How low will gold prices spiral to when the bubble bursts?

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Gold is a very difficult asset to call. People bought gold when the world economy was riding on the commodity boom and they also bought gold as the financial system crashed and burnt in 2008.

With gold hovering at USD 1100 an ounce, is it time for the gold bubble to burst? And if does what's the bottom for gold? Our take is it will settle at USD 700 an ounce, the five year average for the gold metal.

Analysts agree that gold will eventually fall but how soon that will happen is anyone's guess. Sanjiv Arole a Mumbai-based bullion analyst says, "Eventually gold prices should come down. But putting a time line is difficult. In 2010 gold prices will rule around USD 1200. Gold touching USD 700 from here onwards will require a lot of change in the world economy".

 

Illustration: Abhijeet Kini

The world economy will have to improve. Drastically. The US growth rate needs to double at 6 percent, the world economy needs to grow at 2.5 percent and developed world stock markets need to grow by 50 percent in the next year.

Once that happens prices may slowly start to fall to 2007 levels (USD 695). But there are some who believe that oil prices can bring in a lot of inflation from now. And gold is the best hedge the world has.
Some even see the price go to around USD 2500 in the next two years. "Gold prices will remain high. The world is not out of trouble and inflationary pressures cannot be ignored. So there is enough reason to see that gold prices will move up from here. Blame it on the US, it has too much trouble to handle and gold is an alternative currency," says Viren Mehta, head of financial services at Ernst and Young.
Others say such a scenario is unlikely because people in India and China (the biggest consuming markets) will simply stop buying gold due to high prices. 

Devendra Nevgi, partner, Delta Global says, "Gold prices are likely to be volatile driven more by the US Dollar and the present world economic outlook. If we roughly calculate the current value of above the ground gold stocks of 160,000 tonnes, it comes to around USD 6.5 trillion, whereas the US Dollars in circulation in the world is around USD 60 trillion.  So is gold undervalued or the US dollar?"

The total value of gold in the world is USD 6.5 trillion that is 10% of the global GDP. Global equity market capitalisation works out to USD 46 trillion. Historically asset bubbles are deflated by policy makes through excessive supply of money or the asset itself. Gold supply is limited. This is one bubble that will be difficult to prick.

By: Pravin Palande/ Forbes India

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