Gold - The next bubble

Gold – The next bubble!

It took me long a while to pin down on the next investment bubble. We have seen the currency, the dot.com, the housing and now what’s next. If identified significantly early, every bubble provides twin opportunities to make money - long on up-cycle, and short the down cycle. It gets better, if the next bubble is a “Quasi” commodity!! – Yes I am referring to the one which many believe is the “Safest investment asset class in trouble times” – Gold.

In the current economic situation of global recession and depleting asset values across the much hyped structured and contra asset classes, Gold continues to remain an asset which is all set to be the next bubble. Symptoms that make a typical bubble. I may surely odd here. A global consensus on Gold being the safest and best yielding asset class, with a myth that its value never erodes. I will tell why it’s a myth later, but nevertheless when the whole world cries a common language it’s time to reassess some of the fundamentals. Inflation concerns, dollar weakening and the search for a new asset class are pointing towards an “emotional” asset – Gold.

For all those who believe its “precious” commodity – I ask so what. For all those who believe its safe investment – I ask with a price volatility as high as an equity asset class. How is it safe? For those who say it’s a hedge against inflation – I ask where is inflation. Say since last five decades or say since 1900’s, gold price has gone from less than 5$ to current 850$ over 100 years. Now, all of us know from our economic textbooks that long interest rates typically follow the inflation rates. Let us assume that long term interest rates over the last century stood in the range 5-6%, the $5 in cash should be worth more than 1500$ in a simple savings account. Tell me how it’s “hedging” inflation.

Are we not forgetting that it’s a commodity? I mean commodities move in cycles. Its been long since the Breton woods agreement, now that’s four decades back!, central banks across globe considered Gold a reserve currency. For average cost of producing a unit of gold still hovers at less than $300, why should a commodity price be as high at nearly 3x. Now does this not defy rules of a competitive market? With China replacing South Africa as the largest Gold exporter and Jewelry demand in India growing at low single digits why should the price of any underlying reflect such a huge mis-pricing?

What ahead is anybody’s guess? The asset has the potential to make it the next bubble only to fold at least by 3x. Now that would mean a price crossing well above 1000$ an ounce only to fold to less than 350$. What is left now is to time these long and short trades!! Well making money out of bubbles could be twice as exciting!!