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Gold Market Is a ‘Bubble Poised to Burst,’ Wells Fargo Says

Gold trinkets sit on display at a jewelry store in the Grand Bazaar's gold souk in Istanbul. Photographer: Kerem Uzel/Bloomberg
Gold trinkets sit on display at a jewelry store in the Grand Bazaar's gold souk in Istanbul. Photographer: Kerem Uzel/Bloomberg

Aug. 16 (Bloomberg) -- 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 said in a report dated yesterday and e-mailed today.

Gold futures have advanced 26 percent this year, following 10 straight annual gains. The price reached a record $1,817.60 an ounce on 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,” Junkans said in a telephone interview from Minneapolis. “We are worried about the downward risk.”

Holdings in exchange-traded products backed by gold rose to a record 2,217 tons on Aug. 8, Bloomberg data show. CME Group Inc. said volume in Comex gold futures and options rose on Aug. 9 to a record 504,368 contracts. That topped the previous all-time high of 469,689 contracts on July 28, 2010.

Gold futures for December delivery rose $27, or 1.5 percent, to close at $1,785, the highest settlement ever, on the Comex in New York. Last week, the metal jumped 5.5 percent, the most since February 2009 and the sixth straight gain.

Soros, Paulson

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 U.S. Securities and Exchange Commission showed yesterday.

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 percent 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.

To contact the reporter on this story: Debarati Roy in New York at droy5@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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