Is the price of gold justified? Has it broken away from market fundamentals and become a bubble?
Yes, the price of gold is justified and NO it is not a bubble. I would agree with the bubble theory, if it would be a speculative-led price movement which is not at all the case in gold. The price is simply a mirror of existing uncertainties in the world's economic and political outlook. The price rally has been driven by a very broad based investment community. The sovereign debt issues, the worldwide economic slowdown, the psychological effect of the downgrading of US debt have amplified the uncertainties which have led to this very strong desire of asset diversification. The main investors are similarly positioned in the private investment segment, as well as the pension fund, sovereign wealth fund and central bank communities. Existing speculative positions in the market have been greatly reduced in the last two weeks and the gold price still holds very well at or around $1600. There was more news about further central bank purchases last week, which underlines the soundness of the fundamentals.
Does history provide any clues as to whether the gold price is overvalued, and where it might be headed?
We had in the past, most notably at the end of the 1970s and in January 1980 a major price surge, which led the gold price to a new all-time high of $852 (Dh3,127) at the time. The last gold fix of 1979 was around $480 and the price rocketed in early 1980 until January 21, 1980, when it went from $480 to $852 which in percentage terms was a 77.5 per cent move inside a three-week period. The main drivers at the time were the beginning of the Soviet Union's hostilities in Afghanistan and the US economy where the US dollar prime rate was around 20 per cent. Inflation fears gripped the world. None of these play any sort of role in today's markets and thus I do not think that gold is overvalued. There is simply not enough supply out there to satisfy the demand.
If someone were considering buying gold today, would you say that gold remains a good hedge against paper, especially if the investor's horizon was, let's say, 2-5 years?
I would definitely consider gold as an asset class in the current circumstances but I would urge caution against a too long-time horizon. I strongly believe that gold will reflect failings in our society and in the economic environment. The US elections will be in November 2012 and I hope that the issues confronting many European countries now will be either resolved or at least be a lot closer to being resolved by then. I would therefore look to re-evaluate investments within a year. It might be possible that the investment community's confidence in paper currencies will return, which would, in my view, lead to a fall in gold prices.
Would it be fair to say that new investors should expect increased volatility as the price gets higher?
Increased volatility is not just the case in a rising market. You can and will also find increased levels of volatility in ranging and in falling markets. The rise of the gold price to the current levels and the rise in volatility experienced over the course of the last 10 days tells us to view gold also as an asset class and not only as a safe haven. The increased ranges are a lot for precious metals but relatively common if you look as stocks where 10 per cent moves up and down for certain stocks are considered to be absolutely normal.
The writer is Head of Precious Metals, Emirates NBD. Opinions expressed here are his own and do not reflect those of his organisation or those of Gulf News.
