Wednesday, September 1, 2010

Gold To Rally To US$1500: Tell Me Why This Isn’t A Bubble

On Bloomberg today:

Gold Rallying to $1,500 as Soros’s Bubble Inflates

Aug. 31 (Bloomberg) -- Investors are accumulating enough bullion to fill Switzerland’s vaults twice over as gold’s most- accurate forecasters say the longest rally in at least nine decades has further to go no matter what the economy holds.

Analysts raised their 2011 forecasts more than for any other precious metal the past two months, predicting a 10th annual advance, data compiled by Bloomberg show. The most widely held option on gold futures traded in New York is for $1,500 an ounce by December, or 18 percent more than the record $1,266.50 reached June 21. Holdings through bullion-backed exchange-traded products are already at more than 2,075 metric tons, within 0.1 percent of the all-time high.

“Either a swift economic recovery or further dismal economic performance should bring new buyers into the market,” said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt who was the most accurate forecaster in the first quarter and expects the metal to rise as high as $1,400 next year. “A stronger economy would create more jewelry demand. If the economy stays weak or gets worse, then investors will be looking for a safe haven.”

Investors added to their gold holdings through ETPs for three consecutive weeks, reflecting demand for assets typically favored in times of financial stress. Two-year Treasury yields fell to a record low of 0.4542 percent on Aug. 24 and the yen reached a 15-year high against the dollar the same day. Pacific Investment Management Co., Deutsche Bank AG and Citigroup Inc. have announced or are offering funds or traded instruments designed to guard against sudden market declines.

Global economy gets better – gold will rise; economy gets worse – gold will rise. More than anything, that hints to me that gold has outrun its market fundamentals. The only reason the gold price is rising is...because the gold price is rising. The fact that Soros’ fund is trimming their holdings suggests that they see a bubble end game looming, so buyer beware. This thing still has legs so we’re nowhere near the peak yet, but given the dramatic rise in the gold price, you would expect an equally dramatic fall.

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