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.