BUBBLE SIGNALS IN GOLD INVESTMENTS

The price of Gold has been rising uniformly in the past decade and has returned an average of about 17% annually during that time. However, hedge funds and HNI’s (high net-worth investors) have been cutting down their investments in gold over the past few months. It is estimated that roughly $4.5 billion had been disinvested by hedge funds and HNI’s due to which gold prices have been very volatile of-late. Let us check out some of the signals, what hedge fund managers & HNI’s have been wary of.

Increased strength of US Dollar

Federal Reserve’s discontinuation of Quantitative Easing (Infusion of excess liquidity in to the economy) and improved US macro-economic indicators indicates a swift recovery of US economy. US economy’s strength coupled with debt crisis in European Union, slowing down of economies in developing countries and recession fears in other developed nations has been strengthening US dollar. Many investors who used gold as an effective hedging instrument against weak dollar when US economy was struggling, have started showing confidence in US Dollar and US economy  by switching over to dollar investments from gold.

Low Inflation and high interest rates

Inflation across developing nations is showing signs of moderation to more acceptable levels due to slowing down of economic growth in majority of developing and developed economies. Debt crisis and stopping of quantitative easing has resulted in high interest rate environments in many countries. Investors and fund managers, who used gold as a hedge against inflation, have started switching to debt instruments and US Dollar.

High level of speculation in Yellow metal and wider interest in street

The speculative investment patterns, large investor base, trading volumes and volatility in gold prices can suggest the formation of gold price bubbles. Unprecedented and wider interest in any instrument is a big sign that the price has peaked and may be set for a major slide. There are lessons from the recent past regarding the fallout of high speculative investments viz., bursting of the technology bubble a decade ago and stock market capitulation in 2007 & early 2008.

Abstract

There are strong signs that the gold has peaked and might even crash in the near future. It is impractical to predict the time frame for the burst of the Gold bubble. Hence, if you are planning a new investment in gold, think twice about buying it now; if you do own gold, then review your investment strategies at the earliest.BUBBLE SIGNALS IN GOLD INVESTMENTS

NEED OF THE HOUR FOR INDIAN ECONOMY - INFLATION ADJUSTED BONDS/ SECURITIES

Indian house-holds fascination for GOLD for its ornamental value is comprehensible as it is a part of Indian culture and tradition. However, of late, Indians have started buying GOLD as a hedge against inflation, thus enormously increasing the physical gold imports causing a huge trade deficit which is resulting in ever increasing India’s fiscal deficit. Gold imports are next only to Crude oil imports and if this import component is not reduced, it will have a wide ranging direct and indirect impact on both macro and micro levels of economy.

Gold demand and imports can be reduced partly, if Government issues Inflation indexed bonds/ securities akin to the instruments in place in the developed economies viz., US, UK, France, Italy, Canada etc,. It can be a good instrument to hedge against inflation for investors.