Is the gold “bubble” going to burst? Gold prices have risen from USD 255 an ounce in 2001 to a new high of over USD 1,500 an ounce in April 2011. Gold hit a record high of USD on April 25th 2011. The annual return on gold is over 18 percent and is the best performing asset in the past ten years. The continuous demand for the precious metal due to the increased geopolitical uncertainty in the past few years has driven up the price of gold to such high levels.
Gold trading has now probably been overbought, and traders who are long gold have begun closing their positions. After hitting an all time high on Monday of this week, gold prices have declined almost 25 pips to hit a low of USD 1,492.89 in the US trading session on April 26.
So the question arises whether investors have missed the train and if the gold bubble will soon burst?
Gold acts as a safe haven investment. Its demand increases when investors want to hedge against uncertainty, such as inflation, currency fluctuations, times of war, and so on. Recently we have seen the political unrest in Libya and the Middle East which have caused gold prices to surge.
There is no doubt that in past history investors have turned to the precious commodity in uncertain times, so as long as there will be uncertainty in the global financial economy in any future date, gold will continue to rise and offer attractive yields as an investment. The yellow metal is a good portfolio diversifier and an excellent hedge against inflation.
On the other hand, speculating on the future direction of the value of gold is not as easy. As commented by Bradley George, Manager of the Global Gold Fund, he estimates that USD 1,000 an ounce will become the long-term floor for the price of gold. Other investors believe that the price of the commodity is still below the inflation-adjusted high of the early 1980s and hence investment demand will further push up the price.
On the other camp, some sceptics do not believe that any investment can continue an endless rally and pointed out that gold prices were fairly stable in the 1980s and 1990s.