Investors, now stung by sudden losses, are starting to follow suit and abandon their quest for gold, he said.
“My prediction is that gold will go out in a whimper; it will not crash like the equity or real estate bubbles that preceded it,” he said.
Investors fuel bubble
The ancient practices of purchasing gold for adornment and wealth still thrive in Asia and the Middle East, but the surge in prices in the past decade has been fueled mostly by investors and central banks in emerging economies, analysts say.
Hedge funds, pensions and other major investors often diversify by putting small shares of their pooled funds into gold and other commodities, but the investment craze heated up nearly a decade ago when gold became widely available to small investors through exchange-traded funds and gold stocks, which are instruments backed by gold that investors can use to cash in on rising prices without taking physical possession of the metal.
Investment in gold funds soared from close to zero in 2003 to $140 billion last year. But the market for gold funds is shrinking fast this year, to more than $100 billion as of April 13, according to calculations by Bloomberg News.
Now that price charts no longer show a steep incline, gold is losing value to investors, who look to resell the commodity rather than hoard or wear the metal, said Mike Williams, a small investor and blogger.
“The tide for gold has changed,” he said. “Investors are now in the ‘return-to-normal’ phase of bubble psychology.”
The biggest problem is that gold doesn’t pay interest or dividends, so the only upside for the investor is the rise in price, he said. “The pressure for [yield] is simply too great to be holding significant amounts of gold.”
Avi Gilburt, manager at Gilburt Financial Services LLC, said investors have been exiting the market en masse since last month but that gold remains a favorite topic in investment circles. In particular, “the few bulls left in the market” continue to push reasons — such as the advent of the “Indian wedding season” — for maintaining their gold-buying habits.
“What we are seeing is that everyone and their mother is now providing ‘analysis’ as to what is happening in the metals markets. I have never seen so many articles coming out,” he said, leaving readers with “their heads spinning with so much information.”