The recent volatility in stock markets has sent investors scurrying to the safe havens. The obvious choice has been gold. And they appear to have been rewarded as the yellow metal has been smiling since the dawn of crisis. Gold prices have touched nearly US$ 1,918 an ounce last week, recording one of its best performances historically.
But all good things appeared to have come to an end when the gold prices corrected by almost US$ 120 an ounce within a week. This was a correction of almost 6% from the peak. While it questioned the safe haven status of gold, experts commented that gold prices are in a bubble territory. The recent increase in the demand for gold may lead many to believe that gold is indeed in a bubble state. As per the World Gold Council, the demand for gold has more than doubled since 2009. This demand is purely for gold coins and bars. At the same time, the demand for jewellery has actually declined by 18% since 2004. This shows that people prefer to hold on to the more liquid form of gold that they can sell on a later date. On a pure face value it may indicate that gold is in a bubble state. And whenever the bubble bursts, it would lead to a sharp fall in gold prices.
But we beg to differ from this opinion. Gold is a natural hedge against inflation. And inflation has been raging upwards. In addition to this, the tumultuous times in the world economy has led asset prices across the board to correct sharply. At times like these, it is natural for investors to turn towards gold to hedge their risks. While it is true that some part of the increase in gold price maybe based on speculation but largely it is a result of higher demand. Not to mention that even central banks and pension funds are looking to increase their gold exposures. Therefore, gold will remain a safe haven at least for as long as it takes for the world to come out of this inflationary crisis. But as Ajit Dayal, founder of Equitymaster, recently commented at a webinar, buy gold as an insurance not as an asset with a target price.
Do you think gold is still a safe haven or is it a bubble waiting to burst?