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Sunday, July 15, 2012

Craze for Gold in India and China and possible Gold Crash!


The Craze for Gold in India and China has reached its Pinnacle. Billionaire trader and investor George Soros has warned investors several times that Gold is the Ultimate Bubble, but Gold continues to move higher. I personally witnessed yet one more proof of craziness & sentiment indicator of this ultimate Bubble. When Gold was lying flat at Rs 8000 per 10 Grams in 2007 timeframe, no one was interested in this precious metal. People used to think about Gold only during marriages when buying Gold becomes a cultural and social necessity. Few days back I was shocked to see a Television soap-opera when a TV vamp uses 2 gram Gold coin as a Bindi on her forehead. Utterly obscene and crazy! Such is the level of craziness that Gold has reached in our country.



I immediately opened multi-year Gold charts and realized that from her choice of ornament, this particular TV vamp is probably signaling end of multi-year Gold Bull-run. Great Bull-runs and Tulip-manias only end when Sentiment is hugely located in one direction and using a Gold coin as a Bindi signals a sentiment overdose in favor of Gold. Probably for this one time, Soros is correct.



The multi-year chart for Gold above highlights that Gold starting moving in 2007, when equities were at all time high and Gold was lying flat on its face at Rs 8000 per 10 grams. From 2008 crash in equities and money printing exercise by Central Banks around the world, Gold started its ultimate Bull-run and reached a peak of Rs 30,500 per 10 grams in mid-2012. Huge volumes that were witnessed in late 2011 in Gold futures have scaled down and probably smart investors and hedge funds have started scaling down their longs in Gold. Gold is moving in a Flag pattern from better part of last 9-10 months which being a bearish pattern is prone to break southwards. Volumes in this flag pattern have definitely reduced which signals that longs have scaled down their activity. So Gold will most probably break, only question remain is what is the downside target? First target can be the support received from the Upper Trend-line at Rs 25,000-26,000 and second can be the 38% Fibonacci decline at 22,000 or so.  



Silver is considered as a sister commodity of Gold and their prices have always moved in tandem throughout history of mankind, except during brief periods of craziness which correct duly and sharply. Sister Silver followed Gold and scaled into huge Bull-run along with Gold to go from Rs 15,000 per kg to Rs 73,500 in month of April, 2011. In the immediate following month, Silver crashed from 73,500 to a steep correction of Rs 50,000 per kg and this ruined many of Mr Johnny-come-late traders who lost crores on long bets on Silver. This crash happened over just one week and precious metal Silver lost 30% of its value in one week. Traders who joined the party late on leveraged long bets lost lot of money during this one week.



So while Silver has corrected, Gold hasn’t and this ultimate bubble’s correction is long overdue. End of this craze will be good for Indian economy as money stored in Gold is out of circulation and doesn’t produces anything as Warren Buffet often says. Huge Gold imports are making our currency weak and our craze for Gold is partly responsible for crash in Indian Rupee. So stop blaming Mr. MMS entirely. And hoping the soap-opera TV Vamp would find some other craze to restore her Bindi once Gold prices revisits Rs 20K per 10 grams. 

1 comment:

  1. Well said. I am one of those strong opponents of Gold. Only brainless buys gold. It is a dead investment. If you carefully observer, every one buys it in view of investment, those who encash physical gold are countable on fingers.

    At some point in future George Soros would be true. When stock market rallies like in 2000 & 2007, gold can witness significant correction. But there are plenty of people depending on gold, banks, term lending, gold showrooms, many to name, I don't they let the price down.

    My only concern is we should stop gold imports. Govt should impose 200% tax on gold imports. Countries like Canada are gaining due to these imports.

    The raise in gold causing many economical and social issues. Economical issues you have already touched. On the social front, few incidents like, an AP gold businessman was killed in Bangalore by the car driver after knowing that victim carrying a bag of gold. Numerous cases of thieves attacking couple wearing ornaments, perhaps we can read one such news everyday.

    Other side of coin. Those who predicts these would be ultimate winners, neither you nor myself. I still remember in 2007, my mother told to buy gold than investing in paddy fields. But, my insider strongly opposed. Strangely, I still feel that I am correct, may be some arrogance or confidence.

    The only reason my mother said, "I never saw gold price going down from my childhood". She might be right during 2007, and till now. Time only will answer.

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