Have bullion prices entered bubble territory yet?

Posted on September 13, 2011

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Analysts seem confident that gold has quite a run ahead.

A London Good Delivery bar, the standard for t...

A London Good Delivery bar, the standard for trade in the major international gold markets. Image via Wikipedia

It’s not just the retail seasonal demand that is expected to drive gold prices higher and higher, it’s the economy, stupid. As fears of a double-dip recession gain traction across the world, safe-haven buying of bullion will continue. In fact, retail jewellery demand has been contracting as the yellow metal becomes more expensive for the common man. On the other hand, speculative pressures are building up and analysts are not shying away from predictions that take the price of bullion all the way to USD4,000 per troy ounce in the months – rather than years – ahead.

A further rally in the price of gold will be determined by the US Federal Reserve’s tolerance for rising short-term inflation expectations, which are largely being driven by oil. In other words, the lower the Fed rate and the higher the price of oil, the more likelihood that gold prices will rally. The magical mark of USD2,000 may be achieved as early as this month, or in the third quarter of 2011. The price of bullion has increased by more than 32% already this year and, given minor corrections along the way, is looking good for more gains. As much as 12% of the overall price increase came on the heels of the US downgrade by rating agency Standard & Poor’s.

If the Fed decides that another round of quantitative easing is warranted to stimulate a flagging economy, the move will flood the money markets with dollars, pushing down the currency’s value and putting even more downward pressure on interest rates. As safe havens and other investment-grade opportunities become harder to find, and as economic worries continue to mount in the US, Europe as well as Asia, talk of a golden bubble may be premature. Analysts seem quite confident that bullion has quite a run ahead of it.

Bullion intelligence on Zawya.com:
Gold prices set to hit $2,500/oz
Gold price pierces $1,900 again
Yellow metal to retain luster this year
Should gold be the new reserve currency?

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