While I agree it probably not the best time to buy, there is no way that it's currently in a bubble, it would have to double before I considered it to be a bubble.
Double bubble...luverlly
I stand by what I said.
I believe it's a bubble. Just look at the graph in the OP
2006 300
2010 900 (almost)
Three times the price.
Gold is pure speculation. Unlike shares there are no dividends on gold. There are no benefits to ownership. With property you get rental. With cash you get interest (by lending it). With gold you get nothing, other than a medium of exchange and a belief that it will continue to hold value.
The reason why gold has shot up in value was initially because it's always been seen as a good hedge (a safe place). If you were worried about your own currency then you'd fire your money into gold, and it would hold value. Later when you were not worried you could take the gold back out.
The supply of gold?
Well...
Cash for Gold is a new phenomenon. It wasn't happening in 2006 much. It was happening, but not to the same extent. A whole lot of gold has been produced from old jewelery that wasn't in the supply system already.
It's now far more profitable to mine for gold than it was previously. With over double the yield some forms of mining that were not worth doing are suddenly worth doing. That increases supply.
People who traditionally held gold in the very long term have sold it. They held it because it had a static value, and kept up with inflation. Because the price has boomed it cannot be viewed in the same light, and no longer fills the function. They've cashed in. That increases supply.
So supply has increased. This should have decreased prices, but it hasn't. The reason why? Demand has increased farther than supply. So let's look at demand.
It is only fair to say that as the world matures, economically, people who were previously in a subsistance existance are now starting to leave that, and are looking for stores of wealth. Jewellery is one of those, and owning gold on paper is another. It's reasonable to say that there has been both an increase population and an increase in the number of people who are able to and want to hold gold. It goes nowhere near to matching that graph though.
Demand for gold increased because people wanted out of currency and wanted out of stocks. The stock market boomed last year, people are getting back into stocks.
The real reason for the demand on gold, demand so high that it's exceeding the effects of greatly increased supply.... The reason for that demand is just simply demand. People want gold because other people want gold. It's rapidly increasing in price so people like sheep join in and buy more.
So what does all that mean? Massive increase in supply should lower price, but it's been offset by the extreme demand. That demand will disappear in a flash as soon as people realise the boom is over.
When the value of gold starts to go down people will be pushing and shoving to get their gold sold as quickly as possible in order to avoid losses, and to get out of the gold market. So what happens then? Unlike housing or shares there is no real value in the gold, no dividends, no rental so the price has no hard limit.
At some point in the future I believe the price of gold will drop. It'll drop slightly more than normal fluctuations and people will start to get worried. They will sell. The price will crash very very hard. I expect it to go down to 100 £ per ounce, before going back up again to between 2 and 4 hundred.
