Gold is the ultimate asset bubble'

George Soros is one of the most successful modern day speculators. He has amassed most of his wealth by identifying bubbles and participating in them until they become ripe for bursting. Thus, it can be concluded quite safely that he indeed knows a thing or two more about bubbles than the average Joe out there. Hence, we were all ears when Soros recently proclaimed that gold is the ultimate asset bubble. Gold has certainly appreciated in the region of 40% in 2009. And interest rates were also quite low in 2009. These two conditions have to be met for an asset class to be declared a bubble. And indeed they were met in the case of gold.

However, it should be noted that on a long term basis, gold has still not reached the inflation adjusted high of 1980. By some estimates, it will have to double from here to reach those levels. Moreover, the inflation adjusted high mostly takes into account a trend line inflation. Not the type that is staring us in the face in view of the enormous money printing that is being done. Now, there is no doubt Soros has said that Gold is the ultimate bubble. But even he has not mentioned whether the bubble is about to burst or will continue to make new highs. Thus, there may not be a big gold price correction at all.

We are of the view that there will be pullbacks along the way. Some big and some small. But as long as central banks, most notably the US Fed continue to print money, Gold will be an important asset class to have in one's portfolio. Like we always mention, please do not go overboard with it.