Public Fine Gold International Sdn Bhd

Are banks creating gold price bubble?

Published on February 05, 2010 at 15:45

By David Lew
Two months after gold posted the historic high price of $1,227 per ounce, bullion investors have been caught in pains of losing money for every ounce of the yellow metal. On Thursday, gold plunged to its biggest one-day loss in 16 months. The yellow metal fell 4.4% in volatile trade, plunging below $1,060 an ounce.

Is all the bubble talk on gold turning true? Is gold price headed down to $1,000 or below that level in February? That is the question bullion investors and gold analysts are asking these days.

The biggest irony and risk in investing in gold these days is the disastrous predictions that bullion analysts with investment banks have been making all these months. While some analysts have predicted that gold price would skyrocket to an astronomical high of $3,000 to $ 5,000 per ounce in few years, several banks have been consistently predicting a great bull run for gold all these days.

I have been wondering whether the hype on gold price is created by bullion analysts with global banks.

Read now some interesting comments that several investment banks have made on gold recently:

According to Ernst and Young, which employs 144,000 people around the world, gold price will continue to rise in the long-term, reaching as much as $2,500 per ounce within the next two years.

"The underlying factors driving up gold prices remain in play and will continue to do so for some time, meaning that the precious metal will remain an attractive proposition. Gold prices will remain high. The world is not out of trouble and inflationary pressures cannot be ignored," the investment bank said.

Recently, leading British bank Standard Chartered predicted in its latest Commodities Quarterly report that gold prices will continue to advance, with a particularly strong showing in 2010.

"The increased availability of scrap gold as prices surge to new highs will see gold average $1,300/oz in Q4 2010 - once the dollar resumes its weakening trend," said Standard Chartered Bank.

It said that anyone with gold investment in their folds is well-positioned for a great future.

Similarly, Commerzbank said recently: "A further gold price increase has to be expected, especially as short-term-oriented market participants are likely to be jumping on the bandwagon."

Likewise, Africa's Standard Bank said that households in China have become the world's No.1 buyers in 2009. "There is still very good physical demand for Gold ahead of [early Feb's] Chinese New Year."

While several banks have been predicting a boom time for gold, there is one global bank that has been consistently sharp on gold price-HSBC.

Some months back, HSBC announced its gold price forecasts for 2009, 2010 and 2011. The world's largest financial services group predicted that the yellow metal would average $990 per ounce in 2009.

HSBC also revised its estimate for 2010 from $950 per ounce to $1,100 per ounce, while it now pegs gold at an average of $975 per ounce in 2011.

Globally, banks have been the aggressive traders in gold. Banks view gold as safe assets. Banks lend money to people, if they are ready to pledge their gold for loans. Central Banks are trying to build up gold reserves so that nations' foreign exchange reserves are stable and secure for the future.

But the only trouble is that when banks begin to predict gold prices, things go haywire in bullion market. Banks predict gold prices according to their whims and fancies. So, it would not be too much to say that banks are, in fact, trying to create the bubble phenomenon in gold, by forecasting gold prices without throwing light on basic fundamentals.

Can the bullion analysts and banks stop predicting gold price? Can the physical gold price go up or down according to the precious metal's inherent asset and holding value?

Source: http://www.commodityonline.com/news/Are-banks-creating-gold-price-bubble-25429-3-1.html