Monday, September 20, 2010

Five-fold rise in gold price 'is not a bubble', claims industry body

By Mark Leftly - UK Independent: World Gold Council says its research proves the 10-year bull market is no illusion

The gold price surge, which saw the precious metal reach record highs last week, will not turn into a bubble that will burst, says a new report.

The World Gold Council looked at previous bubbles, where prices rapidly surged and then just as quickly collapsed, such as the dotcom boom of the late 1990s and the US housing collapse of 2006-07.

Statisticians found that such bubbles followed similar patterns, mainly defined by two unusual spikes in prices. Although the gold price hit a record $1,280 per troy ounce earlier this week, the price increases have followed a relatively stable course.

The council researched the 10-year bull gold market in a perspective report after central bankers expressed concern that the price, which has increased five-fold in less than a decade, might be unsustainable.

George Milling-Stanley, the council's managing director of government affairs, said: "As we looked at various bubbles across the world we found that gold was not in a bubble. There is also a case for optimism [for continuing price growth] because of the strength of emerging market economies that are consuming more and more gold."

Central banks have also been net sellers of gold for the past 20 years, but increasingly they are buying more than they shed. These factors and the new uses being found for gold in technology as an electrical conductor mean that it should continue its growth.

Co-author Ashish Bhatia said: "Adjusted for inflation, the real level of the gold price has not even reached that seen in the 1980s."

The start of that decade was the last time a gold bubble existed. The price had then soared partly as a consequence of geo-political events, such as oil price hikes and the Soviet Union's invasion of Afghanistan, which led investors to put their money in assets typically considered safe havens.

The report concluded: "Unambiguously, the results showed that gold price developments do not resemble statistical characteristics of past bubbles. Furthermore, we demonstrated that there is ample scope for continued robust growth in gold market demand."

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