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Gold is often seen as an ultimate asset and a safe haven in times of economic uncertainty, but is it heading towards a big fall given the current levels at which the precious metal is trading?

Some experts believe that since 2002, when all of today's bubbles began, gold started climbing and now it has crossed all levels and is out of reach – so a reversal is bound to happen.

"Unlike other asset classes, such as equity, gold does not enjoy long-term solid growth potential. In fact, the long-term average price of gold during the past 40 years is $340 (Dh1,249) compared to the current $920. Even the average of the past 10 years is $460, clearly a far cry from the current levels. It's only during the past couple of years, especially since Q4 2008, that we have seen a sustained rally in gold," MR Raghu, Senior Vice-President for Research at Kuwait Financial Centre (Markaz), told Emirates Business.

Manqoba Madinane, an analysts at Standard Bank, believes that on a fundamental basis gold is over valued in real terms at current market prices but the bubble is still not about to burst.

"This does suggest that there is a bubble that has developed in the gold market," he said. "However, the real gold price is nowhere near the 1980 highs, which suggests that this bubble probably still has a long life span left. If indeed real gold prices rise to the 1980 highs, this can translate into a nominal gold price of about $1,700 per ounce. So we are very bullish on gold at the moment and do not see the gold price as an asset price that is about to fall."

Demand for hold has fallen. Data reveals that in February, India's gold imports were close to zero, down from 28 tonnes a year ago. In March, it was the same trend and there were no imports – and this news is coming out from the biggest gold consuming nation.

Since there is little demand for physical gold and most of it is coming from exchange-traded funds, some experts see speculators driving the prices to an all-time high.

According to Raghu, the current bull run in gold is not backed by demand.

"It is backed by fear. The favourable disposition towards gold is more due to the fact that investors do not have any clear visibility about other asset classes. Not that gold can be construed as an asset class, It's more of a reserve currency and an inflation hedge than anything else," he said.

Madinane said: "It is true that fabrication demand for gold has come down significantly, but we believe quantitative easing measures from the eurozone and US opens the possibility for a surge in the nominal gold price. We believe the resultant surge in money supply should feed back positively into medium- to long-term inflation expectations that would attract investment fund flows into the gold market as investors flock to protect their capital base.

"We have seen a strong positive correlation between real gold prices and inflation expectations. ETF buying should still provide the main source of investor interest that would drive speculative interest in the metal – as seen in futures trading activity. In the short run, we expect speculative interest to play an important role in gold price volatility."

Madinane expects the short-term gold price [one- to two-month horizon] to average about $930/oz. "Although sentiment should remain on aggregate positive, we expect a steady ascent in the gold price above $1,000, closer to Q3 2008, mainly due to sluggish jewellery demand, especially from India otherwise the ascent would happen much quicker."

"Currency volatility of the emerging markets is another important feature that will keep fabrication demand, which constitutes a significant portion of final demand for gold, under pressure.

"Further depreciation of the rupee for example, would see Indian gold demand come under even more strain," he added.

However, Rahgu said the current bull run will continue till the time there is more clarity as far as other asset classes are concerned.
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