IS GOLD a “bubble”?
Well, there have been many who recently concluded that the 'bull run' of gold is
drawing to an end. They obviously drew their conclusion from the correction mode
that the price of gold has moved in to, after setting a record high at $1226 per
ounce. There have also been some who were of the opinion that gold was in a bubble
which has now popped and hence the price of gold should decline further.
However, we do not think so...
Yes, we beg to differ, with a fundamental question: How can an asset that is so
under owned be a bubble?
Most investment portfolios still don't own any gold. And those who do own gold don’t
seem to have it in adequate proportions.
Chart 1: Gold remains an under owned asset
Source: Barrick Gold Corporation
The scarcity value of gold is explained in the table above, showing gold ETFs and
gold equities amounting to $0.4 trillion, which is miniscule in comparison to the total
managed assets or to the global financial assets.
When compared, gold ETFs and equities amount to 0.7% of total managed assets
and 0.3% of total global financial assets.
The year gone by did witness some record flows, but gold still constitutes a minority
investment. The value of all the gold that has ever been mined approximately
amounts to $6 trillion which is also very small when compared to $123 trillion of
We do not think that gold is any close to being a bubble. Rather, the small size of
investment in gold demonstrates the potential for a shift of money into gold. If gold
were to become a more mainstream asset, if a small percent of the cash held in
money market funds and savings were re-directed towards gold, then the impact on
the price of gold would be profound.
A correction of 10-15% isn’t popping of a bubble. Long term bull runs often do have
corrective and consolidation phases which are healthy signs of the bull run being
intact. Also, this correction in gold price has not come as a surprise. We had written
(in our monthly outlook) about these speculative forces that are capable of bringing
in a correction in the price of gold. We think this is a healthy sign and beneficial for
investors to add more gold to their kitty.
Policymakers still reserve monopoly over their printing presses and keep running
them at full capacity to dole out money at any and all problems faced by them. Ever
increasing money supply will always make gold the preferred choice for citizens to
protect their purchasing power.
We recommend a 15-20% allocation of one’s portfolio in gold. If you under own gold,
then treat these declines as an opportunity to increase your holdings of gold. Or a
more sensible way is to keep allocating to gold over the next 36 months and reach
the optimum level.
(Source: “The Golden Truth”, from Quantum Gold Fund, dated Jan 6, 2010)