Gold is the new Dubai property (unfortunately)

By Anil Bhoyrul Sunday, 11 September 2011

Strange things happen when you go abroad with an iPad. People you have never met, who don’t speak a word of your language, attempt to communicate with you. They are desperate for information that they believe you have access to.

In the past, it was usually the latest football scores. Or the weather. Or the traffic report. Or sometimes just to borrow your iPad to check their emails.

Last week, as I sat in a café on the border of Italy and Slovenia, the waiter asked me if he could borrow my iPad for two minutes. “Urgent, urgent,” he said in broken English. I gave it to him. A minute later, he muttered some abuse in Italian and gave it back, leaving on the display the website, which indicated gold had just dipped below $1,800 per ounce. No wonder he was upset.

There is surely now no doubt whatsoever that gold is the new Dubai property. Everybody — no matter how rich or poor you are, whether you have a clue about investments, the risks and the returns, everyone wants a slice of the action. Everybody is buying gold.

This global herd effect is what is now really driving the price to new record highs, last week crossing $1,930 per ounce — a gain of 35 percent this year, the 11th straight year of gains. But it is in the last two months that there has been a real strategic shift in the market. Gold prices are no longer being controlled by currencies, governments and central banks. Nobody is really paying attention anymore to the sovereign debt crisis or the price of government bonds. Nobody is that interested in what US Fed Reserve boss Ben Bernanke, or UK chancellor George Osborne has to say. What is the real value of gold? Who cares as long as it goes up.

In a strikingly similar pattern to the Dubai property boom in 2007, nobody understands it but everybody wants it. Gold today is cutting through all boundaries of race, religion, class and wealth. Dubai gold traders in August this year reported a staggering 100 percent increase in customers buying gold. The gold bar machines in the UAE are close to running on empty, and I am told that more people are trying to open a gold certificate account with Emirates NBD than are trying to get a new credit card.

And here lies the problem. At some point, the gold rally will come to a sudden end. And when it does, the professionals — currency traders, governments, central banks — will have long sold their gold. Holding the baby (or more precisely several gold bars that are suddenly worth 50 percent of what they were the day before), will be the ordinary man of the street.

When the Dubai property market crashed, the biggest victims were not the professional flippers but the middle-to-low income groups who had put their life savings into an off plan property that remain off plan today. A case of déjà vu awaits the gold market. The real irony in all this is that gold will ultimately crash when the global economy recovers (which doesn’t look anywhere near right now). But at the point, there is a danger that the number of gold investors globally, not just in Dubai, will be so astronomically high, that it will lead us out of a double dip recession and into a triple dip. When gold goes down, it will take a lot of people down. The million-dollar question of course is how high can it go in the first place. When is the best time to get out? One of the region’s top analysts told Arabian Business last week that $2,200 an ounce before the year is over is a near certainty. One outside factor (away from the herd effect) in all this is the Chinese government, which currently holds just 1.6 percent of its foreign reserves in gold (compared to seven percent in India and Russia). As a report by Sharps Pixley in London points out, China only needs to up its gold reserves by a tiny amount to have a huge impact on the market and price.

My own prediction is that gold will get closer to $3,000 per ounce. But my own suggestion is unless you know exactly what you are doing, and what you are getting yourself into (which most people don’t), stay away.

Anil Bhoyrul is the Editorial Director of Arabian Business.

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