at its history,” Khurram Jafree, Head of Investment Advisory (MENA), Barclays Wealth, told Emirates 24|7.

Firstly, because historically speaking, at times of high unemployment and low inflation, which is currently what we have, gold hasn't performed well usually. Secondly, gold has shown little to no systematic relationship with high inflation in the US.
Thirdly, the demand for gold currently is not coming from end users, rather it's actually coming from investment demand, particularly exchange-traded funds (ETFs), he said.

“In fact, the percentage of the total demand from end-users of gold is at its lowest level than what it has been anytime in the last 10 years, and the investment demand from ETFs now equals that from jewellers and manufacturers, which is where the demand traditionally used to come from,” Jafree added.

However, he added: “We don't think that we're going to have a sharp fall in the price of gold and given the amount of short term interests in gold, the probability of a sharp drop in the gold price from the current levels is quite small.”

Nevertheless, ultimately the price of gold should be lower than where it is now mainly because, first, there appears to be a lot of hype around gold currently which is driving the price higher. So in the short term, we could see gold staying at a higher price but in the longer term, perhaps in a year or a year-and-a-half, the price should fall lower than where it is today, he added.

Secondly, he said, the gold supply has increased and it would probably continue to increase, this could also suppress its price.

According to the recent edition of Gold Investment Digest published by the World Gold Council (WGC), the gold market continued to be supported by concerns over the health of the global economy and its ability to show a sustained recovery, especially in developed nations.

It said investors bought a collective 28.3 tonnes of gold via physical-backed ETFs during the third quarter this year, bringing the total holdings to a new high of 2,070.1 tonnes, worth $87 billion at the quarter-end gold price.


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