Every economic expert is puzzled by the recent crazy run the gold prices exhibited since the month of September 2009, from $950 to $1,100 an ounce. It has been a phenomenal rise! Three important questions arise:

1) Can the gold price rise sustain?
2) Is the rise purely speculative leading to a gold bubble?
3) If it is a Gold Bubble when will it burst?

1) Can the gold price rise sustain?

The global economic recession marked down the projected value of US currency and foreign exchange markets saw liquidation of US Dollars. As the US Dollar is world reserve currency most of the countries build their US$ reserve. But due to the declining US$ value most of the government treasuries have started offloading US$ reserve and build up their gold reserve. Two weeks back India bought 200 tons of gold from IMF. This fact also contributed to the gold price rise.

The sale proceeds of US$ are being invested in gold. At present it looks the investment in gold commodity is mostly speculative by short term speculators. The medium term investors are getting ready to book profit at higher levels. How long these short term speculators can hold on to their investment in gold is the key factor. So it looks a correction in gold prices is round the corner at any time now. The correction would be substantial which could be a minimum of 20 to 30% of the recent rise.

2) Is the rise speculative creating a Gold Bubble?

The extraordinary rise in gold prices looks to be mainly speculative created by the short term gold commodity market players. Also people have started taking bank loan to invest in gold. The very low-interest (as low as 0.25%) loan given by the US Govt to tide over the global recession is also being diverted by some shrewd Wall Street Bank wizards in purchasing gold is a matter of grave concern. Will this not lead to another scam?

Certainly the mad rush for gold has created a Gold Bubble which is about to burst or at least make a considerable correction which too could lead to chaotic market conditions. Any commodity has an intrinsic value and gold seems to have overtaken its intrinsic value by far too much.

3) When will the Gold Bubble burst?

As per natural gravitation rule any thing that goes up has to come down. Particularly the commodity prices which enjoy unbelievable rise tend to crash because of its own weight at higher levels. No one can predict exactly when the gold bubble will burst but the crash in gold prices look highly possible in the near future.

Considering the above it’s prudent to book profit in gold at higher levels and invest in shares and safe mutual funds when the stock markets make substantial correction. The stock markets exhibit uptrend in all 3 time frames, viz. long, medium and short terms. The trend will be up for at least one to two years. Nevertheless, periodically book profit in shares also. This is the investment wisdom. Be WISE and Be PROSPEROUS!

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