THE price of gold has shot up and has now hit €1,335 an ounce. The deeper the downturn, the more the price of gold shines. But is gold displaying all the characteristics of another asset price bubble?
Bubbling yellow metal
The yellow metal has catapulted from a rock-bottom low of around $250 an ounce in 1999 to about $1,335 now. That is an annualised return of around 10% - pretty impressive. The rise has been going on for more than 10 years now, but this month its price has fallen back a bit.
Why buy gold
Fears of a financial meltdown and a break-up of the euro currency have prompted some people to buy gold. Gold is seen as a safe haven during a financial crisis. Other reasons include the following:
Fears of a return of high inflation as central banks around the world print money;
The Chinese and the Russians are big buyers of gold, driving up its value;
Gold mining is more expensive and is also in decline;
There is a limited supply of gold.
Gold price is a bubble
Gold prices have risen five fold since January 2000. When everyone is getting into gold, maybe it is time to get out. Many investment advisers argue that gold is looking like a big fat bubble. It will pop, say the gold sceptics.
This year could mark the last of the heydays for gold, warns Pat McCormack of Barclays Bank Ireland: “The dollar isn’t about to collapse, hyperinflation is not lurking around the corner, the gold price has already risen a long way and there is no yield - nor any prospect of one. It wouldn’t be a surprise to see gold at some stage fall by 20 to 30% if investors were to regain confidence in other assets.” You should never have more than 5% of your investment portfolio in gold.
Dublin company Goldcore begs to differ
The gold price remains less than half of the inflation-adjusted price reached in 1980 when it was valued at more than $2,300 per ounce in inflation-adjusted terms, according to Mark O’Byrne of Dublin-based gold trader Goldcore
The perception that gold prices are high is also due to the “cash-for-gold” phenomenon. This has seen thousands of companies all over the world entice the public to sell their gold jewellery in droves. When taxi drivers and middle class housewives embrace gold as they recently did property, it will be time to reduce allocations to gold, he says.
Desperate housewives warned about selling gold
People tempted to sell their gold jewellery should be careful they are not fooled into parting with it for a fraction of its worth. Gold-buying firms have mushroomed everywhere but some, particularly the ones buying gold in the post, offer very poor value.
Also, the gardai are investigating whether some businesses buying gold for cash are being run by organised crime gangs.