Commodity Online
MUMBAI: YES, gold futures closed in New York on Friday at $1002.20 an ounce. So, talk about the gold bubble bursting can’t be far away. The world has started speculating heavily on the gold bubble, which, according to some analysts, will burst very soon.

But reality is far from that. Do you know the present gold prices are far from what it was in 1980. And definitely gold will have to reach its inflation adjusted 1980 high of $2,400/oz before it can come down. In fact, it is currently less than half the value that it was in 1980.

There cannot be a bubble in an asset class unless it rises to all time inflation adjusted highs and often times asset bubbles result in prices of multiples of their previous record highs.

In January 1980, gold price peaked at $875. That is $2,430 in today’s dollars. But the pools of speculative capital are much larger now than in 1980. A true gold bubble could well leave this benchmark far behind.

And if the dollar collapses as some fear and the US suffers virulent stagflation or hyperinflation then gold will rise way above the 1980 inflation adjusted high.

Gold rose by more than 2,400% (from $35 to $850) in 1970s. Should a similar bubble form now gold would have to rise from a low of $250 in 2000 to over $6,000/oz.

The Nasdaq rose some 1600% from some 300 in 1990 to over 5000 in 2000. Should a similar bubble form now, gold would have to rise from a low of $250 in 2000 to over $4,000/oz.

Even the Dow Jones went from 1900 in late 1987 (after crash) to over 14,000. Should a similar bubble form now, gold would have to rise from a low of $250 in 2000 to over $1,750/oz.

However, the problem is that gold investment is replete with potholes and potential pitfalls.

The worry is the enormous growth in gold exchange-traded funds. There were doubts about how these exchange-traded funds are laying their hands on so much physical bullion when it is in short supply around the world. The fear is that some of the gold is not in the form of bullion, but gold derivatives.

But take these facts into consideration. Base metals producer Kagara (KZL) is to spin off Mungana Goldmines as a new ASX listing based on 1.6 million ounces of gold and 14 million ounces of silver, along with copper.

Fat Prophets has sent out a bullish note on Integra Mining (IGR), which has been part of the bloodbath at the junior end. Integra has just raised $13.65 million, which should allow feasibility work on its Aldiss-Randalls gold project to be completed by mid-year. Fat Prophets sees IGR, which closed at 22.5c, as a cheap play on the gold price.

Clearly there are a growing numbers of investors taking an interest in Oceanagold Corp (OGC).

Newcrest Mining (NCM) reported a $150 million interim profit but no dividends. Now Lihir Gold (LGL) has reported a full-year bottom line of $US109.3 million, but the company said there would no dividend this year because of the company’s financing requirements.

Lihir has form on the subject of dividends. In 2004, the Papua New Guinea miner paid its maiden 2c dividend, then dividends were suspended. The money was needed for expansion.

So, all these companies are seriously going for more investments in their mining. So, that they can cash in on the new love for gold.

So, gold sector is witnessing a huge investment. This is a good hint for the doubting Thomases that gold is here to stay. It is no time for gold to burst.

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