The gold bubble is about to burst. Well, that’s the view of several analysts and commentators see dollar gold prices. It is hitting new record highs every day. Is it a correct call?
The reasons for the strong U.S. dollar gold price up front are well rehearsed. Gold is seen as a “safe haven” investments, especially if the current recession-fighting strategies, quantitative easing and low interest rates lead to inflation. Countries begin to fall over themselves to gain trade advantages by lowering the rates. And central bank gold sales are either afraid to or adding to their gold reserves – and what does it mean when an important step in the possession of U.S. dollars in reserves?
Rising gold prices are feeding themselves or self
As it is, the usual gold bugs predicting Armageddon and call prices several multiples of current levels as long as the U.S. budget and current account are not addressed, gold coin dealers Egging on the innocent purchase of forecasts from the fabulous profits to come.
This week, AngloGold Ashanti and the mining industry’s largest global hedge book settlement, the cry was that this is an important vote of confidence in the gold price further advances. Yeah, well … AngloGold’s decision might be a good mine managers, but none of them claims to precisely predict gold prices. So what does it mean for the average South African?
Consider this: on June 9, when gold was fixed at $ 1233.5/oz in London, a loan from Absa’s NewGold ETF traded at R95.54 on the JSE. Last Wednesday afternoon, when gold was in London hitting a new record of $ 1346.5/oz the NewGold ETF traded at R90.70. Ignoring transaction costs, would you have a 9.2% dollar profit for the period, but in Rand terms you would have lost 5%. Each bond is backed by one hundredth of an ounce of gold – although you can not convert in precious metals.
If you want bullion, you’ll have to settle for Krugerrands, which were listed on the JSE R9900 on Wednesday – 7.5% premium in London that day afternoon to fix.
Less than one month ago, George Soros, the Prince of hedge fund managers, warned of a bubble developing in gold. He may well be talking his own book, and since then, the metal has gone from strength to strength – in dollars, that is. But now Soros is echoed by others looking at the reasons for the price of the metal performance.
Running the AngloGold Ashanti hedge argument on its head, market analysts say the closure of the hedge book removes a buyer from the market – hedged miners around the world to buy them to sell their hedge book commitments.
This past week led to a record high dollar price followed the Japanese central bank decides to reduce interest rates to zero, the yen to weaken and give the country exports a competitive advantage.
Interest rate reductions have failed to export-driven Japanese economy to drag out a decade-long stagnation, so why would they work elsewhere? Or, as some analysts now argue, we are facing a double-dip recession because the existing problems are not financial, but more fundamental basis – that of continued weak consumer demand, job loss or the fear of them and the need for a number of years of budget and balance sheet restructuring of companies, governments and private households?
According to strategists at Barclays Wealth and Commerzbank, the rising gold prices to feed themselves or self-sufficient. They have their own dynamics. And ETF buying is partly responsible for the gold “bubble”. The gold market, it is argued, is close to a tipping point where millions of people to lose their gold investments, because there is little prospect of further price increases and because the interest (and thus the cost of holding gold) inevitably rise.
Recently, Barclays Wealth clients who apparently suggested SPDR shares shorted as a precaution against a gold price decline. In contrast, in a recent paper, the World Gold Council’s Ashish Bhatia and Natalie Dempster rejected the argument that ETFs have given rise to a bubble. Council George Milling-Stanley was recently quoted ETFs had opened for means of investing in gold simply and easily to a new “universe” of investors.
We must now see if they remain as solid containers or – as so many individual Indians do with gold “scrap” – they start to sell gold to the dollar bills that can be spent in the supermarket to get.
source:timeslive.co.za
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