Gold Investing News

By Kishori Krishnan Exclusive To Gold Investing News

It is sure to burst. Any time soon. The gold bubble that has got investors pouring in over $12 billion this year into the SPDR Gold Trust (GLD), the big exchange-traded fund, has not just made it top-heavy. Several market watchers say the fundamentals indicate that gold is poised to fall.

Gold is a two sided, two-faced coin that has very distinct personalities. On the one side, it is a hedge against inflation, a reserve currency and the only Holy Grail that gold bugs from around the world, worship.

On the other, the yellow metal is a real commodity, used in jewelry, electronics, computers and space components.

Clearly, gold investors can’t have it both ways.

More capital

As central bankers flood the world’s financial system with ever-increasing amounts of cash and increasingly easier credit, observers insist that there is just no offset increase in the amounts of goods and services available for purchase.

The result: more capital chasing the same amount of production.

Also, check out the supply and demand ratio. Gold would surely lose some of its luster. Gold miners have poured more than $40 billion into new projects since the bull market began in 2001, according to Montreal-based bullion dealer Kitco.

Like big oil explorations started earlier this decade amid rising energy prices, new gold projects are now bearing fruit, maintain analysts.

Moreover, in the first six months of 2009, mining output climbed 7 per cent after several years of declines. What gave it an added boost: China, Russia, and Indonesia pushed up production. The timing was just right.

Kitco predicts that new mining will add 450 tons annually, or 5 per cent, to the gold supply through 2014, enough to move prices lower.

The dollar, too, is playing second fiddle. But for how long?

“There will always be a focus on the dollar,” Wolfgang Wrzesniok-Rossbach, head of marketing and sales at Hanau, Germany-based Heraeus Metallhandels GmbH, told Reuters. “There’s still a lot of interest for physical gold. There’s now a tendency to buy on dips.”

With the dollar likely to stay down, gold will remain attractive as an alternative currency.

“Until the dollar puts in a convincing rebound, then the onus is to the upside in gold,” said Jim Steel, senior vice president and metals analyst with HSBC.

Huge swings

Old-timers also point to the fact that gold has moved in huge swings since the economy started to crack in 2007. The price closed above $1,000 for the first time on March 14, 2008, just before Bear Stearns was sold to J P Morgan, a Fortune 500 firm, then fell to near $700 last November.

On Monday, November 16, gold price traded up to a new record high of $1,133.20 per ounce, as investors sought exposure to the price of gold on the back of an acceleration of the U S dollar decline.

After a brief rise at the start of November, the U S dollar is near its 52-week low against a basket of its trading partner currencies.

Analysts maintain that the rush into the gold sector reveals waning confidence in both government and governmental agencies such as the Federal Reserve, and the broader monetary system.

Incidentally, price targets for gold are being pushed ever higher - Swiss-based money manager Felix Zulauf recently called for a $2,000 to $3,000 per ounce gold price in five years.

Overbought

Some analysts insist: gold is clearly overbought. For almost ten years - from 1995 to 2005 - gold has been trading between $250 and $420 per troy ounce. The rally began only in 2005.

Moreover, the subsequent oil rally ended as the financial crisis reached its apogee in September 2008. The gold bubble lived through that period, falling to is local minimum of $680 in October, 08.

Even Kitco analyst Jon Nadler has repeatedly said gold is setting record prices amid “some of the poorest fundamentals I’ve seen in the market for a long time.”

Nadler has been top-calling gold for years. He prefers to view gold as a momentum-driven commodity like any other, as opposed to a global currency substitute that is not consumed like a commodity.

He suspects the recent rise has been driven by large hedge funds and institutional investors making momentum-driven trades. As for fears of financial collapse, “The sky did actually fall last year — and it was good for $1,035 gold,” says Nadler. “But that’s about where the worst ends.”

So the short-term outlook is not promising.

Obstacle course

The speculators who are buying the metal can be divided into two camps, according to Adam Klopfenstein, senior market strategist with futures broker Lind-Waldock. The first are those who think the economy is recovering, so they are seeking riskier assets such as gold. The second are those who are buying gold for its more traditional role as a haven investment, because they believe the rally in stocks will collapse.

Perhaps the greatest obstacle that could short circuit the rally in gold in the short term to intermediate picture would be a US dollar (USD) rally, insist some experts.

While the USD is overdue for a short term rally, other analysts maintain the financial markets could soon offer something else for investors to get in. And that investors would soon have better ways to multiply their funds than sitting on piles of gold.

Mark Davis, writing for BNW News Wire, makes the case for limited gold supply downstream too. An even more pronounced downtrend can be seen in North America. This is where output has dropped over the last decade from 17.06 million ounces in 1998 to 10.59 million ounces in 2008.

Given all these circumstances, there is only one way ahead - down.