After I used the historical data for home prices for my previous article in January, in which I concluded that home prices will stabilize or recover this year, I tried to study gold prices.
(By the way, a month after that article was published, we saw positive news in the housing market this year).
Gold, unlike home prices, has seen extreme swings since the 70s, where the price per ounce moved from $40 in 1970 to $850 in 1980 and thereafter collapsed to under $300 in 2001.
Due to limited usage of gold, it is obvious that there are only two factors influencing gold prices: emotional and speculative.
As speculators have limited capability to keep prices high for a long time, I would just focus on emotional factor of masses.
As we witnessed during the housing cycle, people increase the demand of a product when emotions are running high (“let us buy it today or else we might never be able to afford it ever !”), but start thinking with a cool-headed mind when prices go above affordability.
When that level is reached, the demand falls and the prices decline.
Most of the market experts fail to recognize when this point has arrived, since they are unaware of the ‘affordability’ of the product from the point of masses.
India has been the largest importer of gold in the world for many years now. It imported 800 tonnes of gold in 2007 and 450 tonnes in 2008.
However, in the past two months of 2009, India’s gold imports have been almost negligible. Ignoring forex changes, it is obvious to me that the “affordability” level has been breached, and therefore the prices should now fall dramatically.
The dollar has been rising against most currencies, so the argument that gold prices will go up since they are inversely proportional to dollar does not work.
