Deutsche Bank: Gold Price Bubble Highly Probable

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"A collapse of the dollar cannot be dismissed out of hand."

The formation of a gold price bubble is a "high probability event," warns Deutsche Bank Commodity Strategist Michael Lewis. He says that the price of gold would need to rise above $2,000/oz. to represent a bubble but he notes the factors that have driven the market higher in recent years are likely to continue in 2011.

Expecting U.S. real (inflation-adjusted) interest rates to remain negative, an environment that historically has seen gold (and silver) perform well, Lewis also warns that a collapse of the dollar "cannot be dismissed out of hand" given the significant fiscal consolidation required in the U.S.

He also expects central banks, particularly in Asia, to diversify their foreign exchange reserves further by increasing their gold holdings and says inflows into gold ETFs will continue rising, reflecting investors' desire for protection against the twin threats of deflation or rising inflation.

The value of investors' holdings in gold ETFs ended 2010 at $98B—a record, even though last year's inflows into gold ETFs were substantially lower than in 2009.

Last year's rise in gold prices helped to increase the value of gold ETF holdings 40.2% from $69.9B at the end of 2009.

According to Barclays Capital, inflows into gold ETFs were 330 tons in 2010—down almost half from 614 tons in 2009. Total gold ETF holdings were 2,140 tons at year-end 2010, slightly below mid-December's all-time high of 2,155 tons.

Investment buying (ETFs, coins and bars) has become an increasingly important source of total gold demand, rising from just over 10% in 2000 to an estimated 40% last year.

Barclays Capital Precious Metals Analyst Suki Cooper says investment demand for gold is likely to slow toward the end of 2011—but it will still be strong enough to push the price to a fresh record high.

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