Gold Investments Market Update – Gold “Bubble” Burst?

Gold

Gold finished trading in New York yesterday at $800.50, up $14.50 and silver was up 33 cents to $13.19. Both gold and silver have again fallen in European trading. Gold is trading at $786.00/786.40 per ounce (1030 GMT).

Gold rebounded from very oversold levels yesterday but market weakness has resumed overnight in Asia and early in London as the dollar has continued to rally (reaching a 6 month high at 1.4631 to the euro). Speculative interest in the precious metals has fallen dramatically as seen in the recent CFTC data and this usually presages a rally in the precious metals.

As ever the important short term influences on gold will be whether the dollar can keep strengthening and whether oil prices continue to fall. However, it is likely that the important fundamental long term drivers of increasing macroeconomic and systemic risk (as seen in the fresh fears regarding the financial system yesterday on increasing money market liquidity tightening and sharp falls in Fannie and Freddie and former IMF chief economist Kenneth Rogoff said the worst of the global financial crisis is yet to come and has warned that a major US bank will fail within 3 months) and geopolitical risk (increasingly bellicose statements from the Russian President Medvedev and Prime Minister Vladmir Putin).

Also inflation continues to surge internationally as seen in Germany this morning. German producer-price inflation accelerated to 8.9 percent, the fastest pace since October 1981, reinforcing speculation the European Central Bank will keep interest rates at a seven-year high even as the economy cools.

While the sheen has been taken off gold’s inflation hedging and safe haven attributes by the recent sharp sell off, those who write gold off do so at their peril.

Gold (bullion) remains the ultimate safe haven asset and a finite currency that is one of the few assets that has no counterparty risk and these essential attributes will lead to it’s safe haven status being reaffirmed in the coming weeks and months.

Gold “Bubble” Burst?

Much of the financial media is once again heralding the bursting of the “gold bubble” or “precious metals bubble” and many seem to think that this is the end of the bull markets in gold and silver.

It is interesting that it is the same commentators who never predicted a bull market in gold, barely acknowledged a bull market was in existence and yet they are again gleefully banging the “precious metals bubble is burst” drum.

The extent of the bearishness amongst many commentators and institutions is a classic contrarian indicator and is exactly what happens in bull markets which climb a ‘wall of worry’. Bull markets do not normally end with the majority calling the top correctly rather they end when the majority (including the media) have been conditioned to expect ever higher prices and have given up attempting to call a top.

Only when the prevailing mass psychology is all bullish do bull markets end. As by then there are few buyers left to prop up prices and there is often a final exhaustion rally prior to the end of a bull market.

We are a long way from that now with much of the media continuing to completely ignore gold most of the time and only some specialist financial media covering it on a regular basis.

There is blood in the street in the futures market and worry and fear is at levels not seen so far in this bull market and this should see prices bottoming in the coming days.

Also it is worth recalling the huge sell off in 1974. Gold had surged from its fixed Gold Standard price of $35 per ounce to over $200 in 1974 prior to a brutal sell off that saw prices fall in half to nearly $100. At the time, many called a market top and they were proved very wrong when prices subsequently rose 8 fold in the next 6 years.

The fact that an asset class can be considered in a bubble when it has only recently surpassed its all time record nominal high of 28 years ago is astonishing and will be seen as so in the coming years when gold likely reaches its inflation adjusted high of some $2,400 per ounce.

Don’t believe the gold and silver “bubble” burst hype!

Today’s Data and Influences

Housing starts and building permit figures released in the US today are expected to come in lower than last month and the dollar’s early gains may be tested by data that comes in weaker than expected.

Gold and Silver

Gold is trading at $786.80/786.40 per ounce (1030 GMT).
Silver is trading at $12.78/12.83 per ounce (1030 GMT).

PGMs

Platinum is trading at $1315/1325 per ounce (1030GMT).
Palladium is trading at $272/277 per ounce (1030 GMT).

Mark O'Byrne

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