Gold market bubble 'poised to burst,' Wells Fargo says

Speculative demand from investors has pushed the gold market into a “bubble that is poised to burst” after prices surged to a record this year, Wells Fargo & Co. said. “We have seen the economic damage” of past bubbles and “feel compelled to ring the warning bells,” Wells Fargo analysts led by Dean Junkans wrote in a report last week. Prior to last Tuesday, gold futures had advanced 24% this year, following 10 straight annual gains. The price reached a record $1,817.60 an ounce Aug. 11 on demand for an investment haven as European and U.S. sovereign-debt woes escalated. “There could be substantial risk to gold once the fear that the world is coming to an end subsides,” Mr. Junkans, chief investment officer of Wells Fargo's wealth management group, said in a telephone interview. “We are worried about the downward risk.”

SETTING RECORDS

Holdings in exchange-traded products backed by gold rose to a record 2,217 tons Aug. 8, Bloomberg data show. CME Group Inc. said volume in Comex gold futures and options rose Aug. 9 to a record 504,368 contracts. That topped the previous all-time high of 469,689 contracts on July 28, 2010. George Soros and Eric Mindich cut their holdings in the SPDR Gold Trust, an exchange-traded fund, in the second quarter as prices rallied, while billionaire John Paulson maintained the largest stake, a filing with the Securities and Exchange Commission showed last week. Thailand, South Korea and Kazakhstan added gold valued at about $2.56 billion to their reserves in July, joining Mexico and Russia in increasing holdings this year as central bankers hedge against depreciating foreign-currency reserves. About 60% of clients surveyed by UBS AG expect gold to be trading above $1,800 by the end of this year. The survey was conducted in the first two weeks of August, the bank said.