Tuesday, 5 April 2011

Are Gold and Oil prices signs of an impending doom?


Bubbles they say are evolutionary. They bust and give rise to another one.
There are many reasons behind the price of gold and oil to go higher to insane levels. There are many reasons that can bring them down as well.
Gold has always been a hedge against inflation i.e. higher the inflation higher the number of people putting money on gold making it costlier. Inflation is a result of many domestic as well as external factors.
When U.S economy is pumping money into the system so as to avoid deflation some money is bound to come into Asia.
A lot of countries in Asia are unproductive economies so the bulk of money is going into equities, real estate and commodities (these are unproductive assets) which is eventually driving up the prices of everything.
Oil is a commodity which is traded on the exchange. Any unusual occurrence like the Libya crisis is going to add momentum into the already galloping prices because there   is a risk of supply being cut off from the Middle East disrupting the supply-demand equation.
Oil is a major commodity which is imported by India and any price hike is going to affect the inflation.
Only way out for the government is to increase interest rate to dampen demand but will also hurt the growth sentiment.

U.S is virtually giving out money at 0% to anyone who can return it back with surety which is a sign of an inherent macro economic structural inefficiency (i.e. risk of default) in the system which is also making gold a protection against risk thus increasing its prices.

It is said that markets can remain insane for a considerable period of time. And suddenly they realise that the economy cannot take the burden which eventually leads to a collapse of the bubble.
Are gold and oil prices a harbinger of an impending collapse or will the financial system take the necessary steps by sucking out liquidity thus restoring sanity into the system. Only time will tell.

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